Rep: OEB Doc: 12WW2 Rev: 0 ONTARIO ENERGY BOARD Volume: 7 15 OCTOBER 2003 BEFORE: P. SOMMERVILLE PRESIDING MEMBER A. BIRCHENOUGH MEMBER 1 RP-2003-0063 2 IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Sched. B); AND IN THE MATTER OF an Application by Union Gas Limited for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, storage, and transmission of gas for the period commencing January 1, 2004. 3 RP-2003-0063 4 15 OCTOBER 2003 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 PAT MORAN Board Counsel MARTIN DAVIES Board Staff CHRIS MACKIE Board Staff MICHAEL PENNY Union Gas Limited TOM BRETT Ontario Association of School Business Officials ROBERT WARREN Consumers Association of Canada JAY SHEPHERD Ontario Public School Boards Association MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group TIBOR HAYNAL TransCanada PipeLines ROBERT ROWE Enbridge Gas Distribution Inc. PETER THOMPSON Industrial Gas Users Association BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [18] UNION GAS LIMITED - PANEL 6; BROEDERS, WITTS, BODNAR, NEILLY [39] CROSS-EXAMINATION BY MR. SHEPHERD: [44] CROSS-EXAMINATION BY MR. BRETT: [811] CROSS-EXAMINATION BY MR. MORAN: [964] QUESTIONS FROM THE BOARD: [1263] RE-EXAMINATION BY MR. PENNY: [1303] 10 EXHIBITS 11 EXHIBIT NO. M.7.1: CROSS-EXAMINATION MATERIALS FOR PANEL 6, HUMAN RESOURCES [23] EXHIBIT NO. M.7.2: ARTICLE FROM THE OCTOBER 15TH, 2003, GLOBE AND MAIL REPORT ON BUSINESS ENTITLED: "PENSION SMOOTHING HIDES THE FACTS [374] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.7.1.: TO PROVIDE A SUMMARY OF THE PENSION EXPENSE ESTIMATES AND REVISED FIGURES FOR 2003 AND 2004, INCLUDING A RECONCILIATION THEREOF, TOGETHER WITH INFORMATION TO EXPLAIN THE DERIVATION OF THE ELEMENTS OF EXPENSE [166] UNDERTAKING NO. N.7.2: TO PROVIDE A BREAKOUT OF LINE 10, EXHIBIT J.26.56, FOR EACH OF THE SIX PLANS [234] MODIFIED UNDERTAKING NO. N.6.14: TO PROVIDE A CURRENT WRITTEN STATEMENT OF INVESTMENT POLICIES AND GOALS [266] UNDERTAKING NO. N.7.3: A RECONCILIATION OF THE $11.8 MILLION NUMBER ON EXHIBIT M.6.1 AGAINST THE $7.7 MILLION NUMBER THAT THE WITNESSES HAVE TESTIFIED IS THE INCREASE IN DEFINED BENEFIT CONTRIBUTIONS FROM 2003 TO 2004 [358] UNDERTAKING NO. N.7.4: TO PROVIDE TOWERS PERRIN PENSION INDEX [530] UNDERTAKING NO. N.7.5: TO DETERMINE WHAT THE O&M REDUCTION WAS ASSOCIATED WITH THE VERP PROGRAM [580] UNDERTAKING NO. N.7.6: TO PROVIDE THE DATE THAT UNION STARTED TO LOSE MONEY, THE DATE THAT UNION FIRST IDENTIFIED WITH THE PENSION COMMITTEE THAT THERE WAS A RISK OF UNDER 100 PERCENT FUNDING, AND THE DATE UNION ACTUALLY WENT BELOW 100 PERCENT [665] UNDERTAKING NO. N.7.7: TO PRODUCE THAT PORTION OF SECTION 3.13 OF THE WESTCOAST EXPOSURE LETTER AS IT RELATES TO UNION GAS'S PENSION PLAN; TO DETERMINE WHETHER OR NOT THERE WAS A CHANGE IN THE DISCLOSURE LETTER FROM THE DATE OF THE AGREEMENT TO THE DATE OF CLOSING [703] UNDERTAKING NO. N.7.8: TO BREAK OUT THE INCENTIVE NUMBER BETWEEN THAT PORTION DRIVEN BY PROFIT VERSUS OTHER CONSIDERATIONS [782] UNDERTAKING NO. N.7.9: TO FILE THE FOUR ACTIVE PENSION PLAN DOCUMENTS [915] UNDERTAKING NO. N.7.10: TO PROVIDE A COMPARISON BETWEEN UNION'S PENSION AND BENEFITS PACKAGES AND THE COMPARATOR GROUP [1276] UNDERTAKING NO. N.7.11: TO PRODUCE THE TABLE IN J.3.18 ON PAGE 2, INCLUDING ACTUAL CASH CONTRIBUTIONS AS WELL AS ACTUAL EXPENSES FOR 1999 THROUGH 2004, FOR BOTH DEFINED CONTRIBUTION AND DEFINED BENEFIT [1326] 14 --- Upon commencing at 9:38 a.m. 15 MR. SOMMERVILLE: Thank you, please be seated. 16 This is a continuation of the Union Gas Limited 2004 rates case. 17 Are there any preliminary matters that we need to deal with from the applicant? 18 PRELIMINARY MATTERS: 19 MR. PENNY: Just a note, Mr. Chairman, so that the record is clear for those who aren't here, that we have provided now to the Board and to the parties answers to undertakings in 3.2, 3.3, 4.1, and 5.2. 20 MR. SOMMERVILLE: The Board has those, Mr. Penny. Thank you. 21 MR. PENNY: Thank you. 22 MR. MORAN: Mr. Chair, from yesterday, you also have a bound document that's been filed as an exhibit by the Ontario Public School Boards Association, Cross-Examination Materials for Panel 6, Human Resources. That would become Exhibit M.7.1. 23 EXHIBIT NO. M.7.1: CROSS-EXAMINATION MATERIALS FOR PANEL 6, HUMAN RESOURCES 24 MR. SOMMERVILLE: That was distributed yesterday, I believe. 25 MR. PENNY: That's correct. 26 MR. SOMMERVILLE: Are there any other preliminary matters? 27 MR. SHEPHERD: If I could add to that, the bound volume that was distributed yesterday had the first three pages of the sixth tab not very easy to read, so we copied some additional pages and they're at the back of the room for anybody who got a copy that's not readable. 28 MR. SOMMERVILLE: The Board has that. 29 MR. MORAN: I inserted those. 30 MR. SOMMERVILLE: Thank you, Mr. Moran. 31 MR. PENNY: Now, yesterday when you were talking about scheduling, it looked like Mr. Brett wasn't here, but he is here now so I'm assuming he has some questions for this panel so we'll have to add that. 32 MR. SOMMERVILLE: Is that so, Mr. Brett? 33 MR. BRETT: That is so, Mr. Chairman and Mr. Birchenough, and I will come after Mr. Shepherd. 34 MR. MORAN: He was on the original list. 35 MR. BRETT: I was on the original list. 36 MR. SOMMERVILLE: I see that, Mr. Brett. Thank you very much. 37 Mr. Shepherd. 38 MR. SHEPHERD: Thank you, Mr. Chairman. 39 UNION GAS LIMITED - PANEL 6; BROEDERS, WITTS, BODNAR, NEILLY 40 M.BROEDERS; Previously sworn. 41 A.WITTS; Previously sworn. 42 B.BODNAR; Previously sworn. 43 D.NEILLY; Previously sworn. 44 CROSS-EXAMINATION BY MR. SHEPHERD: 45 MR. SHEPHERD: My first questions are for Mr. Bodnar and Mr. Broeders, I think. And I listened all day yesterday to the various numbers thrown around and I still don't know what the numbers are. So forgive me if I try to go through and just clarify so that at least I understand what the actual numbers are. 46 Do I understand correctly that your current application includes a number for pensions that is $21.4 million; is that right for the test year? 47 I can assist you if you like. You can look at Exhibit J.26.56, which has the blue-page update budget, $21,350,000 for pension. And as I understand it, the blue-page update is your current application before this Board. 48 MR. BROEDERS: That's the correct figure. Yesterday we did mention -- 49 MR. PENNY: I thought we were going to get an AV presentation that we haven't seen before. 50 MR. SOMMERVILLE: We have a technical problem if we can just hold off for a few minutes, Mr. Shepherd. If there's something you need to look up, you can have them do that for a few minutes. For a moment there we thought it was a ghost, but it was Board Staff. 51 We can now recommence, Mr. Shepherd. 52 MR. SHEPHERD: Thank you, Mr. Chairman. 53 So the correct number is 21,350,000? 54 MR. BROEDERS: That's the number that's in the blue page. Yesterday there was the discussion about the change in assumptions that management is currently reviewing based on the latest values received from Towers Perrin. That figure should drop by approximately $2 million, but again, that's still subject to review. 55 MR. SHEPHERD: So as of right now you're still asking for 21,350,000 but you have before you a report from Towers Perrin that recommends that you go down to what is it, 19.7? 56 MR. BROEDERS: It was about 19,350,000, it's a drop from the 21,350,000 number you quoted down approximately $2 million. 57 MR. SHEPHERD: And what's the status of that change? 58 MR. BROEDERS: We got that early last week, management was reviewing it as of Friday, I didn't hear anything, I didn't see anything in my e-mail last night so hopefully by the end of the week those numbers will be approved. 59 MR. SHEPHERD: And presumably if they're approved then that reduces your revenue requirement and reduces your request for a rate increase? 60 MR. BROEDERS: That's correct. 61 MR. SHEPHERD: Now, that number, if it's all right with you, I'm going to use the 19,350,000 -- you're assuming it's going to be approved, is that correct. 62 MR. BROEDERS: Yes. 63 MR. SHEPHERD: So if it's all right with you, I'm going to use that number. 64 MR. BROEDERS: As long as we don't start trying to tie in numbers between other schedules and we lose track, that's my only fear. 65 MR. SHEPHERD: Well, we will eventually. And that number is both defined benefit and defined contribution plans; correct? 66 MR. BROEDERS: That's correct. 67 MR. SHEPHERD: But it's only pensions, it's not post-retirement, it's not other benefits, just pensions? 68 MR. BROEDERS: Correct. 69 MR. SHEPHERD: And Mr. Neilly, I think, you made some changes to assumption that caused that number to drop, what were those changes? 70 MR. WITTS: The principal change from the base case that you are looking at, the 19,350,000 was predicated on a discount rate of 6 percent and an expected return on assets of 7 percent. The change that we've made is to increase the expected return on assets to 7.5 percent. 71 MR. SHEPHERD: So now it's a 6 percent discount rate on the obligations and a 7.5 percent assumed return on the asset side? 72 MR. WITTS: That's correct. 73 MR. SHEPHERD: And that's effective from January 1st, 2004? 74 MR. WITTS: That's correct. 75 MR. SHEPHERD: Now, you just changed from 7.5 down to 7, why did you go back up to 7.5? 76 MR. WITTS: The 7 percent was predicated based on preliminary data that we had back in the middle of the summer. We've now updated that information, completed some external benchmarking and came up with a range that suggested that 7.5 percent was more appropriate. 77 MR. SHEPHERD: And I seem to recall somewhere that every quarter of a point on your assumed return on assets is a million dollars in pension contribution in 2004; is that right? 78 MR. WITTS: It's slightly less than $1 million. 79 MR. SHEPHERD: But it's in that range? 80 MR. WITTS: Yes. 81 MR. SHEPHERD: Thank you. Well that helps a lot. 82 Now, I guess the next thing I'm trying to understand is how much of an increase that number is, now we're using 19,350,000, how much of an increase that number is from last year, that is this year, 2003, and 2002, and EBRO 499. And there's numbers all over the place and I'm having a hard time figuring it out. So perhaps you could just tell me. 83 I can assist you a little bit here in the sense that again at 26.56, J.26.56 you have a 2003 budget number of 13,120. Is that still correct? 84 MR. WITTS: Yes, that's correct. 85 MR. SHEPHERD: So would I be correct in assuming, then, that the increase from 2003 to 2004 is 6,230,000. 86 MR. WITTS: From the 2003 budget, yes. 87 MR. SHEPHERD: Okay. Do you have a sense of what 2003 actuals is going to be yet? 88 MR. BROEDERS: Just a second. Approximately 11 and a half million. 89 MR. SHEPHERD: So then your actual increase is likely to be something in the order of $7.8 million; have I done that right? 90 MR. BROEDERS: Thereabouts, yes. 91 MR. SHEPHERD: And your actual increase from 2002 to 2003, then, would have been something like -- I'm just mentally doing it, something like 6.8 million? 92 MR. BROEDERS: That is correct. 93 MR. SHEPHERD: Now, in the original Towers Perrin letter, and maybe you could turn this up, this is D.1, tab 9, appendix A, page 2. Do you have that? 94 MR. BROEDERS: Sorry, yes, we do. 95 MR. SHEPHERD: So if you look at the top of page 2, Towers Perrin is recommending that you may have an increase of 8 million to 2003 and another 6 million to 2004, but you seem to be reversing that. Why is that? 96 MR. BROEDERS: Sorry, what were the increase numbers again that we were discussing? 97 MR. SHEPHERD: 2002 to 2003 was 6.8 -- 98 MR. BROEDERS: Okay. 99 MR. SHEPHERD: -- and 2003 to 2004 was 7.8. 100 MR. BROEDERS: I think it's -- the differences are a matter of timing. This letter was written back in June, before the actual 2003 was determined. We were still working with the preliminary figure at the time. 101 2004 has changed as well, and 2002, as I mentioned yesterday, we had a reclassification problem between our DC, our defined contribution expense, and our other benefits. The $1 million discrepancy we're seeing between 2002 and 2003 is a result of that reclass of approximately .9, so that gets us in the ballpark. Three to four is timing differences, comparing different numbers. 102 MR. SHEPHERD: Sorry, coming back to that 2002 to 2003, what is that .9? 103 MR. BROEDERS: The .9 is the DC expense that should have been reported as an other benefits expense. 104 MR. SHEPHERD: Well, then, maybe what we better -- I obviously have misunderstood this. Let's break this out, then. 105 We've got numbers of -- for 2002 of 4.8 total pension contributions; 2003, you just said -- 106 MR. BROEDERS: Sorry, before you get too far, contributions is different than expense. 107 MR. SHEPHERD: Well, okay, we'll get to that. Expense, then, all right? And 2003 you've just said was 11.5 actual, and 2004, you're now proposing 19.4. So let's break those figures out as between DB and DC; can you do that? 108 You see, I thought the 2002 -- the DC numbers were 2.7, 3, and 3.2 for those three years, so I don't understand -- 109 MR. BROEDERS: The DC numbers should be -- 2002 is about 1.9 million; for 2003, it's 2.1. 110 MR. SHEPHERD: Okay. 111 MR. BROEDERS: And 2004, expected is 2.3. 112 MR. SHEPHERD: Okay. So then that leaves, for defined benefit plans, 2.9 in 2002, 9.4 in 2003, and 17.1 in 2004. Do I have that right? 113 MR. BROEDERS: Looks about right, yes. 114 MR. SHEPHERD: So you've got a $6.5 million increase in DB from 2002 to 2003 and Towers Perrin said 8 million, so now where does this .9 fit into that? 115 MR. WITTS: I think the reason that, as I stated in my letter, we had anticipated that the 2003 expense would increase by approximately 8 million and the 2004 by approximately 6 million, we've restated the 2003; therefore, the increase in 2003 is 6 and you're going to a higher number in 2004, so it does, in fact, reverse the scale of the changes. 116 MR. SHEPHERD: And this is a new recommendation that you made? 117 MR. WITTS: It's not so much a recommendation as more as a confirmation of the actual numbers based on updated estimates and revised assumptions. 118 MR. SHEPHERD: Well, this letter on May 8th, 2003 is a recommendation; right? You recommended that they increase amounts by certain amounts. 119 MR. WITTS: No, it's not a letter of recommendation. 120 MR. SHEPHERD: Okay. You didn't make a recommendation to increase the amounts in these totals? 121 MR. WITTS: These are estimates of the expense in those years. 122 MR. SHEPHERD: Based on your recommendations? 123 MR. WITTS: Based on the assumptions and the application of the handbook. 124 MR. SHEPHERD: Okay. I'm sorry, I thought you said yesterday that you made a recommendation as to how much they could expense for pension and they didn't really have a choice, they had to take it; is that right? 125 MR. WITTS: What I discussed yesterday was the selection of the key assumptions that are used to compute the pension expense. Those two assumptions are the discount rate and the expected return on assets. As I stated yesterday, there is very little leeway with respect to the choice of the discount rate because it's prescribed to be the yield on long-term corporate AA bonds. There is more discretion with respect to the expected return on assets. I provided a range and made a recommendation to the company and they accepted that recommendation. 126 MR. SHEPHERD: All right. And then the actual amounts of the pension expense, then, just followed that as a calculation; is that right? 127 MR. WITTS: That's correct. 128 MR. SHEPHERD: And do we have that calculation somewhere? 129 MR. WITTS: Do you mean the actual components that go into the calculation of the pension expense? 130 MR. SHEPHERD: Well, actually I was responding to -- you said there was a calculation and I'm asking if I can see it. So I don't know what's in the calculation; you have it. 131 MR. WITTS: We provide the company with an estimate that's based on the disclosure requirements that are set out in section 3461 of the handbook which summarizes the results of the computations that we perform. 132 MR. SHEPHERD: I'm not trying to be rude here, but I think my question was: Can I see the calculation? It's a yes/no question. 133 MR. WITTS: For the 2003 or 2004 or both? 134 MR. SHEPHERD: Well, I guess we're looking for both of them because we're trying to discern how somehow a million eight moved from a PBR year into a cost of service year. 135 MR. BROEDERS: Are you asking for a mathematical formula or are you just asking for the components that are being driven, so the current service cost, the interest cost? 136 MR. SHEPHERD: Mr. Broeders, is it, I'll say the same thing as I said before. I asked Mr. Neilly. 137 MR. BROEDERS: Witts. 138 MR. SHEPHERD: Witts. You see, I'm confused. I asked him whether he recommended the number. He said he recommended the components and the number fell out of the calculation using those components. So you know what components he's recommended, he's already told us that. So there is a calculation that produces X million for 2003 and -- 139 MR. BROEDERS: By putting numbers into their model, the number comes out which gives us the expense. 140 MR. SHEPHERD: So I'd like to see the calculation where you take those recommendations and out pops the number, can you not show us that calculation or is it too complicated. 141 MR. BROEDERS: Again, they input it into the model so I don't know the mathematics that go into the actuarial calculations. I don't think that's something that can be easily shown on a piece ever paper, I think is what you're requesting. 142 MR. SHEPHERD: Well, it's Mr. Witts' model. Mr. Witts is this just a spreadsheet? 143 MR. WITTS: Yes, it is. 144 MR. SHEPHERD: So can we see the spreadsheet? 145 MR. WITTS: We can provide the summary spreadsheet. 146 MR. SHEPHERD: That would be wonderful. 147 And I'm going to ask for an undertaking Mr. Chairman, but I just want to clarify what we're after here. 148 Can you show us the spreadsheet that produced the 6 million and the 8 million and then the new spreadsheet that produced the 6.8 and 7.8, can you show us both of those? 149 MR. WITTS: What I'd suggest would be the most useful to provide is the summary which would show you the reconciliation from the prior estimates, on which my earlier letter was based, to the revised recommendation that we've landed upon. 150 MR. SHEPHERD: That would be very useful, but I'd still like to see how you got the numbers. 151 MR. WITTS: That will include... 152 MR. SHEPHERD: Okay. And finally, in delivering that undertaking, it's a spreadsheet, right, it's an Excel spreadsheet? 153 MR. WITTS: Yes, I can't provide you with the actual spreadsheet, I can provide you with a hard copy of the output. 154 MR. SHEPHERD: Can you also print out the cell formulas? So we can see how the numbers calculate to each other. 155 MR. PENNY: Well, I think I heard the witness say that that's the part that's proprietary. 156 MR. SHEPHERD: I didn't hear the word proprietary, Mr. Chairman. 157 MR. WITTS: We can include commentary that will explain the derivation of the cell elements. 158 MR. SHEPHERD: That would be fine. The algebra is not necessary. 159 Mr. Chairman, I wonder if we could have an undertaking for that. 160 MR. MORAN: Mr. Chair, it would be helpful if the witness could briefly describe what it is he's going to produce. 161 MR. SOMMERVILLE: I think you have, Mr. Witts, but if you could sort of recap. 162 MR. MORAN: For the assistance of the court reporters. 163 MR. WITTS: The undertaking is to provide a summary of the pension expense estimates and revised figures for 2003 and 2004, including a reconciliation thereof, together with information to explain the derivation of the elements of expense. 164 MR. MORAN: That would become Undertaking N.7.1, Mr. Chair. 165 MR. SOMMERVILLE: Thank you, Mr. Witts. 166 UNDERTAKING NO. N.7.1.: TO PROVIDE A SUMMARY OF THE PENSION EXPENSE ESTIMATES AND REVISED FIGURES FOR 2003 AND 2004, INCLUDING A RECONCILIATION THEREOF, TOGETHER WITH INFORMATION TO EXPLAIN THE DERIVATION OF THE ELEMENTS OF EXPENSE 167 MR. SHEPHERD: Now, witnesses, still on the actual numbers because this is so much fun, as I understand it, the amount that we see in J.26.56 for 2002 actuals, that's not the number that, as they say, is baked into rates, is it? 168 MR. BROEDERS: No, it is not. 169 MR. SHEPHERD: Do you know the number that's baked into rates? 170 MR. BROEDERS: 7.9 for -- sorry, the 7.9 is representative of the post-retirement benefits and the pension number. So the 7.9 would compare to the 8.8 shown for 2002. 171 MR. SHEPHERD: Sorry, I don't see the 8.8, help me here. 172 MR. BROEDERS: 4.030 plus 4.767, lines 9 and 10. 173 MR. SHEPHERD: All right. Where did you get the 7.9 from? 174 MR. BROEDERS: From RP-1999-0017. 175 MR. SHEPHERD: And how is that broken out in 0017? How much of that is pensions? 176 MR. BROEDERS: I think the pension was 1.4 and future benefits number was 6.6 less rounding, so call it 1.3 and 6.6. 177 MR. SHEPHERD: So then the actual amount of the increase in revenue requirement for pensions, tell me whether I'm right here, is about 18.1 million, isn't it, being the 19.4 you're asking for less the 1.3 million that's baked into rates? 178 MR. BROEDERS: Yes. 179 MR. SHEPHERD: I'm quite sure I heard you tell Mr. Thompson yesterday -- or actually I'm quite sure I'm not sure of anything at this point -- but I thought I heard you tell Mr. Thompson yesterday that the revenue requirement impact of the pension changes was some different number, 11.8 or something like that or is that -- am I mixing apples and oranges here? 180 MR. WITTS: The 11.8 million that was referred to yesterday was the amount that is included in the expense that is solely relatable to the impact of the changes in capital markets, capital losses that have been incurred. 181 MR. SHEPHERD: So the 11.8 is the loss component, that's the investment loss component? 182 MR. WITTS: That's correct. 183 MR. SHEPHERD: Okay. Well, actually, this is good because that's what I wanted to get to next. 184 Then the remaining $6.3 million of that amount is presumably partly discount rate -- the change in the discount range assumption and partly the change in the return assumption; is that right? 185 MR. BROEDERS: The 11.8 figure is a component of the total expense for 2004. It's not a comparison back to 1999 or 2000 rates. 186 MR. SHEPHERD: Well, presumably, the 1999 and 2000 rates didn't have any amount in them for loss of investments because you hadn't been losing on investments at that point, had you? 187 MR. BROEDERS: There were gains or losses in prior years that would have made up the pension expense -- that would have made up the pension expense number at the time. 188 MR. SHEPHERD: Okay. 189 Now, in a number of places, it's indicated that the increase from -- sorry, from OEB EBRO 499 to 2004 is $13.9 million in pension expense; do you recognize that number? We see in it in a number of places in the evidence; D.1, tab 9, page 4, it nets out to that; several other places. Do you recognize that number? 190 MR. WITTS: Yes, we know that number. I would note that it is -- was based on the prior 2004 estimate versus the revisions that have now been made. 191 MR. SHEPHERD: Well, it was actually the prior; right? 192 MR. WITTS: That's correct. 193 MR. SHEPHERD: Which is almost the same as where you are now. 194 MR. WITTS: That's correct. 195 MR. SHEPHERD: So it's still pretty close, the number is still pretty close. 196 MR. WITTS: Yes, it's representative. 197 MR. SHEPHERD: Now, I also notice that the originally-filed difference between 2002 and 2004 was also 13.9; is that just coincidence? 198 MR. WITTS: Yes. 199 MR. SHEPHERD: Thank you. I'm just trying to reconcile. 200 Now, finally on this point, you have six plans; right? 201 MR. BROEDERS: That's correct. 202 MR. SHEPHERD: Can you tell us briefly what those plans are? 203 MR. WITTS: There are three plans which cover three different bargaining units and there are three plans which cover non-bargaining employees. 204 MR. SHEPHERD: And they're all defined "benefit"; right? 205 MR. WITTS: That's correct, apart from one of the plans which includes the defined contribution plan. 206 MR. SHEPHERD: Yes, understood. 207 The three plans for unionized employees cover, did I read somewhere, a total of 350 employees; is that right? 208 MR. WITTS: The total number of bargaining unit employees that will be covered will be around about a thousand. 209 MR. SHEPHERD: A thousand, okay. And so -- and there's just three different bargaining units? 210 MR. WITTS: That's correct. 211 MR. SHEPHERD: And then the three non-union plans, or plans for non-union employees, what's the distinction between those three? 212 MR. WITTS: Two of those plans are actually closed to new entrants, they are legacy programs; one that was for former manager and supervisory employees of Union Gas and one that was for former salaried employees of Centra Gas. And then the other plan is the main plan that is now open to all new employees, which is the Choices Pension Plan, and new employees can select between a defined benefit option or a defined contribution option. 213 MR. SHEPHERD: Did I understand you to say yesterday that there's some -- that flex benefits are tied into this in some way; that they can use their flex benefits to impact their defined contribution participation, or am I misunderstanding that? 214 MR. WITTS: The program that is offered on the pension side is Pension Choices and on the benefits side is Benefit Choices. The programs are linked through the credits that are available under the flexible benefits program and through the savings plan, and which can be applied to the pension program if the employee so elects. 215 MR. SHEPHERD: Now, that can only be applied to the defined contribution component, though, right, it can't be applied to defined benefit because that's an employer plan -- employer contribution plan; right? 216 MR. WITTS: The Choices Program, pension program, has two defined benefit components that employees can choose from. One is non-contributory and totally paid for by the company and the other is contributory where the employee has to make a contribution. 217 MR. SHEPHERD: So now this flex benefits thing was introduced a couple of years ago; is that right? 218 MR. BODNAR: I believe it was introduced in 1998. 219 MR. SHEPHERD: Okay. I think I heard you say yesterday that some of your numbers projections for 2004 are based on changes that you expect to happen in people's use of flex benefits. Are any of the pension numbers impacted by that? 220 MR. WITTS: The program is being changed in 2004 on the benefits side. There are no changes on the pension side, and the numbers would not be impacted. 221 MR. SHEPHERD: Wonderful. So, now, in your six plans, all six of your plans are now under 100 percent funding; right? 222 MR. WITTS: That's correct. 223 MR. SHEPHERD: Can you tell us what the percentages are, the funding percentages? 224 MR. WITTS: I can't tell you offhand, but that information will be included in the actuarial valuation reports which we are going to provide. 225 MR. SHEPHERD: Yes, of course. Of course. 226 Could you -- would this be too much work -- this may be something you already have, if you take a look at J.26.56, line 10, this is your actual pension numbers for the various years in question. Could you break that line out into the six plans? Is that something you can do? It's something you have; right? 227 MR. BROEDERS: The information is available, not handy, not here. 228 MR. SHEPHERD: No, that's fine. And could you also tell us what the baked-into-rates component for each year is, or is that a more difficult task? 229 MR. BROEDERS: I'm not sure I have the -- sorry, back up there. The number that was put in for rates was based on an estimate and then actual numbers were then provided. I don't know if I have the back-up at a detail level by plan for the number that's in rates versus what was expressed actually. 230 MR. SHEPHERD: That's fine. That's fine. 231 So I wonder if I could get an undertaking to break out line 10 by the six plans. 232 MR. BROEDERS: We can provide that. 233 MR. MORAN: Mr. Chair, Undertaking N.7.2, breakout of line 10, Exhibit J.26.56, for each of the six plans. 234 UNDERTAKING NO. N.7.2: TO PROVIDE A BREAKOUT OF LINE 10, EXHIBIT J.26.56, FOR EACH OF THE SIX PLANS 235 MR. SHEPHERD: Now, I wonder if we can turn to smoothing with great hesitation, I assure you. No, before we do that, have there been any changes in any of these six plans since 2001? 236 MR. PENNY: What sort of changes are you interested in? 237 MR. SHEPHERD: Any changes? 238 MR. PENNY: Changes in the number of members? 239 MR. SHEPHERD: No, the plan documents, the structure of the plans, the investment strategies, et cetera. 240 MR. BODNAR: Yes. 241 MR. SHEPHERD: Okay. Did any of those changes arise because of the acquisition by Duke Energy? 242 MR. BODNAR: No. 243 MR. SHEPHERD: And if I understand your evidence yesterday, your plans are managed completely separately from either the Westcoast plans or the Duke plans; is that right? 244 MR. BODNAR: We have a management pension investment committee that is for the Canadian pension plans. Within the umbrella investments for those plans, there are segregated components for obviously Union Gas and other companies that form part of the Canadian organization, Westcoast, for example, and so on. The management pension investment committee invests the funds in those plans with various pension managers in terms of the total amount of dollars, but in turn, there's segregation between the plans so that there's amounts that are attributable to say to Union Gas as well as other Canadian-based companies. 245 MR. SHEPHERD: But the investment strategies of the Canadian plans are the same strategy, right, you don't have a different strategy for Union Gas? 246 MR. BODNAR: The investment strategies are the same for all Canadian plans. 247 MR. SHEPHERD: And Duke Energy has an appointee on this committee? 248 MR. BODNAR: That's right. Duke has an appointee on the committee. 249 MR. SHEPHERD: And aside from just being one member on the one committee, what influence does Duke have over how the pot of pension assets is invested? 250 MR. BODNAR: Aside from having that member on the committee, really, there is no other influence. The pension investment committee makes the decisions with respect to the investments that take place -- the investment managers and then the investment managers, in turn, make decisions as to the types of investments that are made. 251 MR. SHEPHERD: Since September 2001 when you signed the deal with Duke, have you changed any investment managers to shift to a manager that had a relationship with Duke? 252 MR. BODNAR: No. 253 MR. SHEPHERD: Does Duke have a pension policy that the Canadian companies take account of in their pension management? 254 MR. BODNAR: No, the statement of investment policies and guidelines that we utilize is one that was developed by and for the Canadian companies and it is something that we're providing in an earlier undertaking, and it is one that's for the Canadian plans. 255 MR. SHEPHERD: And as I understand it, it was actually developed prior to the Duke acquisition; wasn't it? 256 MR. BODNAR: We had a statement of investment policies and guidelines that was developed prior to the acquisition by Duke. Now, we review it annually as a matter of fact, and where there are, for example, legislative changes that may have occurred or certain governance issues that have come up, we will fine-tune it, probably on an annual basis. 257 MR. SHEPHERD: So you've made some changes since the acquisition, but they weren't driven by Duke. 258 MR. BODNAR: That's correct. 259 MR. SHEPHERD: You've already undertaken to provide that policy, I believe. Could you provide us with the policy from the end of 2000, how it was written at the end of 2000 just so we can compare and see what the changes were. 260 MR. BODNAR: I will certainly check our records and if it is available I will provide it. 261 MR. SHEPHERD: Mr. Chairman, should that be a new undertaking or added to the -- 262 MR. SOMMERVILLE: I think so. 263 MR. MORAN: We could add it to the undertaking from yesterday, if you wanted, Mr. Chair, since it hasn't been -- 264 MR. SHEPHERD: I'm happy with that. 265 MR. MORAN: -- provided yet. So Undertaking N.6.14 is to currently to provide the current statement. 266 MODIFIED UNDERTAKING NO. N.6.14: TO PROVIDE A CURRENT WRITTEN STATEMENT OF INVESTMENT POLICIES AND GOALS 267 MR. SOMMERVILLE: Can we just amend that to include the policy that was in operation in 2000. 268 MR. SHEPHERD: Thank you. Now we can go on to smoothing. 269 And with great trepidation, I'm going to turn to Exhibit M.6.1. Mr. Witts, this is the reason why I asked you for the formulas in the undertaking this morning because I'm having some terrible difficulty understanding this. 270 So let me just ask you some specific questions. Do you have this M.6.1, Mr. Witts? 271 MR. WITTS: Yes, I do. 272 MR. SHEPHERD: Thank you. 273 You have an actual rate of return on assets for the year and you have an asset-related experience gain or loss incurred during the years. How are those two different? 274 MR. WITTS: The actual return is obviously what the actual pension fund actually earned during the year. The expected rate of return is the assumption that is made pursuant to section 3461 of the handbook. The $20 million gain that's shown for 2000 represents the excess return that was earned, the difference between the 13.25 percent and the 7.5 percent. 275 So we had expected to earn approximately $25 million, we ended up actually earning somewhere around $45 million, and under the accounting rules that's recorded as a gain of $20 million. 276 MR. SHEPHERD: Because the expected rate of return is already built into your expenses and your contributions and everything else. 277 MR. WITTS: Absolutely. 278 MR. SHEPHERD: That's the sort of black box calculation we were talking about earlier. And so if you're outside of that in either direction you have to -- that's the amount you have to adjust for? 279 MR. WITTS: That's correct. 280 MR. SHEPHERD: Oh, perfect. So if we look at the line that says: Asset related gain/loss incurred during the year, as a percentage of the market value of the assets at the start of the year, that should actually be the difference between first two lines, shouldn't it? 281 MR. WITTS: That's correct. 282 MR. SHEPHERD: And miraculously it is in each case. 283 MR. PENNY: It's not miraculous at all, Mr. Chair. 284 MR. SHEPHERD: No, given how much trouble I had trying to understand it last night, yes, it is. 285 Let's look at the next line, the asset related experience gain/loss recognized during the year. I take it that this is smoothing; right? 286 MR. WITTS: It's the combination of the two smoothing methods that are employed. The first smoothing method is that we use a market-related value of assets which essentially is a three-year averaging of the market value of assets, and the second is the application of the 10-percent corridor. 287 MR. SHEPHERD: Okay. So let's look at that two ways. First of all, just from a common-sense point of view, if I read this right, you lost a whole lot of money in the plan in 2001 and 2002 and you recognized none of it in those years. 288 MR. WITTS: We recognized 2.5 million in 2002. 289 MR. SHEPHERD: So there's a line here that says: Asset related gain/loss recognized during the year, and in 2002 there's a dash. 290 MR. WITTS: There are two components. There is the actual reduction in the value of the assets or the asset loss and none of that, as you state, was recognized. The other impact on the expense is that because you have a lower value of assets, when you apply your expected return to that lower value, you end up with a relative increase in expense. So our expense in 2002, you will see there was an increase of 2.5 million as a result of the asset values being lower and the expected return therefore being lower in the following year. 291 MR. SHEPHERD: Okay. Tell me whether I -- I think I may actually get this. Each year, you have an increase or an amount of pension obligation that accrues during the year and you only have two places to get that from. You can get that from return on the pot of money and from contributions from the employer, or you could also get it from contributions from employees, I suppose. But you only have certain places to get it and they have to add up to at least the amount of the obligation that accrued during the year; is that right? 292 MR. WITTS: That's right. 293 MR. SHEPHERD: And so if your pot is lower, or if your expected rate of return is lower, then the employer has to put in more to offset that to make sure you cover those obligations for the year. 294 MR. WITTS: Yes, and in the context that we're discussing, the employer putting in more equates to an increase in the accounting expense. 295 MR. SHEPHERD: Well, okay. So it's not actually putting in the money that matters, it's taking the expense that matters, in this context. 296 MR. WITTS: That's correct. 297 MR. SHEPHERD: And the actual rate of return on the assets for the year doesn't matter -- well, it matters later, but in that year it doesn't matter. What matters is the expected return. 298 MR. WITTS: That's correct. 299 MR. SHEPHERD: Why is that? Why didn't you say, We didn't earn enough money, we better put some more money in? 300 MR. WITTS: That's the methodology that's prescribed under the Canadian accounting standard and also under the United States accounting standard. 301 MR. SHEPHERD: Presumably, and tell me whether this is correct, presumably it's designed to ensure that companies aren't sort of hostage to the ups and downs of their pension plan, that they are long-term assets; is that right? 302 MR. WITTS: That's correct. The primary goals, if you will, I believe, of the accounting standard are to recognize the expense for pension in a rational and systematic manner which does provide for a smoothing of the expense in order to minimize year-over-year volatility. 303 MR. SHEPHERD: Now, the two smoothing methods, as I understand them, one is that you take the assets, the market value of the assets, and you don't assume that this year's market value is the right one, you assume that the average of the last three years is the right number for today. 304 MR. WITTS: That's correct. 305 MR. SHEPHERD: Even though you know that's not true, because you've lost the money; right? 306 MR. WITTS: That's correct. 307 MR. SHEPHERD: So, for example, in 2002, instead of saying, We started the year with $315 million, you pretend that you started the year with about $350 million, the average of those three years; is that right? 308 MR. WITTS: That's correct. It takes the market value from the current date and the two previous anniversaries and takes the three-year average of that amount. 309 MR. SHEPHERD: Okay. So I'm doing what I tell witnesses not to do, that is calculating things on the fly, and that is, in fact, a $350 million average as of 2002; isn't that right? Will you accept that, subject to check? 310 MR. WITTS: Sorry, could you repeat that? 311 MR. SHEPHERD: That as of 2002, you were assuming that the market value of the assets was $350 million for expense calculation purposes. 312 MR. WITTS: Subject to check. 313 MR. SHEPHERD: Sure. And similarly, in 2003, you assume something in the order of $335 million, even though you only have 290 million in the pot. 314 MR. WITTS: That would be correct. 315 MR. SHEPHERD: Okay. So that's the three-year average method and that has the effect, then, of slowing down the impact of movements in the pot of assets. 316 MR. WITTS: That's correct. And if one tracks the three-year average relative to market value, it typically will lag the market value, as one might expect, but does track reasonably close to market value except when markets are very volatile. 317 MR. SHEPHERD: I'm resisting starting to talk about 20-year trends, Mr. Chairman. I would want that noted for the record. 318 Okay. Now, the 10 percent corridor is on top of that; right? 319 MR. WITTS: That's correct. 320 MR. SHEPHERD: And the 10 percent corridor says what? How does that work? 321 MR. WITTS: The 10 percent corridor says you do not have to reflect in your pension expense gains or losses until they exceed the greater of 10 percent of your obligation and the value of your assets. So it provides a corridor, 10 percent above or 10 percent below, in which the plans can experience gains and losses without impacting expense. Again, it's there to smooth the year-over-year volatility. 322 MR. SHEPHERD: So, again, I guess I'm going to -- I don't see exactly how that works in terms of the math on this page, so perhaps you can take us through where we see the 10 percent corridor impact and where we see the three-year averaging impact on this sheet. 323 MR. WITTS: Perhaps the best place to look is actually in year 2003. 324 MR. SHEPHERD: Okay. 325 MR. WITTS: And I'll take you to -- under B, the italicized, bold heading "Effect on Amortization," the first line, the cumulative experience loss at the beginning of the year is 107 million. Of that amount, 44 million is not being recognized because of the smoothing of the assets. 326 MR. SHEPHERD: Okay, just stop there. Okay. That 44 million, then, is the difference between 290 and the three-year average. 327 MR. WITTS: Correct. 328 And 37 million is not being recognized because it is -- that is the amount of the corridor. 329 MR. SHEPHERD: So first you reduce your actual loss to a -- sort of a proxy, a pro forma loss which is smoothed by average, and then that is what you test against the corridor. So it's the 44 that you compare against the corridor -- sorry, not the 44, the -- what would it be, 63 left. 330 MR. WITTS: Correct. 331 MR. SHEPHERD: So you say you had -- even though you had 107 million of accumulated losses, you treat that as 63 for calculation purposes and then you say, But 37 of it we don't have to deal with because it's in the corridor, and so we only have 26 left that we have to deal with. 332 MR. WITTS: That's correct. 333 MR. SHEPHERD: Okay. So then -- but you don't just take that 26 and pay it into the plan, do you? 334 MR. WITTS: No, it's amortized over what is colloquially known as the EARSL, which is the expected average remaining service life, and in this case, in 2003, it was 13 years. So we recognize that 26 million over 13 years at the rate of $2 million per year. 335 MR. SHEPHERD: So now I understand this, I think. So by reducing your expected return on assets in the section above, you increase your expense in 2003 by $4.9 million. 336 MR. WITTS: Correct. 337 MR. SHEPHERD: Right? Then you have to amortize this small amount of the loss over, it's about 10 or 15 years; right? 338 MR. WITTS: Thirteen years. 339 MR. SHEPHERD: Thirteen years, sorry. And so that 2,000 there plus the 4,900 impact by the return is the $6,900 increase in your pension expense. 340 MR. WITTS: That's correct. 341 MR. SHEPHERD: It's magic. And so in 2004, now, I'm going to try and reconcile these to the numbers you just gave us earlier, the 6.9 is just about right, but for 2004, these numbers don't appear to be -- the $11.8 million increase doesn't appear to be the same as what we were talking about, unless I'm missing something. We were talking about a 7.7 million increase. 342 MR. WITTS: The 7.7 was the total impact on expense from the '03 to '04. 343 MR. SHEPHERD: Yes. 344 MR. WITTS: What we're looking at here is simply the asset-related experience. It doesn't include any of the other components. 345 MR. SHEPHERD: Of course, because you've driven down the discount rate too, which is... 346 MR. WITTS: Right, absolutely. 347 MR. SHEPHERD: But if you drive down the discount rate, doesn't that increase your -- no, that -- does that reduce your obligations? 348 MR. WITTS: It increases the obligations. 349 MR. SHEPHERD: Increases your obligations. So then it should be more than 11.8. 350 MR. WITTS: There are other factors, components of the expense that aren't shown here. 351 MR. SHEPHERD: Would it be too much trouble to ask you to reconcile the number with the number that you've given us for the increase of 2003 to 2004? Is this a difficult task? 352 MR. WITTS: We can provide that information. 353 MR. SHEPHERD: Thank you. 354 MR. MORAN: Mr. Chair, I'm not sure I fully understand the undertaking, Mr. Shepherd is asking for reconciliation of the $11.8 million -- 355 MR. SOMMERVILLE: Why don't we ask Mr. Shepherd to stipulate the -- 356 MR. SHEPHERD: It's a reconciliation of the $11.8 million number on Exhibit M.6.1 against the $7.7 million number that the witnesses have testified is the increase in defined benefit contributions from 2003 to 2004. 357 MR. MORAN: That would become Undertaking N.7.3. 358 UNDERTAKING NO. N.7.3: A RECONCILIATION OF THE $11.8 MILLION NUMBER ON EXHIBIT M.6.1 AGAINST THE $7.7 MILLION NUMBER THAT THE WITNESSES HAVE TESTIFIED IS THE INCREASE IN DEFINED BENEFIT CONTRIBUTIONS FROM 2003 TO 2004 359 MR. SHEPHERD: Before we leave the issue of smoothing, this smoothing has become a bit of a -- sorry. 360 MR. WITTS: Maybe I'll help you right away, Mr. Shepherd. I just had an a-ha. The line that I'm showing in the total net increase/decrease is actually -- it's not cumulative. So the 6.9, the increase from '03 to '04, the total increase as a result of the asset that you will recognize as 11.8 million, but from '03 to '04, it's the 11.8 minus the 6.9, so it's actually the 4.9 which may help you with the -- 361 MR. SHEPHERD: But that's still not 7.7. 362 MR. WITTS: Well, as I say, the other factors are the discount rate. 363 MR. SHEPHERD: I wonder if you could just break that down for us so that my confusion will be less. 364 This question of smoothing is a hot issue in accounting circles these days, isn't it? 365 MR. WITTS: Yes, it is. 366 MR. SHEPHERD: And there are a number of proposals including some that suggest that smoothing should be dramatically lessened; isn't that right? 367 MR. WITTS: That's correct. 368 MR. SHEPHERD: What is the status of those proposals? 369 MR. WITTS: The status of the Canadian proposals, is, I believe, that it's under review by the Accounting Standards Board and that they expect to release an exposure draft sometime next year. 370 MR. SHEPHERD: Mr. Chairman, Mr. Mackie has been kind enough to provide me with a copy of article in the ROB this morning dealing with pension smoothing that's timely, and I have copies of it to be available and I'd like to ask the witnesses about it if that's possible. 371 MR. PENNY: Well normally, Mr. Chairman, I take exception to this kind of thing because we have a 24-hour rule, but in this case I know the witnesses are familiar with the article because it was in the paper this morning and we all read it, so I don't think it will be disadvantageous to the witnesses to ask them about it. 372 MR. SOMMERVILLE: I'm happier that it's on the record rather than off the record. 373 MR. MORAN: Mr. Chairman, Exhibit M.7.2 is an article from the October 15th, 2003, Globe and Mail Report on Business entitled: "Pension Smoothing Hides The Facts." 374 EXHIBIT NO. M.7.2: ARTICLE FROM THE OCTOBER 15TH, 2003, GLOBE AND MAIL REPORT ON BUSINESS ENTITLED: "PENSION SMOOTHING HIDES THE FACTS 375 MR. SOMMERVILLE: Sorry, the number again, Mr. Moran? 376 MR. MORAN: 7.2. 377 MR. SHEPHERD: And I'm only going to draw your attention to one thing in this, although I suspect my friends may have something to say about this as well, and that is in the second column you'll see it says: 378 "According to a Dominion Bond Rating Service analysis of 263 major defined-benefit pension plans in North America, 30 per cent recorded income from their pension plans in 2002. What's wrong with that? Almost all of them actually lost money on their pension plan investments in 2002." 379 I take it from this article and I think from the other things I've read, tell me whether this is correct, that that's really the crux of the problem right now is in the same way as Union lost a bundle in 2001 and 2002, but isn't recognizing any of it, so this is happening in a lot of pension plans; right? 380 MR. WITTS: Yes, it is happening in a lot of pension plans, but I would add that all that folks are doing is following what are currently the generally-accepted accounting principles and that those principles, as we discussed, include the concept of smoothing to minimize short-term volatility, and it is only in the last two or three years with the very significant decline in capital markets that the methodology has come under scrutiny from shareholders who may have a shorter-term view and be looking through a shorter-term lens; whereas, we're dealing with what are very long-term obligations and long-term investment of assets. 381 MR. SHEPHERD: Now, Mr. Witts, the pension accounting rules have two major purposes, don't they? The first is to deal with the relationship between the beneficiaries of the plans and the employer, right? And the accounting rules have to recognize those relative rights and make sure that the pension plan doesn't hurt either employer or employee; correct? That's one of the reasons? 382 MR. WITTS: I believe the primary reason for the accounting rules is for the systematic and rational recognition of the cost of providing pensions in the corporate financial statements and that the -- one of the guiding reasons for implementing the standard was to increase the comparability of financial statements between different corporations. 383 MR. SHEPHERD: Well, okay. So that's the second reason, I think, which is that the companies have to present financial statements to the public to their shareholders and their shareholders have to understand what those pension obligations are in some -- some organized way that is clear and comprehensible; right? 384 MR. WITTS: That's correct. 385 MR. SHEPHERD: And that's the purpose of having nice strict accounting rules, everybody knows what they mean; right? 386 MR. WITTS: Correct. 387 MR. SHEPHERD: I take it and tell me whether this is right, and I take it that these accounting rules are not in any way set up to reflect the relative interests of ratepayers versus shareholder in a regulated utility. 388 MR. WITTS: There is no differentiation in the standards with respect to that. It's simply treated as a -- yeah, prepared for the uses of the financial statements. 389 MR. SHEPHERD: Now, in an unregulated company, if you -- if the pension plan suffers significant losses, there's basically only two places that the company can get it from; right? They can get it by reducing the return to their shareholders, their profits, or by increasing the prices of their products; right? 390 MR. WITTS: There may be other sources of funding; for example, General Motors recently issued bonds to pay for some of its pension costs. 391 MR. SHEPHERD: All right. And one last thing on the numbers before I try to move away from them. Could you turn up J.26.55. 392 MR. BODNAR: We have it. 393 MR. SHEPHERD: And we've been talking about where this increase in the pension plan -- pension costs came from, and we had this $13.9 million number, which is still roughly right, it's just after a number of changes we're almost back where we started. But I guess I can't reconcile these numbers with the numbers we've been hearing about the last days - 11 million for losses, the discount rate having an impact of 3 or $4 million. Can you help me here? 394 MR. WITTS: J.26.55 responds to a request to provide a breakdown of the increase between 1999 and 2004 -- 395 MR. SHEPHERD: Yes. 396 MR. WITTS: -- whereas I believe the numbers that we've discussed this morning relate more to 2002 through 2004. 397 MR. SHEPHERD: All right. 398 What's the number $10 million "other" on this exhibit? 399 MR. WITTS: Primarily, those -- that is the impact of the two smoothing mechanisms. 400 MR. SHEPHERD: What was the discount rate in 1999 that you were using? It was 7.5 -- sorry, it was 6.5, wasn't it? 401 MR. PENNY: Mr. Chairman, can we get clarification as to whether what's being asked is the discount rate that was used for pension accounting purposes? 402 MR. SHEPHERD: Yes. 403 MR. BROEDERS: For actuals 1999 or in the rate case 499? 404 MR. SHEPHERD: This is rate case to rate case, so I guess it would have to be rate case. 405 MR. BROEDERS: The discount rate was 7.75 to 8 percent. 406 MR. SHEPHERD: The discount rate or the rate of return? 407 MR. BROEDERS: The rate of return were the same numbers. 408 MR. SHEPHERD: The rate of return and the discount rate were the same? 409 MR. BROEDERS: For the -- for purposes of the rate case and 499 -- for 499, yes. 410 MR. SHEPHERD: Isn't that unusual? 411 MR. WITTS: It wasn't unusual at that time as the prior standard was in effect. It would be unusual today, given the different prescription that applies under 3461. 412 MR. SHEPHERD: So what's happened between '99 and 2004 is actually -- tell me whether this is correct: that if you had the same discount rate and rate of return, then you're assuming that your obligations and your investments go up in lock step, it's symmetrical. 413 MR. WITTS: Correct. 414 MR. SHEPHERD: And if you have different amounts, then you're assuming that your obligations go up more slowly, which means you have to put more in to cover them. You're, in effect, giving yourself a safety factor; isn't that what the purpose of it is? 415 MR. WITTS: The accounting standard prescribes the use of a discount rate that is equal to the yield that's available on high-quality bonds that have an appropriate duration that matches the expected timing and cash flow of the pension payments. So it's more akin to actually the rate that one would be expected to pay if one were to settle the obligation by, for example, buying annuities from an insurance company, but it's only a bond yield. The expected return on assets reflects the diversified investment fund portfolio which will include not only bonds but also equities. 416 MR. SHEPHERD: So the idea here is that you make your contributions, or actually decide your expense, not necessarily your contributions, based on -- as if you were just buying annuities to cover the obligations; but then you make an assumption that you're actually going to do better than that in the plan. 417 MR. WITTS: Depending on the outlook for capital markets, the expected return on assets typically in the current environment is higher than the discount rate. There could be situations when the reverse would apply. 418 MR. SHEPHERD: Now, finally on this interrogatory, there is line "Increased Life Expectancies," 4.8 million, and I listened all day yesterday and I didn't hear anything about increased life expectancies. So can you, sort of, tell us how that fits into what we're talking about. Did all that happen before 2002? 419 MR. WITTS: That topic was covered in response to an interrogatory in J.3.17. 420 MR. SHEPHERD: So this was a one-time change in the year 2000. 421 MR. WITTS: That's correct. We periodically review the mortality experience under the pension plans. The table that we had used previously included a projection that allowed for expected improvements in mortality, i.e., took account that folks will be living longer in the future. This new study was done and has effectively become the generally-accepted standard that's applied in Canada now. 422 MR. SHEPHERD: And in a defined benefit plan, if people are living longer, then you have to put in more today to buy an annuity for their -- in that, sort of, conceptual way. 423 MR. WITTS: That's correct. 424 MR. SHEPHERD: Okay. 425 Mr. Chairman, I'm moving to another area now. If this is a convenient time to break, I'd be happy to. 426 MR. SOMMERVILLE: We'll break until quarter after 11. Thank you. 427 --- Recess taken at 10:58 a.m. 428 --- On resuming at 11:21 a.m. 429 MR. SOMMERVILLE: Thank you, please be seated. 430 Mr. Shepherd. 431 MR. SHEPHERD: Thank you, Mr. Chairman. 432 Mr. Broeders, could you turn to Exhibit J.7.27, please, sir. 433 MR. BROEDERS: I have that. 434 MR. SHEPHERD: Thank you. Now, you said this morning that you understood that the amount baked into rates for pensions in RP-1999-0017 was 1.3 million, and I'm looking here at this summary -- 435 MR. BROEDERS: Sorry, you're saying 1.3? 436 MR. SHEPHERD: Yeah, 1.3. 437 MR. BROEDERS: 7.9. 438 MR. SHEPHERD: No, for pensions. 439 MR. BROEDERS: I'm sorry. 440 MR. SHEPHERD: 7.9 was post-retirement of 6.6 and 1.3 of pensions; right? 441 MR. BROEDERS: Okay. 442 MR. SHEPHERD: Now, I'm looking at this 7.27 which has the budget for 2000 which is RP-1999-0017 is 2000 test year; is that correct? 443 MR. BROEDERS: Yes. 444 MR. SHEPHERD: It shows the 6.6 for post-retirement but it shows another 6.6 for pension, so which number is correct? 445 MR. BROEDERS: Sorry, which numbers are you asking me to compare again, the 1.3 and the 6.6? 446 MR. SHEPHERD: That's right. 447 MR. BROEDERS: The 1.3 is what was in rates. This is the actual expense. 448 MR. SHEPHERD: No, the actual is actually 7.9 it says here, the 6.6 was budget. 449 MR. BROEDERS: Sorry, I'm looking at the wrong section, sorry. Our budget at the time was different than what got into rates. 450 MR. SHEPHERD: Okay. The second question, just as a matter of clarification, this is for you, Mr. Witts, on M.6.1. In 2003 it shows that the corridor excluded $37 million of losses, but I see the assets at 290 million and 10 percent of that would have been 29 million, and I don't understand that. Can you explain how that works? 451 MR. WITTS: The corridor test is based on the 10 percent of the greater of the assets or the obligation and the obligation was approximately 370 million. 452 MR. SHEPHERD: Oh, I see. Oh. All right. 453 Could we turn -- just one sec, I have papers all over the place. Can I ask you to turn to tab 4 of our materials, Exhibit M.7.1, and I guess this is probably you, Mr. Broeders, again. 454 I'm looking here at -- I'll start at the first page. This is from your annual report; do you recognize this? 455 MR. BROEDERS: Yes, I do. 456 MR. SHEPHERD: And this is the 2002 annual report? 457 MR. BROEDERS: Yes, it is. 458 MR. SHEPHERD: Okay. And so it shows your plan assets of 292 and your plan obligations of 386 for a net funding deficit of 94 million; is that correct? 459 MR. BROEDERS: That is correct. 460 MR. SHEPHERD: And I'm looking at M.6.1, now. Keep this other one open, we'll get back to it in a second. And for 2002, this shows an asset-related loss of 107 million as of year end. I take it that 107 million is the same as the 108 million that you see on unamortized net actuarial loss? 461 MR. BROEDERS: That's correct. 462 MR. SHEPHERD: And similarly, the 292 that you see there is the same as the 290 opening balance for 2003 in M.6.1. 463 MR. BROEDERS: That's correct. 464 MR. SHEPHERD: And these are just rounding differences. 465 MR. BROEDERS: Yes. 466 MR. SHEPHERD: Thank you. And so a $94 million deficit means that, correct me if I am wrong, that your assets, at the end of the 2002 year, fund 76 percent of the obligations. Will you accept that subject to check? 467 MR. BROEDERS: Subject to check, yes. 468 MR. SHEPHERD: And just on the column beside it, you see the 2001 numbers, and that shows you had a $40 million deficit as of the end of -- now that would be September 30th, 2001; right? 469 MR. BROEDERS: That's correct. 470 MR. SHEPHERD: And so that would mean that you had 89 percent asset coverage for your obligations. Do you accept that subject to check? 471 MR. BROEDERS: Subject to check, yes. 472 MR. SHEPHERD: And let me just take the 2001 number back to M.6.1 again, because M.6.1 says you lost $96 million in 2001 to September 30th and that you had a $76 million cumulative asset-related loss, but I don't see that anywhere in these numbers; can you help me with that in the annual report numbers? 473 MR. BROEDERS: The 96 million would be in the unamortized net actuarial loss/gain along with other actuarial gains and losses. 474 MR. SHEPHERD: All right. And you show a loss here, return on planned assets of minus 64 million in 2001, and that's the actual loss; correct? And then the $96 million number in 2001, that's the actual loss plus what you were supposed to have made, the expected return; isn't that right? 475 MR. BROEDERS: What was your question again, sorry? 476 MR. SHEPHERD: In 2001, you were expecting to make 8.5 percent on 390 million which is about $32 million and instead, you lost $64 million, according to your financial statements, which is the total of the two is the $96 million asset-related loss. 477 MR. BROEDERS: Correct. 478 MR. SHEPHERD: Okay. 479 MR. BROEDERS: Correct. So the 64 would be the 16 and a half percent loss. 480 MR. SHEPHERD: Would be the 16 and a half percent loss? 481 MR. BROEDERS: Correct. 482 MR. SHEPHERD: Okay. Now, if we could just go back to -- well, I guess you can just help me with one other thing here while we're at it. Can you take a look at page 2? It has a line net benefit plan expense for each of 2002 and 2001 and they are $2 million each year. And that's not the same as any of the other numbers that we've seen, can you help me with that? 483 MR. BROEDERS: Sorry, what numbers are you trying to compare to specifically? I think your main difference is going to be that this is the DB expense only. Other numbers when we've talked about pension expense have included the defined contribution expense. 484 MR. SHEPHERD: Okay, that's good. 485 Then if you take a look at page 6 of this tab, you'll see this is for the year 2000; you recognize this? 486 MR. BROEDERS: Yes, I do. 487 MR. SHEPHERD: And it shows that you had a surplus as of September 30th, 2000, of 35 million; right? 488 MR. BROEDERS: Correct. 489 MR. SHEPHERD: And so you -- you were funded at about 110 percent, you had 110 percent assets relative to obligations. Now this is, by the way, this is after taking account of the increased life expectancies; right? 490 MR. BROEDERS: That's correct. 491 MR. SHEPHERD: Okay. By the way, does that show somewhere in these numbers that impact, that $5 million impact, or is it buried in something? 492 MR. BROEDERS: It was -- 493 MR. SHEPHERD: It would have been in this year; right? 494 MR. BROEDERS: I'm sorry? 495 MR. SHEPHERD: The impact would have been in 2000. 496 MR. BROEDERS: It would have been in 2000. It's in the 32 million line with the actuarial gains, so it would have an offset to other items in there. 497 MR. SHEPHERD: Okay. And then finally -- no, not finally, almost finally, if you can go to page 8, at September 30th, 1999, you had about $62 million of surplus which is about 120 percent coverage; right? Subject to check? 498 MR. BROEDERS: That's correct. 499 MR. SHEPHERD: And in 1998, you had a $24 million surplus which is about 107 percent coverage. 500 MR. BROEDERS: Subject to check, yes. 501 MR. SHEPHERD: And finally, the last page, you see 1997, you also had a surplus and you had about 105 percent coverage, subject to check. 502 MR. BROEDERS: Yes. 503 MR. SHEPHERD: All right. 504 Now, this pattern of increasing assets relative to obligations, Mr. Witts, this is -- this is what happened for a lot of pension plans over that period; right? It's not an unusual thing that Union Gas went up and then slid. 505 MR. WITTS: The majority of defined benefit pension plans in Canada were consistently funded in excess of 100 percent during the '90s and particularly in the run-up in the capital markets to the end of '99 and indeed even into 2000. Since that time, the funded ratio has declined below 100 percent. The standard plan out there today typically is around about 80 percent funded. 506 MR. SHEPHERD: Is about 80 percent right now? Okay. 507 Mr. Witts, are you familiar with the Mercer Canadian Pension Health Index? 508 MR. WITTS: I am familiar with it. I am more familiar with a similar index which my own company produces. 509 MR. SHEPHERD: My apologies, I couldn't find it on your web site; I had to use the Mercer one. 510 Could you turn to tab 1, please. And this representation of pension health is also roughly equivalent to average funding status, isn't it? At least the pattern is the same. 511 MR. WITTS: Yes, I believe it is. 512 MR. SHEPHERD: Now, if you plotted the funding status of Union on this, will you accept, subject to check, or you can do it if you like, that Union had a better funding status than this index up until the end of 1999, but then slid below and is now lower than this index? It's gone lower more steeply than the index has; is that correct? 513 MR. WITTS: That would be correct relative to this index. My only concern in making the comparison is, and it's not stated here, is whether the index is actually based on an accounting measure or if it is based upon some other measure. 514 MR. SHEPHERD: No, in fact, it arbitrarily sets January 1st, '98 at 100 percent. 515 MR. WITTS: Correct. 516 MR. SHEPHERD: So it's just a relative measure, right, but still the pattern is the same. 517 MR. WITTS: My point would be, though, that the funded status can be determined using a number of different measures, and the measure that is included in the rate application in which we are discussing is the measure of the obligation under the accounting standard. What is not stated here is whether the index is based on the assumptions that would be used in complying with the accounting standard. 518 The index that my company produces is based on that standard, and just looking at this, the line does look a little different. 519 MR. SHEPHERD: In what way? 520 MR. WITTS: I think that there's been greater variation in the index based on an accounting measure, because the accounting measure reflects not only the change in the asset value but also the significant decline that's occurred in bond yields which affects the obligation. 521 MR. SHEPHERD: I wonder if it's possible, is that index something that you could -- the Towers Perrin one, is that something you could file for this same period? 522 MR. WITTS: I can certainly file the index we have. I'm not certain that it covers exactly the same period. 523 MR. SHEPHERD: Well, certainly it would be useful if we could see the run-up to the market going crazy and then the run-down as it came to its senses. Will it cover that, do you think? 524 MR. WITTS: I believe it covers the 2000 period. 525 MR. SHEPHERD: But not necessarily before? 526 MR. WITTS: No. 527 MR. SHEPHERD: Well, maybe we can see it. 528 MR. WITTS: I can undertake to provide that. 529 MR. MORAN: Mr. Chair, that would be Undertaking N.7.4, an undertaking to provide the Towers Perrin pension index. 530 UNDERTAKING NO. N.7.4: TO PROVIDE TOWERS PERRIN PENSION INDEX 531 MR. SHEPHERD: Now, Mr. Witts, Union Gas's performance wasn't, by any means, the worst in the market, was it? There were a lot of pension plans that did much worse. 532 MR. WITTS: Yes, there have been some plans that have fared relatively worse. 533 MR. SHEPHERD: And we've included in our materials at tab 5 some copies of pages from the Bombardier financial statements for several years, and it's well known, Mr. Witts, that Bombardier has one of the worst records; is that correct? 534 MR. WITTS: I believe that they have featured significantly in the press. 535 MR. SHEPHERD: And so this shows, for example, on page 2 of tab 5, that as of January 31st, 2003, they had a $2.7 billion funding deficit. Are there even worse examples than that, Mr. Witts, that you know of? 536 MR. WITTS: I believe there are other companies that have significant deficits of this order of magnitude. Typically, they tend to be the more mature companies that have large retired populations. 537 MR. SHEPHERD: In Bombardier's case, that $2.7 billion presumably -- that deficit presumably depresses its stock price, too; is that a fair leap? 538 MR. WITTS: That would be speculation on my part, but I think that analysts certainly would look at the information that's disclosed in the financial statements and draw appropriate conclusions. 539 MR. SHEPHERD: Now, I wonder if you could turn to tab 6. Now this is the Enbridge plan, I guess this is the closest comparative we have in Ontario to Union Gas. I just want to take you through some of these numbers because Enbridge has had a quite different experience in terms of this bad period for pension plans. If you take a look at page 2 of tab 6, and this is one of the pages where it was difficult to read, but I think if you look at the new pages, it's easier. Enbridge still had a surplus, it looks to me like $223 million, as of the end of 2002, and will you accept, subject to check, that that's 131 percent funding coverage? 540 MR. WITTS: Yes. 541 MR. SHEPHERD: So that compares to Union at the same time, which has a 6 percent funding coverage as we identified a second ago. 542 And similarly, in 2001, you have a $334 million surplus which is about 145 percent coverage relative to Union's 89 percent; will you accept those numbers subject to check? 543 MR. WITTS: Yes. 544 MR. SHEPHERD: And I'm not going back through the evidence, but it's true, isn't it, that Enbridge pension fund started out a lot higher in the late '90s and has continued to perform much better than Union's over that period of time? 545 MR. WITTS: The relative performance can be measured in a number of ways. Obviously, the Enbridge situation we're looking at here is a much bigger arrangement than Union Gas, approximately twice as big. And like other pension funds, particularly in 2001, they had a $120 million loss on those funds. 546 MR. SHEPHERD: So let me just stop you there, so that's a 10 percent loss relative to the 25 percent loss that Union experienced in 2001; correct? 547 MR. WITTS: I believe the actual rate of return on Union's fund in 2001 or the loss was negative 16.5 percent. 548 MR. SHEPHERD: I'm sorry, I'm confusing numbers. It's 16.5 as opposed to 10 here. 549 MR. WITTS: That's correct. 550 MR. SHEPHERD: Now, I wonder if you could turn back now to tab 4 again. And one of the things I've been trying to understand is how you got from a $62 million surplus to a $94 million deficit so easily. And one of the things I note is that in 1999, and this is after September 30th, 1999, I think you can confirm that, you used $21 million for your VERP program, right? 551 MR. BROEDERS: That's correct. 552 MR. SHEPHERD: And that was after September 30th, 1999, in those three months from October 1st to December 31st; right? 553 MR. WITTS: That's correct. 554 MR. SHEPHERD: And so at the end of 1999, if you look at page 6 of tab 4, you had a -- no, I'm sorry. Page 8 of tab 4, you had a $62 million surplus, but you took 21 million of that to fund this VERP program. I couldn't understand yesterday, did you get an approval from the FSCO? 555 MR. WITTS: Yes, the program was approved both by the Canada Customs and Revenue Agency and the Financial Services Commission of Ontario. 556 MR. SHEPHERD: And it didn't require approval from this Board, right, because it was internal? 557 MR. WITTS: No, I don't believe so. 558 MR. SHEPHERD: So, if you had $62 million at the end of 1999 and then you spent 21 of it on this VERP program, that would have left you with 42 million, and your funded status at the end 2000 was 35. So correct me if I am wrong, but it sounds like the main impact between the end of 1999 and the end 2000 was that use surplus for that program; right? 559 MR. WITTS: That would have been the primary factor driving the change. 560 MR. SHEPHERD: Now I'm looking at page 6 at tab 4, and I'm trying to understand, so that 21 million would have been spent in this year, in the 2000 year, and I couldn't find it anywhere here in these numbers reporting the pension benefit plans. I guess -- could you help me out with where it is in there? 561 MR. WITTS: I'm sorry, which page? 562 MR. SHEPHERD: Pages 6 and 7 of tab 4. This is the 2000 annual report so this is the year in which you spent that money and I couldn't find it anywhere and I was wondering if you could help. 563 MR. WITTS: The additional liability appears under the accrued benefit obligation on page 6, and the recognition of that obligation is included in the actuarial gains and losses line. 564 MR. SHEPHERD: Sorry, the additional liability is in accrued benefit obligations, where is it in there? 565 MR. WITTS: In the 349 million. 566 MR. SHEPHERD: That's the balance at the beginning of the year so that's before the program happened; right? 567 MR. WITTS: But it was recognized as of -- we measured it as of January 1, 2000. 568 MR. SHEPHERD: All right. Now, the VERP was 100 to 125 employees that were terminated and instead of paying them severance, you allowed them to retire early and take an enhanced pension; is that correct? 569 MR. WITTS: That's correct. 570 MR. SHEPHERD: So how much did you save in severance costs by doing that? 571 MR. BROEDERS: I don't know that figure. 572 MR. SHEPHERD: Is it something that you have in your records somewhere? Is that something that you would -- I mean, presumably, if you were going to spend $21 million of pension money to terminate these employees, you would have figured out that it was cheaper to do that than to pay severance. Did you do that? 573 MR. BROEDERS: I wasn't involved with the decisions at the time. I don't know if it those numbers -- I'm not aware of those numbers. 574 MR. PENNY: Mr. Chairman, my recollection is that this was the subject of proceedings before the Board in RP-1999-0017 and the Board, in recognition of that restructuring that took place in late 1999, as I recall, I think this is in the decision, but I think the Board reduced the O&M allowable recovery by about 5 million a year which was, of course, then ongoing throughout the term of the PBR. But perhaps what we should do is check on that and get back to Mr. Shepherd. 575 MR. SHEPHERD: That would be very useful, Mr. Chairman. 576 MR. SOMMERVILLE: Thank you, Mr. Penny. 577 MR. SHEPHERD: Should we have an undertaking for that, or is that ... 578 MR. MORAN: Undertaking N.7.5. How does Mr. Penny want to describe the undertaking? 579 MR. PENNY: I think the request was to determine what the O&M reduction was associated with the VERP program. 580 UNDERTAKING NO. N.7.5: TO DETERMINE WHAT THE O&M REDUCTION WAS ASSOCIATED WITH THE VERP PROGRAM 581 MR. MORAN: In RP-1999-0017. 582 MR. SOMMERVILLE: Thank you, Mr. Moran. 583 MR. SHEPHERD: Now, I wonder if I could turn to a new area. You've mentioned a number of times that the expense and the contribution are different. 584 MR. WITTS: That's correct. 585 MR. SHEPHERD: And why is that? 586 MR. WITTS: The pension accounting expense is determined in accordance with section 3461 of the Canadian Institute of Chartered Accountants Handbook. The cash contributions are determined in accordance with the Ontario Pension Benefits Act and regulations thereunder. 587 MR. SHEPHERD: So will you confirm that the cash contributions by Union Gas into its pension plans were 10 million in 2000, 11 million in 2001, 11 million in 2002, and 11 million in 2003? Will you confirm those numbers? 588 MR. PENNY: Well, it might assist if Mr. Shepherd could tell us where he's getting those numbers. 589 MR. SHEPHERD: Okay. 2000, you'll find on page 6 of tab 4 of our materials, employer contributions, 10 million. That's the right number, isn't it? 590 MR. BROEDERS: For 2000, 10 million is correct. 591 MR. SHEPHERD: Okay. And then if you go to page -- 592 MR. BROEDERS: Sorry, before we go to the next page, I'd like to specify that that is the funding for the defined benefit plans and does not contain the number for the defined contribution, which is elsewhere in the notes. About $2 million, I think. 593 MR. SHEPHERD: So there's another, roughly, 2 million in each year that would be -- 594 MR. BROEDERS: Roughly. 595 MR. SHEPHERD: -- a defined contribution. 596 I'm just trying to find the next year. Okay. On page 1, you see 2001, employer contributions, 11 million; 2002, employer contributions, 11 million. 597 MR. BROEDERS: That's correct, sorry. 598 MR. SHEPHERD: Okay. And what's the number for 2003; do you know? 599 MR. BROEDERS: Projected to be about 13 million. 600 MR. SHEPHERD: Okay. 601 MR. BROEDERS: Again, that's just the defined benefit number. The defined contribution is an additional 2 million. 602 MR. SHEPHERD: And do you have a projection for 2004 yet? 603 MR. BROEDERS: 2004 is approximately 12 and 2 again. I believe in 2005, it ramps up to about 20, in the 20 range. 604 MR. SHEPHERD: Okay. Am I right, Mr. Witts, that the amount the company can include in -- can actually contribute is subject to a minimum, but it can put in whatever it wants, it can fund it fully if it wants? 605 MR. WITTS: That's not quite correct. The funding requirements, the cash contribution requirements for pension plans, the minimum is set by the Provincial Pension Benefits Standards Act; in Ontario, the Ontario Pension Benefits Act and regulations thereunder. That establishes a minimum level of contribution that the employer must contribute to the fund. 606 The Canada Customs and Revenue Agency doesn't want to allow employers unfettered room to take tax deductions and fund pension plans; therefore, they set a maximum limit, and typically employers will decide to fund somewhere between the minimum and the maximum. 607 In addition, once you reach a certain funded level under the Income Tax Act and regulations, you are not permitted to contribute any further until the actuarial surplus has been used up. 608 MR. SHEPHERD: Well, you are permitted, you're just not allowed to deduct it. 609 MR. WITTS: No. The Income Tax Act now defines contributions to a pension plan as an eligible contribution, and in order to be an eligible contribution, it has to be certified by an actuary as being a required contribution as within those limits. 610 MR. SHEPHERD: So if, and I don't mean this -- I won't even say it that way. 611 Union Gas doesn't have that problem currently of not being able to put money in because it has a surplus. 612 MR. WITTS: We don't currently have that problem. That problem did exist under one of the pension plans in 1999. 613 MR. SHEPHERD: But, for example, September 30th, 2001, the company could have written a cheque for $76 million and funded the plan; it didn't, but it could have. 614 MR. WITTS: Theoretically, it could have. 615 MR. SHEPHERD: Okay. Let me -- do I understand correctly from your evidence yesterday that all six of the plans are currently on a one-year review, actuarial review, for FSCO purposes? 616 MR. WITTS: They are not all on one-year review. I believe three are on one-year review. And that information is to be provided along with the -- in the undertaking to provide copies of the actuarial valuation reports and the schedules for the valuations. 617 MR. SHEPHERD: It sounds like there will be a wealth of information there. 618 Okay. Let me turn, then, to the assumed rate of return, and I guess I'm a little surprised and perhaps you could explain to me why the assumed rate of return for the Union Gas pension plan has been moving around so much when that's not common, is it, to move the rate of return around? 619 MR. WITTS: The expected rate of return is exactly that, it's an expectation, and therefore it does change in line with expectations for future returns which, in turn, depend on the view of economic conditions now and into the future. 620 Generally speaking, expected returns on assets increased in the late 1990s, as one might imagine, along with the significant build-up in capital markets, particularly the technology bubble; and since that time, particularly since 2001, the events thereof, a more conservative expectation has prevailed. 621 Union Gas's expected rate of return is not out of line with what other large companies in Canada have assumed, and we have, each year, benchmarked against other companies to ensure that we are not out of line with what other companies are doing. 622 MR. SHEPHERD: Yeah, I'm not so much concerned with where it is now. I guess I understand it, and in fact it's true that the average of major pension plans is something like 7.56 percent; isn't that right? 623 MR. WITTS: I believe that number is taken from a Globe and Mail article. 624 MR. SHEPHERD: Yes. Is that roughly the right range? 625 MR. WITTS: That was the expected average rate of return, I believe, for 2002. I believe 2003 is likely to be similar but my expectation is that we will continue to see a downward trend in the median rate. 626 MR. SHEPHERD: So what I'm wondering about is not so much why it's 7.5 -- it's 7.5 now is your current recommendation; right? 627 MR. WITTS: That's correct. 628 MR. SHEPHERD: And that's in line with everybody else's, pretty well. 629 MR. WITTS: We believe so, yes. 630 MR. SHEPHERD: Okay. But it was 8 and a half a couple of years ago and 8 percent a couple of years ago as well, and that was higher than average, wasn't it? 631 MR. WITTS: It would have been slightly above median but not far above median. 632 MR. SHEPHERD: And the other thing is that these are very long-term investments, you're investing for a median maturity of 13 years currently; right? 633 MR. WITTS: 13 years is the expected average remaining service life of the active group to their retirement date and they could then be expected to draw a pension income for perhaps another 15, 20 years after that. So the time horizon for the pension plan is more like 30 to 35 years. 634 MR. SHEPHERD: So then I would have thought that changes in the market this year or last year would have very little impact on your assumptions for that long term an investment; isn't that right? 635 MR. WITTS: Current economic conditions do factor into conditions affecting the expected rate of return. There is also the requirement under the accounting standard that management use its best estimate, and estimates will change from time to time, as I've stated, as economic conditions change. 636 MR. SHEPHERD: But in 1999, I believe it was 1999, when Union was expecting 8.5 percent and the markets were going crazy, wasn't it 1999 you were expecting 8.5 percent or was that 2000? 637 MR. BROEDERS: 8.5 percent was 2001 and 2002. 1999 we had 7.5. 638 MR. SHEPHERD: Okay, so I guess I don't understand how you could get to 8.5 percent in a year in which the market is going down the tubes, and you've had just a couple of good years prior. How did you get to 8.5 percent then? 639 MR. WITTS: The rate would have been determined for 2001 in September of 2000. 640 MR. SHEPHERD: Yes. 641 MR. WITTS: At which point markets were likely very near to their highest levels. 642 MR. SHEPHERD: The markets tanked in April of 2000, didn't they? 643 MR. WITTS: The technology sector began to melt beginning in 2000, but the blue-chip sector actually turned in some significant returns in that year. 644 MR. SHEPHERD: Okay. Let me move on to the question of losses on investments. And I guess what I'd like to try to identify, and perhaps you can help me, Mr. Bodnar, probably, is -- because you were sitting on the pension committee for most of this period, the last three or four years; right? 645 MR. BODNAR: That's correct. 646 MR. SHEPHERD: So you don't just find out at the end of the year that you lost money on your investments during the year, do you, you find out along the way. 647 MR. BODNAR: We certainly get reports in terms of the performance of individual investment managers that we're utilizing, yes. 648 MR. SHEPHERD: And you get, what, a monthly status report? 649 MR. BODNAR: Our status reports are more on a quarterly basis, but we do receive periodic information that comes in, not necessarily on a monthly basis. It may come in on a monthly basis to the administrator who has the responsibility to collect information for the pension investment committee, but the pension investment committee reports, for the most part, are done on a quarterly basis. 650 MR. SHEPHERD: Well, I wonder whether you could tell me or undertake to find out, if you don't know, three pieces of information: The first piece of information is, what's the date of the first month in which you started to lose money in this plan, in these plans? Do you know? 651 MR. BODNAR: No, I don't. 652 MR. SHEPHERD: And the second date is the date that the pension committee identified that it had a risk that it would be under 100 percent funding, not when you got there, but when you first twigged, Hey, we might go under 100 percent. And the third date is you actually went under 100 percent. Will you do that? 653 MR. BODNAR: I will certainly undertake, the best that I can with the records that I have, to determine that kind of information. I should mention though, with the benefit of hindsight, it's much easier to predict what the markets were going to be doing in '99 and 2000 as you were going through an investment review in a period of time and looking at a balanced portfolio, we weren't able to predict, you know, September 11th, we weren't able to predict Enron. We were mindful of concerns around technology, I can attest to that, and indeed, you know, our investment managers were trying to be careful in terms of the quantum with investment in companies that were in larger part of that bubble, but the fact of the matter is, there were impacts on the capital markets that were -- in some cases people's predictions that they would be shorter term and in other cases, predictions that were -- or sorry, not predictions, but impacts that were cumulative over time. 654 So certainly there has been an impact as a result of the markets and certainly we, along with many other plans, experienced losses during that period. But I will undertake to review that information. 655 MR. SHEPHERD: So what I wonder if you could provide is, there are those three numbers, and I wonder if you could provide it a month by month, if you have it, or quarter by quarter if you don't, planned performance starting January 1st, 2000, and going to end of 2002. 656 MR. BODNAR: We already have an undertaking to provide the reports to the extent that we have them, for the pension investment committee minutes, and I presume that that would be included with that. 657 MR. SHEPHERD: Okay, wonderful. Then just those three dates then, the date that you started to lose money, the date that you first identified with the pension committee that there was a risk of under 100 percent funding, and the date you actually went below 100 percent. 658 MR. BODNAR: And I need to clarify the first question. As I mentioned before we use a number of advisers and there will be circumstances where one investment manager may be losing some money in, you know, let's say a small cap fund, but indeed, in our balanced fund we are making gains. So when we first started losing money, I presume, would be the same as number 2 question which would be when there was a net loss to the plan as opposed to when an individual investment manager may have lost some money. 659 MR. SHEPHERD: I'm not interested in the individual investment managers, I'm only interested in the overall. 660 MR. BODNAR: So really it sounds like question 2 and 3; is that right? 661 MR. SHEPHERD: No, item 1 is the first month that you had a net loss in the plans, okay? Item 2 is the first month that the pension committee identified that it might go under 100 percent funding. And the third is the first month in which you were actually under 100 percent funding. 662 MR. BODNAR: Again, I'll do the best I can. We should realize as well that where there may be one month that there's a net loss to the plan, the following month or quarter, and I'll probably only be able to do it on a quarterly basis, but there there is another quarter where they may be a net gain but I'll use my judgment in that and provide it to you. 663 MR. SHEPHERD: Thank you. 664 MR. MORAN: Mr. Chair that would be N.7.6, the three numbers as stated by Mr. Shepherd. 665 UNDERTAKING NO. N.7.6: TO PROVIDE THE DATE THAT UNION STARTED TO LOSE MONEY, THE DATE THAT UNION FIRST IDENTIFIED WITH THE PENSION COMMITTEE THAT THERE WAS A RISK OF UNDER 100 PERCENT FUNDING, AND THE DATE UNION ACTUALLY WENT BELOW 100 PERCENT 666 MR. SHEPHERD: Now, I wonder if I could ask you to turn to tab 7 of our materials. 667 I guess, Mr. Bodnar, this is for you, do you recognize this document? 668 MR. BODNAR: I have seen this document before. 669 MR. SHEPHERD: And am I correct in identifying it as the agreement between Duke Energy and Westcoast and other parties dated September 20th, 2001, with respect to the acquisition of Westcoast by Duke? 670 MR. BODNAR: Yes, that's correct. 671 MR. SHEPHERD: So I'm going to ask you to turn to, if I can find it, to page 27 of that document. 672 MR. BODNAR: The page numbers are on the bottom and on the top left-hand side. Which page number are you using? 673 MR. SHEPHERD: I didn't actually number the top left -- oh, sorry. Okay. Anyway, the bottom is what I'm referring to, 27 at the bottom. 674 MR. BODNAR: Okay. 675 MR. SHEPHERD: And I'm going to ask you to look at F. This is a representation by Westcoast that each of its plans, including all of its pension plans, was fully funded as of September 20th, 2001. Given the evidence that you provided, was that representation true at that time? 676 MR. BODNAR: My comment would be that, although this is a combination agreement, and I have to say I didn't write the combination agreement and I wasn't a party to the negotiations, but where there -- as I understand it, where there may be exceptions to the combination agreement, there may have been amendments made in an appendix to the combination agreement. 677 MR. SHEPHERD: So you don't know whether that representation was true at that time. Or can we take it that at least some of the plans were not fully funded, given the numbers on M.6.1. 678 MR. BODNAR: I think that's probably correct; that in each of these cases, because again, as I understand it, where there were -- where, as a result of the combination agreement, there were certain undertakings that were -- that were not correct or needed an amendment or clarification, there would have been an amendment or clarification that would have been provided to the purchaser. 679 MR. SHEPHERD: Well, I can actually help you with that. If you can turn back to page 25, and look at the bottom 3.13(a) you'll see it refers to something called the Westcoast disclosure letter. And you're familiar with these agreements, aren't you, Mr. Bodnar? This type of agreement, you've seen them before? 680 MR. BODNAR: I've seen these types of agreements before. 681 MR. SHEPHERD: Okay. And the disclosure letter is the document that sets out those exceptions, isn't it? 682 MR. BODNAR: That's correct. 683 MR. SHEPHERD: So I wonder if you could undertake to provide section 3.13 of the Westcoast disclosure letter for us. 684 MR. PENNY: Well, Mr. Chairman, we're dealing with 2004 rates. This is not a shareholder class action or a claim by Duke to determine whether reps and warranties were fulfilled or not. I must say that it strikes me that we're pretty far afield here from relevant information to assist in the formulation of 2004 rates. So I guess I'm asking in a roundabout way for Mr. Shepherd to enlighten us as to why this inquiry would be -- result in any relevant evidence for the Board. 685 MR. SOMMERVILLE: Mr. Shepherd. 686 MR. SHEPHERD: Mr. Chairman, the part of the question that this Board has to deal with is not just what the expense should be but who should pay it. And one of the positions that I know a number of intervenors are going to take, including, perhaps, us, depending on the evidence, is that if you buy a company with $100 million pension deficit, you've accepted that there's a lower value to the company and you've paid less for it. 687 So if Duke bought a company with $100 million deficit, they can't then come to the ratepayers and say, Please give us back some money, because they already got it reflected in their purchase price. 688 And so I think it's legitimate, Mr. Chairman, for us to pursue the question of what did Duke actually know, and how this was taken to account in that transaction. 689 MR. PENNY: Well, Mr. Chairman, the purchase price, whether there's a premium or whether there's a set-off, has nothing to do with whether ratepayers pay for -- what ratepayers pay for the reasonable cost of providing the service. That's a long-standing proposition before this Board. So whether the premiums can't be recovered from ratepayers, equally, in my submission, the fact of what may have been some discount or set-off is not relevant. The issue is what are the reasonably-incurred costs of the company and are they properly recovered in rates. 690 So the entire inquiry, in my submission, is not relevant. 691 MR. SOMMERVILLE: I think that's a matter that can be dealt with in argument. I think it's not inappropriate to have the disclosure letter, and both sides of that issue can be appropriately argued in that context. 692 So I would ask the witness to produce that letter, if it's available. 693 MR. BODNAR: My one comment on this is that this letter, I presume, would include information that is well beyond Union Gas issues, in other words, information that deals with other companies associated with Westcoast, and may, although I'm not certain, include some individual information that I would consider quite confidential to that individual. 694 MR. SHEPHERD: Mr. Chairman, we have no problem with that material being redacted in that way. 695 MR. SOMMERVILLE: Mr. Penny, are you ... 696 MR. PENNY: Well, as I understood it, Mr. Chairman, I think that is a concern, and I appreciate Mr. Shepherd's acknowledgment of that. 697 As I understand it, what's being sought is section 3.13, which, on the basis of this document, clearly includes things that go way beyond the scope of the pension plan and Union's pension plan, such as profit sharing and deferred compensation, stock options, and so on. And it seems to me that the relevant response to Mr. Shepherd's inquiry, both on the basis of the question and in light of the ruling you just made, would be that any -- that that portion of section 3.13 which relates to the Union Gas pension plan be the part that is produced, but not anything else. 698 MR. SOMMERVILLE: I think that's a very appropriate qualification. 699 MR. PENNY: Thank you, sir. 700 MR. SOMMERVILLE: Can I leave it to you, then, to make whatever redactions you think are appropriate and produce that accordingly? 701 MR. PENNY: Yes, thank you. 702 MR. MORAN: That would be become N.7.7, to produce that portion of section 3.13 of the Westcoast exposure letter as it relates to Union's pension plan. 703 UNDERTAKING NO. N.7.7: TO PRODUCE THAT PORTION OF SECTION 3.13 OF THE WESTCOAST EXPOSURE LETTER AS IT RELATES TO UNION GAS'S PENSION PLAN; TO DETERMINE WHETHER OR NOT THERE WAS A CHANGE IN THE DISCLOSURE LETTER FROM THE DATE OF THE AGREEMENT TO THE DATE OF CLOSING 704 MR. SHEPHERD: Now, just following along from that, Mr. Bodnar, there would have been specific due diligence reports on the pension plans delivered by Westcoast to Duke in the course of this transaction; isn't that right? 705 MR. BODNAR: I, again, assume there would have been some independent consultants that would have done a review, or perhaps employees of Duke that, at the time, would have gone through a room filled with information as a part of their due diligence. 706 MR. SHEPHERD: The war room. 707 MR. BODNAR: A war room. 708 MR. SHEPHERD: Yes. 709 Mr. Witts, did you prepare a report at the time of this acquisition on the status of the pension plans, or did your company? 710 MR. WITTS: We did not prepare any specific report related to the Duke acquisition. We did, however, put together the disclosure information comprising documents, actuarial valuation reports, et cetera, that was put into the data room that Mr. Bodnar referred to. 711 MR. SHEPHERD: Thank you. 712 MR. PENNY: Just for clarification, Mr. Chairman, I think that is the material that was the subject of undertakings that were given yesterday. 713 MR. SHEPHERD: It absolutely probably was. 714 MR. SOMMERVILLE: That's my recollection. 715 MR. SHEPHERD: The ubiquitous periodic reports. 716 And just the last point on this. This representation applies not just at September 20th, '01, but also on the closing date which, correct me if I am wrong, was March 14th, '02, was the closing date? Will you accept that, subject to check? 717 MR. BODNAR: I believe that's correct, yes. 718 MR. SHEPHERD: And this representation is brought down to the closing date in standard practice; isn't that correct? 719 MR. BODNAR: Again, it would be subject to any changes that occur that may otherwise then be reported to the purchaser. 720 MR. SHEPHERD: So in your undertaking, N.7.7, if there was a change in the disclosure letter from the date of the agreement to the date of closing, could you provide that as well? 721 MR. BODNAR: I will do that. 722 As I recall, and my memory is a little dusty on this, but as I recall, and I will research this, but as I recall, I believe what was provided were the actuarial reports that were current to the time. 723 MR. SHEPHERD: That would simplify it for everyone. 724 MR. BODNAR: That would. 725 MR. SHEPHERD: Now, lastly on this agreement, I wonder if you could turn to page 43. Just to help you out a bit, the preamble to this is actually on page 40, and the preamble reads, "Westcoast agrees as follows until the effective date..." blah, blah, blah. 726 In other words, there's certain things that between September 20th, '01, and March 14th, 2002, Westcoast agrees that it won't do, and I'm asking you to look at VII(a). And it's correct, is it not, that is that Westcoast agreed that it would not increase any of the amounts it funded in its pension plans during that period; isn't that right? 727 MR. BODNAR: That's the general discussion in that paragraph. I should add, again, globally under this article, as we worked with Duke through to the closing, if you will, our instruction was normal business, and under that normal business, really, it meant that the new owner would like us to advise them if we were going to do that, and the manner in which that was articulated, if you will, in the agreement, was to put certain limits in. And then, if we had a need to change from whatever these limits were, we would advise them. 728 So if, for example, we were required to do something under -- whether it's because of a legal reason or because normal business practice would have us do something, we would advise them of those instances and the appropriate individuals would become aware of it, and in most cases we just proceeded. 729 MR. SHEPHERD: But they would have to give their consent? 730 MR. BODNAR: They would look at it and they would give consent, if you will. But as I said, the initial instruction was, Carry on business as usual. We'd like to know about it when you're doing some changes. 731 MR. SHEPHERD: Well, okay. I'm going to ask you to turn back to page 40 where it says under A, "Except with the consent of Duke Energy to any deviation," so they had to consent; right? 732 MR. BODNAR: I understand what you're saying and I'm telling you what the practice was. 733 MR. SHEPHERD: Okay. And so when you got a report as of the end of September saying that you'd lost $96 million on your pension plan, you weren't actually able to put money in anyway, right, any additional money in, even if you wanted to, without the consent of Duke? 734 MR. BODNAR: As we received information with respect to our plans, we would go through our normal due diligence as to -- and following CICA rules and on advice of our consultants, we would consider what needed to be done. If that meant that would be something outside of what was contemplated in this agreement, we would typically send a note or call someone over at Duke and, as I said, I can't think of a period of time when somebody said no to normal business. 735 MR. BROEDERS: For the 2001 contributions, Towers Perrin would have advised the correct contributions to make for the year and I did not go through any separate approval process to ensure that those amounts could be paid. I paid what Towers Perrin told me to pay for 2001. 736 MR. SHEPHERD: But as you've said, it was approximately the same as the previous year anyway. 737 MR. BROEDERS: Right, but we paid the minimum liability, there was no need to go further to increase the amount. 738 MR. SHEPHERD: Well, you lost almost $100 million in your plan so -- 739 MR. BROEDERS: We paid the amount per the legislation according to what Towers Perrin advised us. 740 MR. SHEPHERD: You paid the minimum. 741 MR. BROEDERS: Yes. 742 MR. SHEPHERD: I just want to clean up a couple of other loose ends here. If you could turn to Exhibit J.26.58, please. 743 MR. BODNAR: We have it. 744 MR. SHEPHERD: Thank you. And I guess I'm trying to nail down a couple of numbers. Under the blue-page update for your main plan, the 1100 employees in the defined benefit plan, correct me if I am wrong that you're planning to contribute in 2004, an average of almost $16,000 per employee into the plan; is that right? 17.3 million divided by 1100 is 16,000. 745 MR. BROEDERS: That looks correct, yes. 746 MR. SHEPHERD: And Mr. Witts, that's significantly higher than the average for most pension plans in Canada, isn't it, 16,000 per employee for one year? 747 MR. BROEDERS: Sorry, what are you trying to compare? Are you trying to say that we're contributing $16,000 for each employee's pension plan? 748 MR. SHEPHERD: You are planning to contribute $16,000 per employee -- 749 MR. BROEDERS: Based on the active population, realizing that there is an active retired population that we're funding for. 750 MR. SHEPHERD: Understood, understood. But also assuming you're making some income on your plan; right? 751 MR. BROEDERS: This year, I wish. Sorry, according to the expected rate of return, yes. For the pension expense number as a whole it's not an income, it's an expense. 752 MR. SHEPHERD: And in fact, if you compare your income expected for this year and the amounts you have to pay out to retirees, there's not that much difference, is there, for this year, because you're doing quite well? You're expecting to make 31 million on it this year, I think. Something like that. 753 MR. BROEDERS: I'm not sure what the benefits to be paid are for the year. 754 MR. SHEPHERD: Well, in 2002, if you look at tab 4 of Exhibit M.7.1, 2002, you paid 26 million, so it's not going to be a lot more than that in 2003, is it? 755 MR. WITTS: Perhaps I could respond to your question regarding the level of contribution for employee. It may well average out to $16,000 per employee, but it will vary by pension plan, and that contribution includes not only the current cost of benefits that are accruing in the current year, but indeed, a contribution to pay off the deficits that have emerged. 756 MR. SHEPHERD: Well, the contribution for the deficit is only $4.5 million, isn't it, if I read your M.6.1 right. 757 MR. WITTS: Sorry, where is the 4.5? 758 MR. SHEPHERD: Net increase/decrease in pension expense owing to amortization of the losses is $4.5 million, because you spread it over a lot of years, right? 759 MR. WITTS: Sorry, again, we're confusion pension expense and cash contributions. The $16,000 that you refer to is a cash contribution number? 760 MR. SHEPHERD: No, it's not, it's the blue-page update. 761 MR. WITTS: I beg your pardon. But you refer to the level of 16,000 as being above average? 762 MR. SHEPHERD: Yes. 763 MR. WITTS: It may be, relative to a defined contribution, and I assume you're referring to the typical limits that apply under those plans, but for a defined benefit plan where the expense does include an element for part funding or -- recognition of past service deficits, I don't think that would be out of line in the current environment. 764 MR. SHEPHERD: Okay. Your overall benefit number for 2004 is 35 percent of salaries; will you accept that, subject to check? I can take you to it if it's easier. 765 MR. BROEDERS: It's best to take us to it. 766 MR. SHEPHERD: Go to J.7.22. Do you have that? 767 MR. BODNAR: Not yet. We have it now. 768 MR. SHEPHERD: And line 2 has a percentage of line 1 under the blue-page update as 35 percent; will you accept that, subject to check? 769 MR. BROEDERS: Yes. 770 MR. SHEPHERD: And for EBRO 499 where you started all this, it was 20 percent; is that right? 771 MR. BROEDERS: Subject to check, yes. 772 MR. SHEPHERD: And finally, moving away from pensions with some reluctance, I just have one question on incentives. You talked yesterday with Mr. Thompson about $9.5 million of incentive remuneration next year, planned for next year, and you said some of that is driven by bottom-line performance and profits, things like that, and some of it is other things like environmental performance, et cetera. So I wonder if you could split that up, that 9.5 million, between incentives that are driven by profits or other shareholder benefits and incentives that are driven by anything else. 773 MR. PENNY: Well, as I recall the evidence yesterday, Mr. Chairman, from Mr. Bodnar, it was that those splits are different depending on what level of employee you're dealing with, so it isn't just one -- what class of employee. 774 MR. SHEPHERD: I'm asking if there's a total number. Some of it is going to be paid out because people met profit numbers; some of it is going to be paid out because they met environmental numbers and other things. I just want to know what the difference -- what the split is of that $9.5 million, which is their number. 775 MR. SOMMERVILLE: If Mr. Bodnar can provide an answer to that question with some qualification that there is a different -- it's a competent number, in effect, with different entries for different categories of employee and performance, that would be helpful. 776 MR. BODNAR: What I will need to do in order to answer that question, and I will need a little bit of time, is to look at the overall plan or the detail of the plans, and again, I presume, use some judgment as to what are all the other things versus -- and I'm sorry, what was the first caveat? 777 MR. SHEPHERD: The first is incentives driven by profit or other things that benefit the shareholder, and things that -- and all the other incentive characteristics. 778 MR. BODNAR: So, for example, if we have an earnings target, that would be something that benefits the shareholder. One might argue that there's some benefit to a -- in an organization even to the ratepayers to have an organization that can afford to do business. However -- 779 MR. SHEPHERD: Undoubtedly. All I'm trying to do is get the data on the record and then we'll argue it later. 780 MR. BODNAR: I will review that detail and provide, with the appropriate caveats, the information. 781 MR. MORAN: Mr. Chair, Undertaking N.7.8, an undertaking to break out the incentive number between that portion driven by profit versus other considerations? Is that correct? 782 UNDERTAKING NO. N.7.8: TO BREAK OUT THE INCENTIVE NUMBER BETWEEN THAT PORTION DRIVEN BY PROFIT VERSUS OTHER CONSIDERATIONS 783 MR. PENNY: Well, I mean, let's -- I think maybe we need to be clear about this. Is what Mr. Shepherd wants just the financial performance in one category and everything else lumped into the other, or is what Mr. Shepherd wants the portions relating to financial performance and also the portions relating to each of the other discreet categories of incentive? 784 MR. SHEPHERD: I don't need each of the other discreet categories. But I think it is clear that if, for example, one of the performance measures was Duke Energy profit, I think that's in the first category, regardless of whether technically it might be in the second category. But the idea is to split it between -- 785 MR. SOMMERVILLE: Financial performance and other categories. 786 MR. PENNY: Financial and other categories. All right, fine, that's helpful. Thank you. 787 MR. SHEPHERD: Thank you. 788 And, Mr. Chairman, with great apologies for going over my time, those are our questions. 789 MR. SOMMERVILLE: Mr. Brett, you are the last intervenor. We would normally take a break around now. Do you want to proceed now or should we take our normal midday break? 790 MR. BRETT: I think, Mr. Chairman, in light of the amount of material Mr. Shepherd covered, I do encourage you to stick with your normal practice and I'll start again after lunch. 791 MR. SOMMERVILLE: Very well. We'll reconvene at 2:00. 792 Now, for other reasons, the Board needs to adjourn today somewhere around 4:00, 4:15, in that range. That is going to -- I would expect, Mr. Brett, your estimate is about half an hour. 793 MR. BRETT: Half an hour, sir, and I will be on that. 794 MR. SOMMERVILLE: Thank you. And then Mr. Moran, and then hopefully the commencement of the next panel. 795 MR. PENNY: Yes, the next panel is available and ready to start this afternoon. Although given the progress we're making and the estimates for the O&M panel, it appears to me that we'd be highly unlikely to get to gas supply this week. 796 MR. SOMMERVILLE: That's beginning to be clear. 797 Over the break, the -- 798 MR. PENNY: By Thursday, I'm sorry, my apologies. Before Friday is what I meant to say. I've lost a day. 799 MR. SOMMERVILLE: But tomorrow for the O&M panel and Friday for gas supply. We are slipping behind our schedule. The Board will take a look at where we stand on that over the break and see if there's something we can do. We do have some down days that are currently scheduled and we'll consider whether we need to bring those back into play. And we'll advise the parties accordingly as our thought on that develops. 800 So we'll stand adjourned until 2:00. 801 --- Luncheon recess taken at 12:40 p.m. 802 --- On resuming at 2:10 p.m. 803 MR. SOMMERVILLE: Thank you, please be seated. 804 Mr. Brett. 805 MR. BRETT: Thank you, Mr. Chairman, Mr. Birchenough, good afternoon, panel. 806 MR. PENNY: Sorry, Mr. Chairman, I just have one introductory matter. It has to do with the Undertaking N.7.5 that had to do with the cost savings associated with 1999 employee reductions, and at the lunch break, we found the reference to the Board decision I was referencing earlier, it's in RP-1999-0017 at paragraph 2.168, and there, the Board found that it was going to make a one-time adjustment to the 1999 approved rates for the revenue base for 2000 which included a $5.162 million for staff reductions. And that was the 1999 restructuring. 807 Now, I think specifically what Mr. Shepherd wanted to know was what portion of that related to voluntary early retirement, and we're not able to now specifically break out that number. What we do know is that in rough order of magnitude terms, there were roughly 125 people of the 1999 restructuring that took voluntary retirement and the rest were terminations, and there was a total of about 175. So there were 50, roughly, that took severance packages and 125, roughly, that took the early retirement. But that's the best we can do in terms of -- there's just no other way of doing the financial breakout, but it's 5.162 million in reduced cost recovery for 2000, 2001, 2002, 2003. 808 MR. SOMMERVILLE: Thank you, Mr. Penny. 809 MR. PENNY: Sorry, Mr. Brett. 810 MR. BRETT: Thank you, Mr. Penny. 811 CROSS-EXAMINATION BY MR. BRETT: 812 MR. BRETT: Panel, Mr. Witts, I'd like to start with you. I have a few questions on pensions, first. You had mentioned earlier that -- and I want to focus first on this issue of cash contributions to pension plan versus the accounting treatment. You had mentioned the cash -- the obligation of the company to make cash contributions to the defined benefit pension plan comes out of the Ontario Pension Benefits Act and the regulations thereto. And my question to you was, at a broad level, can you tell us what does the Act and regulations require, how does it frame the obligation? 813 MR. WITTS: The obligation is framed in terms of a requirement to perform a periodic actuarial valuation at least once every three years, as we've previously discussed, and more frequently when the plan is in underfunded situation. 814 The Act then prescribes the amounts that the employer must pay into the pension fund, the minimum amounts. Those minimum amounts comprise of three elements: The first element is the current service cost, the cost of the pension benefits that will accrue during the current year in respect of the services rendered by the employees in that year. 815 The second element depends on the going-concern actuarial valuation. The Act actually prescribes two types of valuation, one is a going-concern valuation and the other is a solvency valuation. The going-concern valuation is predicated on the assumption that the plan will continue indefinitely until the youngest active employee has retired from the company, drawn his pension, or her pension, and perhaps then had a contingent pension payable to a spouse. It projects all of that pension into the future and assumes a going-concern basis. If the plan is in an unfunded position on a going concern basis, the deficit must be amortized over a minimum period of 15 years. 816 The second type of valuation is a solvency valuation and the solvency valuation is predicated on the basis that the plan is effectively wound up on the valuation date and in doing that valuation, we look to the cost of securing the pension promises by buying annuities from an insurance company, for example. 817 If the plan is unfunded on a solvency basis, then additional payments must be made and over a shorter time period of 5 years. So effectively there are three components to the determination of the actual minimum cash contribution requirement. 818 MR. BRETT: And Mr. Witts, does that determination have to be made only in the event that the plan, as of the date of the evaluation, is in deficit, or is that in any event, in all circumstances? 819 MR. WITTS: That evaluation has to be undertaken in any circumstances at least once every three years. 820 MR. BRETT: Right. And then under what circumstances do these cash contributions have to be made? Do they have to be made -- for example, if the actuarial analysis were to find that the plan was in surplus, then I take it the surplus can be utilized to avoid some or all of the contribution of the company that would be required under these three tests; is that the idea? 821 MR. WITTS: If there were an actuarial surplus on a going concern basis and subject to the appropriate provisions being included in the government -- sorry, governing plan document, then the actuarial surplus may be applied to reduce the current service costs that would otherwise be required to be made by the company. 822 MR. BRETT: Okay. I understand. So in each case, in each and every case, there is a current service cost contribution that must be made on an ongoing basis, as it were, on an annual basis, and the only -- and against that obligation could be offset, in certain circumstances, a surplus. 823 MR. WITTS: That's correct. 824 MR. BRETT: Okay. And so is it fair to say, then, that there isn't really any discretion in terms of the amount of money that the company must put in with respect to current service costs, that's a number which it must effectively inject into the plan in each year? 825 MR. WITTS: Unless the plan is in actuarial surplus on a going concern basis. 826 MR. BRETT: Right. 827 MR. WITTS: In which case it can apply the actuarial surplus to meet its obligation to pay the current service cost. 828 MR. BRETT: And these other obligations that stem from these two, the going concern and the solvency test, these are minimum amounts, I think you said. So a company could put in more than that, but I suppose that would be unusual, it would likely put simply the minimum amounts? 829 MR. WITTS: In my experience, most companies do contribute the minimum amounts that are required under the provincial pension benefits legislation. That's not to say that in certain circumstances, a company may choose to make contributions beyond the minimum amount. 830 MR. BRETT: Right. Could I ask you to have a look at yesterday's transcript, please, two or three paragraphs starting with paragraph 529, that's an answer that you gave to Ms. Lott. 831 Do you have that? 832 MR. WITTS: Yes, I do. 833 MR. BRETT: 529 we've discussed. 530, the next section. In fact, I will just read the second sentence of the paragraph: 834 "In fact, most of the plans were revalued as of January 1, 2003." 835 Here we're speaking of the Union plans, I take it. 836 "And it is now commencing in 2003 that the company has started to increase its cash contributions into those plans." 837 So I paraphrase that to say that the triennial valuation that's required, you did in January 1, 2003, and as a result of that, the company has started to increase its cash contributions into those plans, and you're referring there -- the increases you're talking about -- well, is it fair to say that you're talking, for the most part, about increases that will be coming up down the road; in other words, the amount that we have from this morning's discussion that was paid into the plan or is proposed to be paid into the plan in 2004, as I understand it, is $12 million, and 2003 was 11 -- 13 million. Do you recall that discussion? 838 MR. WITTS: Yes, I did. 839 MR. BRETT: And so there isn't really any increase. What -- I guess my question is: What do you mean when you say that the -- it is now, "commencing in 2003, that the company has started to increase its cash contribution into those plans"? 840 Are you looking, really, forward down the road that these are going to get more significant? 841 MR. WITTS: The process of undertaking an actuarial valuation is quite time-consuming. Typically, we receive updates of the membership data in the first quarter of the year, and during the second quarter of the year, that data is then cleaned and we then use our computer programs to undertake the actuarial valuation. 842 It's usually in the third quarter that we have completed our actuarial valuation and I'm ready to present our results to the company. 843 For example, we've just recently delivered to Mr. Broeders the results of two actuarial valuations -- actuarial valuations of two of the plans which show increased funding requirements that are retroactive to January 1 of 2003. So my comments were referring to the fact that, as these valuations are completed, we have been seeing the requirement for the company to make additional contributions. 844 MR. BRETT: And those contributions, for 2003 that are retroactive to January 1, 2003 that you have recommended as a result of your actuarial analysis, are they already in that number of 13 million for 2003, Mr. Broeders? 845 MR. BROEDERS: I don't believe so. I think those numbers will increase by approximately a million dollars, so we might be looking closer to the 14 range for 2003. 846 MR. BRETT: And will that have any impact on the 2004 number at this stage? 847 MR. BROEDERS: Yes, it will, but I'm not sure to what extent. I would guess it would be about the same range. 848 MR. BRETT: Same order of magnitude, so we're not talking about a doubling or anything dramatic. 849 MR. BROEDERS: No. 850 MR. BRETT: All right. And then just sticking with that same page, Mr. Witts, going down to paragraph 532, as I understand where we -- again, focussing on this cash payment schedule, as I understand where we were this morning, or where we are, rather, now, is that in the test year, your schedule to make a cash -- Union's schedule to make a cash contribution of approximately 12 million, subject to this adjustment that we've just heard about, they're proposing to recover in rates, and this is in respect of defined benefit pension, about 19.1 million, I make it. So in respect of 2004, I'm correct that they're going to recover more in rates than they are actually going to pay into the plan in cash terms; is that fair? 851 MR. BROEDERS: According to RP-1999-0017, we were instructed to expense the amount according to the CICA Handbook, not according to the contributions. So the 19 million is what is going to be an expense, not the 14 million or so in contributions. 852 MR. BRETT: All right. Fair enough. And you're going to expense it and then, you agree with me, you're also going to recover it in rates. 853 MR. BROEDERS: I don't know what we're going to recover in rates as yet for 2004. 854 MR. BRETT: You're seeking to recover it in rates. 855 MR. BROEDERS: Yes. 856 MR. BRETT: Sorry about that. 857 Okay. Now, Mr. Witts, in that paragraph 532, you add -- you talk a bit about the smoothing and then you say: 858 "I would also add that this deferral has applied in prior periods, too, particularly when the company has been under performance-based regulation ..." I'll leave that aside for a moment, "... when in fact the expense that's been included in rates has been lower, because in the late '90s, we, in fact were in a healthy financial position but the obligations were less than the plan's assets..." and here's the part I have a question about, "... and in fact the company has reported greater expense during those years than was actually included in rate base." 859 Now, could I -- I'm not quite sure what you're driving at there. Is that meant to be a comparison of contribution with -- what's actually included in rate base, I think, means what's actually -- what the contribution actually was; am I right in that? 860 MR. BROEDERS: The term "rate base," I believe Mr. Witts was referring to the rates, not rate base. 861 MR. BRETT: I understand. 862 MR. BROEDERS: It's comparing the expense to what was approved in 1999-0017, which was the 7.9 million for pension and the other benefits. 863 MR. BRETT: You were saying, sorry, in 1999 -- 864 MR. BROEDERS: For 2000, what's approved as part of 1999-0017, 7.9 million was included for all of the future employee benefits, so the pension and other benefit costs. 865 MR. BRETT: Right. 866 MR. BROEDERS: Whereas we're expensing -- during 2001 to 2003, we expensed approximately $4 million on average above the 7.9 figure. 867 MR. BRETT: All right. So you're not comparing what is happening in a given year there, you're talking about over a period of -- over a period of years; is that right? 868 MR. WITTS: That's correct. 869 MR. BRETT: Okay. And if I could just -- just to make sure that I've got the right -- if you can look briefly at J.3.18. I think we talked about this section before with some people, but -- J.3.18, page 2, section E. 870 MR. BODNAR: We have it. 871 MR. BRETT: Okay. Now, in the far right column, "Minimum Required Contribution," that is -- is that effectively the -- it's just the terminology here. Is that the actual cash contribution to the plan or is that the expense? 872 MR. WITTS: That's the actual minimum required cash contribution. 873 MR. BRETT: That's the cash contribution and that shows this use of the surplus that we were discussing a few minutes ago. 874 MR. WITTS: That's correct. 875 MR. BRETT: Okay. And then just going back to the -- my previous question about comparing the amount recovered in rates with the amount that's actually put physically into the plan, in a cash sense. In 2003, I just want to take this just for 2003 to make sure I understand the numbers here, I think we heard this morning that you put in, or are going to put in, 13 million in cash contribution in 2003, and in rates, as I understand it, you're recovering, in respect of defined benefit, something in the order of 10.2; is that right? All right. Put it this way: The accounting expense in respect of defined benefit is 10.2 million for 2000 and 2003. The total number, if it helps, I think, was 13.2, and I believe 3 million was the defined contribution amount, and the balance, 10.2, would be the defined benefit amount. 876 Do you want to take that, subject to check? 877 MR. BROEDERS: I've lost track of the numbers, but I also hesitate to take that quickly, subject to check. 878 MR. BRETT: Well, perhaps you could just -- let's leave it. Let's pass on it. It's not ... 879 The -- Mr. Witts, do you agree with me that under the CICA, the relevant parts of the CICA, the obligation, the first type of smoothing that we discussed, the sort of taking the moving average of the plan assets, that the company -- the company can use, as I understand it, a smoothing technique, a rolling average technique, for as many as five years, up to five years in duration, or it can use less; but it must use them -- should use them -- whatever it's going to use, it should use it consistently; is that a fair paraphrase? 880 MR. WITTS: Yes, that's correct. The averaging period that can be used can be up to five years, but once you select the averaging period, it effectively is a policy decision and you shouldn't flip-flop from year to year, for example. 881 MR. BRETT: And has Union used the three-year rolling average for the last many years? 882 MR. WITTS: Yes, consistently since the adoption of the new standard effective January 1, of 2000. 883 MR. BRETT: And before that, was there any such standard that applied with respect to that kind of averaging. 884 MR. WITTS: Yes, the prior standard, 3460, also allowed for averaging. 885 MR. BRETT: The same formulation, up to five years? 886 MR. WITTS: That's correct. 887 MR. BRETT: And did Union use three years under the previous standard as well? 888 MR. WITTS: Yes, Union did. 889 MR. BRETT: Just a few questions on the basics here, these plans are all provincially-regulated plans? 890 MR. WITTS: Yes, they're all registered under the Ontario Pension Benefits Act. 891 MR. BRETT: And I take it they're separate? In other words, they are not the sort of plans that can be pooled for purposes of using resources in one plan to pay claims under another, they are all separate entities in that sense. 892 MR. WITTS: They are separate and distinct legal entities and I would confirm that you cannot use assets that belong to one plan to pay benefits that belong in another plan. However, the assets of the plans are pooled within a master trust, although they are maintained within separate segregated trust accounts. 893 MR. BRETT: And the effect of them being in a master trust in practical terms is what, in your view? 894 MR. WITTS: In practical terms, it means that the same investment policy can be adopted for all of the assets of the plan and that the company can enjoy certain economies of scale from pooling the assets. 895 MR. BRETT: And you mentioned earlier that individuals at Union do not manage this plan themselves, they select a number of plan managers who, in turn, determine what goes into each of the plans. 896 MR. WITTS: The management pension investment committee sets the asset allocation policy, taking advice from external advisers, and the funds are invested in accordance with that policy by a number of external professional investment managers. 897 MR. BRETT: And can you tell us again at a high level, what is the content of a typical plan? You mentioned yesterday, I believe, and you mentioned again to me just a few minutes ago, that the plan does typically have something to say about to what uses, if any, a surplus can be put, but can you describe in broad terms what's in a plan, a typical plan? 898 MR. WITTS: In terms of the wording regarding the use of actuarial surplus? 899 MR. BRETT: Not the detailed wording, but the topics that are covered, the broad areas, the substance of it. 900 MR. WITTS: The plan document will typically include a number of definitions, rules regarding eligibility of employees to become members of the plan, the contribution requirements from both employees and from the sponsor of the company, the plan formula that would apply at normal retirement date, which is typically age 65, the provisions that apply in the event of early retirement, the death benefits that are provided both before and after retirement, the provisions in the case of termination of employment, the requirements to undertake actuarial valuations, and a number of other matters. 901 MR. BRETT: Are those plans filed in government anywhere, are they filed with the Commissioner of Pensions -- I don't have the name properly. 902 MR. PENNY: Financial Services Commission of Ontario. 903 MR. BRETT: Financial Services Commission of Ontario, are they filed with this office? 904 MR. WITTS: The plan documents are both filed with the Financial Services Commission of Ontario and the Canada Customs and Revenue Agency, and whenever a plan amendment is adopted by a company, that must also be filed and approved by those authorities. 905 MR. BRETT: Are they public documents in the sense that they are available to members of the public under Freedom of Information or can someone walk into the office and have a look at them? 906 MR. WITTS: I believe that they are generally available under the Freedom of Information Act, and they're certainly available to any other member or any other beneficiary of the plan. 907 MR. BRETT: I wonder if it would be possible, Mr. Witts, and I guess this is really for Union, to file a copy of the major plan, the one that's active at the moment? 908 MR. PENNY: Well, I think we heard evidence that there are six plans, four of which are active. 909 MR. BRETT: I was really trying to simplify the task, but if it's not too great a burden, could I have the four that are active filed, please? 910 MR. PENNY: Could I ask through you, Mr. Chairman, is Mr. Brett asking for the current version of those plans; in other words, as currently amended? 911 MR. BRETT: As currently amended, Mr. Chairman. 912 MR. PENNY: If the Board would find that of assistance we can make those available. 913 MR. SOMMERVILLE: Will you give that a number, Mr. Moran. 914 MR. MORAN: Yes, Mr. Chairman, this is Undertaking N.7.9, an undertaking to file the four active pension plan documents. 915 UNDERTAKING NO. N.7.9: TO FILE THE FOUR ACTIVE PENSION PLAN DOCUMENTS 916 MR. BRETT: I'd like to switch now, thank you very much, to one final question, or there may be a short sequence of questions having to do with salaries and wages, and I wonder if you can turn up J.3.11 which I think is one you've already spoken to people about. It's J.3.11, and it has the attachment to it. What I'm interested in is the attachment to it, the letter from Christopher Hatch, from Towers Perrin. 917 MR. BODNAR: We've got it. 918 MR. BRETT: Now, to set this question up properly, I just want to briefly turn your attention to the three paragraphs on page 2 of the attachment, one for executives, managers and salary professionals, and the last sentence in each of the paragraphs and it's sort of the same structure in each case, it talks about: "If 2003 market..." 919 I'm reading the run for executives, let me read the one for managers it might be more relevant: 920 "If 2003 market projections from the Towers Perrin salary management survey (3.3 percent) and the company's 2003 salary increase budget for managers (3.1 percent) are taken into account...," those are bracketed numbers after 3.3 and 3.1 are in brackets, "...Management base salaries within the company's comparator group will have increased by a total of 18.2 from 1999 through 2003, as compared with the company's cumulative base salary increase of 14.6 over the same period." 921 So that's a four-year period. I take it, that would be -- in other words, if you include 2003, that would be 1999 to 2000, 2000 to 2001, 2001 to 2002, and 2002 to 2003; right, that's four years? 922 MR. NEILLY: It's actually five years. It's inclusive. It's 1999 through 2003 inclusive. 923 MR. BRETT: Okay. Now, with that sort of -- and you can see similar statements with respect to salary professionals and I take it -- is it Mr. Neilly? 924 MR. NEILLY: Yes. Hi. 925 MR. BRETT: The numbers involved here, without getting into detailed discussions of head counts and so on, I take it that the managers and salaried professionals are both significant-size groups of people, what would the numbers be there, how many would there be in each category, roughly, in the company? 926 MR. NEILLY: I can't respond. 927 MR. BRETT: It would be in the hundreds, would it? 928 MR. NEILLY: Oh, yeah. 929 MR. BRETT: The executive group would a very small group. 930 MR. NEILLY: The executive group would be in the tens and the management group would be a hundred to a couple hundred. 931 MR. BRETT: And the unionized employees group would be the largest group, would they? Or is the salary employees group about the same? 932 MR. BODNAR: I would suggest that in all likelihood -- without looking at the specific detail right in front of me, unionized employees would be close to the largest group. It might be a toss up between the non-unionized and the unionized. 933 MR. BRETT: Okay. 934 MR. NEILLY: Salary professionals and unionized might be a toss up. 935 MR. BRETT: That's what I thought. Now, what I'd like to ask you about is going back to page 1 and the composition of the comparator group. And you say here: "For the purpose of this analysis, the company was divided up into four pieces." 936 The next sentence: 937 "This is compared with the start of same base pay trend data over the same period for the company's comparator group of companies, which has been defined as national companies with revenues in excess of one billion," and you say there are 94 companies in that group. 938 Now, would you happen to know -- first of all, some of those 94, I take it, would be other regulated businesses, like, for example, Enwin or -- not Enwin. Well, it could be Enwin. But TransCanada PipeLines, for example. 939 MR. NEILLY: Yeah, TransCanada PipeLines is in this group. 940 MR. BRETT: But is it fair to say that most of them, I mean the vast preponderance of those companies in that group of 94 largest companies, would not be companies that aren't subject to price regulation or profits regulation in the sense that -- and I'm being careful here, in the sense that a regulated gas LDC is; is that fair? 941 MR. NEILLY: There's varying degrees of regulation as you look down a like this, like Canadian Pacific Railway, CanWest Global, so there would be different kinds of regulation. But I'd say the majority of this list of 94 would be not subject to regulation in the way that Union Gas is. 942 MR. BRETT: Would you agree with me that the -- that for a local distribution utility in the gas business in Ontario, like Union Gas or I would have the same comment about Enbridge Gas Distribution, that those businesses are less risky businesses than the, if you like, main risk base by your 94 comparative sample, I mean in the sense that there isn't market risk, in the same sense. 943 MR. PENNY: Risk in what sense? Risk to employees and their jobs? 944 MR. BRETT: Well, I've asked my question. I'm speaking, first of all, about corporate risk, of market risk, the risk that the company will be there in the next five years or will have some competitor eat away half its business. 945 MR. PENNY: Well -- 946 MR. BRETT: No, Mr. Penny, excuse me, Mr. Chairman, I don't understand why Mr. Penny is trying to stop the flow of this -- this cross-examination. I will get to the employees' position. But my question really, to me, it's quite straightforward for the witness, is: Is it not -- do they not agree that the Ontario gas LDCs, Union and Enbridge Gas Distribution, operate in a less risky corporate business environment than the average company in this comparator group? 947 MR. PENNY: Well, I think my point is, Mr. Chairman, that we have here the pension consultant, the wage and incentive compensation consultant and the head of human resources, and I don't know why there would be any expectations that those witnesses could speak to a question like that. 948 MR. BRETT: Perhaps, Mr. Chairman, Mr. Penny, perhaps I should put it this way: 949 In the -- Mr. Bodnar is a vice-president of the company. He has worked for several utilities over his career. He may have worked in the human resources area, but I don't know that that renders him unable or -- to offer a view. 950 MR. SOMMERVILLE: Why don't you put your question, Mr. Brett. 951 MR. BRETT: Okay. My question really is, Mr. Bodnar, to you, perhaps, as the senior company person, would you agree with me that the risks -- the business risks faced by a franchised gas distribution company, like Union Gas or like EGD, and in particular, what I can call the market risk, for want of a better term, is a lesser risk than is faced by the average -- or by many of the companies in that comparator group. 952 MR. BODNAR: It's difficult for me to answer in part because, for one, I don't -- I don't know the full list of the companies that are there; but secondly, it would appear to me that there is risk in both circumstances. I presume that this hearing is some level of risk in terms of what kinds of returns this company can make and certainly is somewhat of a surrogate to market risk. 953 You know, there are levels of profitability with unregulated companies that are based on customer -- customers and sales. We have, as a regulated utility, risk associated with customers and abilities to earn. So I'm not sure that I'm properly qualified to talk about, sort of, the market risk comparison with a regulated company versus a company that isn't regulated. I believe there's risk in both. 954 MR. BRETT: If one were to conclude, and I'm not asking you to conclude this, but if one were to conclude that there is less overall business risk in the case of the regulated utility, then would you agree with me that it would follow from that, that in making comparisons in the salary scale between that utility and a comparator group of companies that are active and what I'll call, broadly speaking, comparative or very comparative markets, that one should take that into account; one should introduce a certain discount, perhaps not a huge discount but a certain discount. 955 MR. BODNAR: Well, it seems to me -- now, if we're asking the question that I perhaps have a little more knowledge about -- if the question is relating to how an employee may view business risk versus the compensation that they may be receiving, it would seem to me, in fact I know that our competitors out there for our employees and the issues around the risk of losing people, retention as well as attraction, I don't think that our employees look at whether -- at whether a company is a utility versus a non-utility -- a regulated company versus a non-regulated company. They will look at some companies more favorably than others based on what they see in the marketplace, the type of role they go into, the type of compensation that they can get, the type of bonus plan that could be available to them, and as well as how interesting is the work. 956 So those are all factors, I think, that they look at. There will be companies that fall out of favour, whether they are regulated or unregulated, because companies see -- or, sorry, individuals see more risk to employment. So if we are going through a downsizing program, perhaps people may see some risk, whereas other companies are growing and they may choose to go somewhere else. 957 Similarly, you know, other companies are going through difficulties in the marketplace and other employees may choose to leave. But compensation, interest in work, are the things that employees look for, I think. 958 MR. NEILLY: If I can add something. By using this comparator group, what Union Gas is saying, and we're very comfortable with their approach to this, is that they are competing for talent with a pool of companies akin to this group. In other words, if they are looking for a financial controller, if they're looking for a mechanic or a truck driver, they're competing against companies akin to these organizations. And these companies include companies in the energy sector with which Union Gas would compete directly for talent to attract and retain people. So we think this is a reasonable proxy -- a reasonable pool of companies with which to compare their wages and comp. and benefits. 959 MR. BRETT: Thank you very much, panel. 960 Thank you, Mr. Chairman, Mr. Birchenough. Those are my questions, and I apologize for going over a little bit. 961 MR. SOMMERVILLE: Mr. Brett. 962 Mr. Moran. 963 MR. MORAN: Thank you, Mr. Chair. 964 CROSS-EXAMINATION BY MR. MORAN: 965 MR. MORAN: I'd like to start with undertaking -- sorry, interrogatory response J.3.11. This is the one that has the attached Towers Perrin letter. 966 MR. BODNAR: We have it. 967 MR. MORAN: And if you could turn to page 2 of that letter. On page 2 and 3, we have the employees of Union divided into four groups as set out on those two pages; right? And then based on those four groups, you've assigned a certain percentage in salary increases for each of those groups, and we see for executives, for example, projected through the 2003 it's f12.8 percent; right, from 1999 to 2003? 968 MR. NEILLY: Yes. 969 MR. MORAN: And that's the same number as it was for 1999 through 2000, so I assume there's been no increase or change in base salaries for executives; is that what that means? 970 MR. NEILLY: Yes, that's correct. 971 MR. MORAN: Turning to the last group, the unionized employees, all you've said there is that from 1999 through 2002, the company's unionized wage settlements have not been in excess of the marketplace movement over the same period, but you haven't indicated what the percentage change has been during that period of time. 972 Do you know what the percentage change has been from 1999 through 2002? 973 MR. NEILLY: Yes, sorry, did you say from 1999 to 2002? 974 MR. MORAN: Yes, consistent with what you have in the rest and then projected through to 2003, I was going to ask you that next. 975 MR. NEILLY: Okay. The market movement from '99 through 2002 is 10.9 percent. Union Gas's movement over the same period was 8.2 percent, and extending that through 2003, the market movement would be a cumulative of 14 percent and Union Gas would be 10.7 percent. 976 MR. BODNAR: Although I should add that not all of our collective agreements have been finalized, so that is still only a forecast. 977 MR. MORAN: Right. As I understand this letter, it's confined solely to base salaries, it doesn't deal with incentives; right? 978 MR. NEILLY: Correct. 979 MR. MORAN: And in terms of the four groups that we see here, do all four groups qualify for incentives? 980 MR. BODNAR: All four groups, in part, qualify for incentives. Not all of the unionized employees have an incentive plan, but I'd say two-thirds of them participate in an incentive plan in the unionized group. 981 MR. MORAN: All right. If we look at the executive group, what percentage of base salary is associated with incentives? 982 MR. BODNAR: The target, and it does vary somewhat within the executive group, but the executive group, I would suggest, on average, would be approximately 30 percent as a target. 983 MR. MORAN: And for managers? 984 MR. BODNAR: For managers, again, it will vary slightly in that group as well, but it would, on average, be a target of 25 percent. 985 MR. MORAN: And for the salaried professionals? 986 MR. BODNAR: Salaried professionals would be approximately 10 percent. 987 MR. MORAN: And for the unionized workers? 988 MR. BODNAR: That, again, is subject to negotiation, of course, but it is somewhere in the neighbourhood of 2.5 to 3 percent, and I might add that there is a group of individuals that would globally fall under this salaried professional, but there are really two ranges, one at 10 percent, another one at 6 percent. 989 MR. MORAN: In the salaried professionals group? 990 MR. BODNAR: Yes. 991 MR. SOMMERVILLE: Mr. Bodnar, I was making a note and I missed your answer to the incentive percentage available to the salaried professionals. 992 MR. BODNAR: The salaried professionals at target would be 10 percent and 6 percent. It really is a split, there's a split within the group. 993 MR. MORAN: And in terms of the split, how would you characterize the split, roughly? 994 MR. BODNAR: I would suggest to you that it is probably closer to two-thirds of the people being at the six and a third at the ten. 995 MR. MORAN: Now, if you could just while we're on this point, turn up Interrogatory J.17.37. If we look at line 3 of the budget for incentives. 996 MR. BODNAR: I see it. 997 MR. MORAN: We see the blue-page 2004 forecast is 9.5 million approximately. 998 MR. BODNAR: Yes. 999 MR. MORAN: How would you split that amongst the four groups that we've just been discussing? 1000 MR. BODNAR: Well, we do have an interrogatory where we're going to be looking at the incentives, so I don't have all of the detail right in front of me. Allow me to just confer with my colleagues for a sec. 1001 I just wonder if the O&M panel might not be able to answer that in a little more detail, they are our numbers people. 1002 MR. MORAN: All right. They will be able to speak to that, Mr. Penny? 1003 MR. PENNY: Maybe. 1004 MR. BODNAR: As to the split of employees in each of the groups: Executive, managers, supervisory. 1005 MR. MORAN: That's fine, I'll follow that up with the O&M panel, it will save an undertaking. 1006 Okay. And then if we turn up Interrogatory J.3.12. 1007 MR. PENNY: Is that 3.12? 1008 MR. MORAN: J.3.12. In this interrogatory response, we have the four employee groups identified. How do you reconcile these four groups with the four groups that we see in the Towers Perrin letter attached to Interrogatory J.3.11? 1009 MR. BODNAR: The management would probably coincide with the management group that we have on that previous note. I would suggest that the group that was called professional in the other area, there would have been a split there with the -- well, would have combined, I believe, the analyst and the non-unionized, and then the unionized would have been specifically bargaining units. 1010 MR. NEILLY: And executives are missing. 1011 MR. MORAN: Okay. So this is essentially the same as what we have. 1012 MR. NEILLY: Same information respun. 1013 MR. MORAN: Respun, thank you. 1014 MR. NEILLY: Or sliced differently. 1015 MR. MORAN: I'd like to go back now to J.17.37. I think earlier today, perhaps it was yesterday, Mr. Bodnar, you were talking about the fact that you don't use FTEs you use, I think you said positions. Could you just explain what you meant by that? 1016 MR. BODNAR: Certainly. Within our system, within our PeopleSoft system which is a purchased human resources management system, there are a number of things that we track. But principally, the things that we know are the actual positions combine both jobs, if you will, that exist, both filled and unfilled, and then similarly, we can give, at any point in time, the actual individuals by job title or by job position that are filling roles and the salaries associated with it and, in turn, that gives a combined base salary role up for us. 1017 And then ultimately, we have, within our budgeting system, the total budget for coming years and, as well, what the final year-end numbers are for salaries, which would include other things like overtime that may have occurred, shift differentials, these kinds of things. 1018 MR. MORAN: All right. So in terms of, for example, part-time employees, you would deal with them as a part-time position under your approach. 1019 MR. BODNAR: That's right. 1020 MR. MORAN: And that would be one of the differences, then, between your approach and the FTE approach which converts everybody into full-time equivalents to control for that; is that right? 1021 MR. BODNAR: That's right. 1022 MR. MORAN: Okay. But it's not dramatically different from the FTE approach. 1023 MR. BODNAR: Part of the difference that we note is that the FTE -- sorry, without -- we have different hours of work for different groups of employees as well. We have the shift employees; we have people that work a 37 and a half hour a week that are office employees; we have people that work a 40-hour week that are field employees; we have individuals that have scheduled overtime and unscheduled overtime. That's where the difficultly really comes in. 1024 MR. MORAN: Okay. When we look at the -- at J.17.37, which has your name on it and talks about FTEs, I take it that this is sort of a ballpark estimate converting your position-based approach into an FTE approach? 1025 MR. BODNAR: Yes, that's right. The other thing that I probably should mention is that -- I need to just absolutely confirm this, but I believe that for 1999, it was something that had been prepared actually for a regulatory hearing, an estimate -- or I shouldn't say an estimate, a number that had been prepared for that. And it's much easier, when one budgets in the future, that we look at FTEs because one gets a sense of how many positions you have and you don't account for things like overtime and other factors. So on a future basis, that estimate is easier to do than on a current or historic basis. 1026 MR. MORAN: Okay. So then if we look at line 15, which sets out the average compensation per FTE by budget, in 1999, we have a figure of 66,681, and if we look at blue page 2004, we have a number 88,196 which reflects, by my math at least, a 33 percent increase; is that about right? 1027 MR. BODNAR: I presume you've done the math correctly, and it's subject to check, of course. But also one would presumably look at perhaps some of the difference in mix, because FTE assumes an overall average of -- when we look at the overall average, one takes whatever the revised number is there and then divide it by the -- the average number of people -- take the total number of salaries and divide it by the average number of people. 1028 MR. MORAN: Well, I mean, in just looking at the two numbers, 88,000 is about 22,000 more than 66,000, which is about a third, right, about 33 percent. 1029 MR. BODNAR: It seems to me as well, as I look at the document, that it also includes the benefits, that's the total compensation budget, so there is a factor there for the benefits. 1030 MR. MORAN: Right. That was my next question. So in these numbers, what we see is the base salary plus benefits. And would that also include the incentives. 1031 MR. BODNAR: I believe it's all of -- right up to line 5. 1032 MR. MORAN: All right. So in looking at what looks to be a 30-percent-plus increase from an FTE perspective, everything all in, that's what would explain the difference between that kind of an increase and the increases that we see set out in the Towers Perrin letter that we touched on just a few minutes ago. 1033 MR. BODNAR: That's right. The Towers Perrin letter dealt with base wage changes that have occurred. The targets on the bonus plans have not changed, but what you do see is some of the other changes in lines 1 to 4. 1034 MR. MORAN: All right. And if we turn to J.7.22, would that also be -- sorry. 1035 MR. NEILLY: We're trying to find it. 1036 MR. MORAN: J.7.22. 1037 MR. BODNAR: We have it now. 1038 MR. MORAN: When we look at line 1 of J.7.22, for 1999, that was about 149.5 million; right? 1039 MR. BODNAR: That's right. 1040 MR. MORAN: And then shortly after that, there was the 400 staff reduction. We're going into 2000; right? 1041 MR. BODNAR: That's right. The -- if I can just confirm we're looking at the same numbers there. It was the EBRO-approved number of 149; the actual of 160 -- 1042 MR. MORAN: Right. 1043 MR. BODNAR: -- and then 146 for the 2000 period. 1044 MR. MORAN: And if we follow that line all the way through to the 2004 test blue-page update, the salaries and wages are still at 149 million; right? 1045 MR. BODNAR: That's right. 1046 MR. MORAN: And that would be explained, presumably, by the kinds of increases, including incentives, that we've just been talking about. 1047 MR. BODNAR: That's right. And there would also be a somewhat difference in skill mix as well. It's not the exact same positions in each of the years. 1048 MR. MORAN: Right. Thank you. 1049 I'd like now to move on to the pension issue. I think you've indicated that you have pension managers that actually manage the funds for you. 1050 MR. BODNAR: That's correct. 1051 MR. MORAN: And these are external pension managers. 1052 MR. BODNAR: Yes, that's correct. 1053 MR. MORAN: And are they on a -- is there, like, one pension manager per fund, or is it based on assets? 1054 MR. BODNAR: No, actually, we have a -- essentially, take all of the assets of the pension plans and then there is a series of pension managers that are based on our asset allocation and so the allocation is done between different types of assets, different types of allocations, pardon me. For example, we'd have bond managers, we would have Canadian equity, we'd have balanced fund managers, and so on. 1055 MR. MORAN: All right. So depending on the asset, that's how you choose the particular manager. There's no managers assigned to specific funds. 1056 MR. BODNAR: That's right. 1057 MR. MORAN: All right. And how do you go about choosing your pension managers? 1058 MR. BODNAR: We do -- we go through a review of managers. We look at their performance -- and this is something that has been carrying on for sometime, I might add, so there were a number of managers that had been with us for a number of years. But we -- if we look for a new manager, we'll look at the type of -- we'll look at our asset allocation plan. Based on that, let's say we had an asset allocation that was to go to a -- you know, a large cap Canadian fund manager, we would look at -- with the help of a third party, an advisor that specializes in this kind of work, they would help to develop for us a list of managers that meet those criteria that we're looking for, and then we would actually go through a review. They would come to the pension investment committee meeting and advise what their history has been, the type of philosophy that they use, and we would set parameters, limits as to what kind of returns we would like to see provided from the -- from them. We'd also negotiate rates, that sort of thing, and then proceed from there. 1059 MR. MORAN: Okay. So from a performance perspective, the pension committee sets parameters for the managers, performance measures, in other words, that they have to meet. 1060 MR. BODNAR: That's right. 1061 MR. MORAN: And what happens if they don't meet them? 1062 MR. BODNAR: These performance measures are typically ones that look to their performance in two ways. One is how they compare to returns as compared to, shall we say, a pure index and how they compare to other similar managers. 1063 If we find some -- a manager performing particularly poorly, we'll seek advice with respect to that. Some of the reason could be quite simply because the type of asset that is being invested for that portion of the pension plan is out of favour at that time, so, you know, value stocks are out of favour or technology is out of favour or something like that is going on. 1064 But if we see through reviews, because we call these managers in on a regular basis, we see each manager at least once a year and more frequently if they're on the launch, if we see an inherent flaw with their approach or we believe, through advice from our third-party advisors, that they've changed from their philosophy, they've changed some of the senior managers within those group, those types of things that could be warning signs for us, we'll put them on a watch, see what happens with their performance, and indeed, we'll change managers if we feel it's appropriate to do so. 1065 MR. MORAN: Okay. Turning now to the third-party advisors, how do you go about choosing them? 1066 MR. BODNAR: We have several groups that we use. We have a list, if you will, which our pension officer, who is a member of our pension investment committee, that they would prepare. We seek advice from Towers Perrin, we have RBC that helps us with reports on managers, and forgive me, I've forgotten the name of one of the groups. 1067 Sorry, I thought perhaps I could recall with some help, but there is another specific group that we use that helps us search for professional managers within asset groups. 1068 MR. MORAN: All right. And in terms of setting objectives for the pension itself, is it the third-party advisors that help you do that and then that's what creates the instructions that get passed on to the pension managers that you hire? 1069 MR. BODNAR: That's correct. We seek the advice, obviously, from professionals in that area, see what the marketplace does, look at what reasonable returns are for the type of risk that exists. Obviously the returns we would be looking for from a bond fund would be different than, for example, a small cap fund. 1070 MR. MORAN: All right and how do you measure the performance of your third-party advisors? 1071 MR. BODNAR: The people that advise us as to who the managers might be? 1072 MR. MORAN: The ones who give you advice about the allocations and that kind of thing, how do you measure their performance? 1073 MR. BODNAR: That's a fairly small group of people that do that kind of business in Canada right now, and what we do is we look at two things: One is the ongoing advice that we receive from them with respect to the reasonableness of the performance of the managers and the second is based on, if you will, how good the advice was with respect to the managers that we ultimately selected. 1074 MR. MORAN: All right. Now, you indicated -- well, first of all, let me ask you this: I don't know if I heard this correctly and correct me if I didn't hear it quite right, you haven't had any change in investment managers since 2000; is that correct? 1075 MR. BODNAR: No, I believe we have. I believe we have had had a change since 2000. 1076 MR. MORAN: Oh, okay. So I did mishear you. 1077 How many investment managers did you have in 1999? 1078 MR. BODNAR: It's either five or six, I think. 1079 MR. MORAN: Five or six, and of that five or six, how many are still managers for you, investment managers, today? 1080 MR. BODNAR: I believe the answer to that would be three, although one of the groups -- one of the remaining pension managers was a balanced fund and I think we removed a part of that portfolio from them as well. So call it two or three, I mean, same name, but they're doing some different work. 1081 MR. MORAN: Okay. Now, you have advised us that for the two-year period that ended in, I believe, October of 2002, your funds overall, your plans overall showed a decrease of 18 percent compared to the median of 11 percent for the same period; is that correct? 1082 MR. BODNAR: That's correct. 1083 MR. MORAN: And I guess my question is, given that that performance were under the median, what was the consequence for your pension managers who were in place at the time? 1084 MR. BODNAR: Again, we're looking at a very confined period of time. Part of that is dependent upon the overall mix that we're dealing with and the types of funds that we would invest in. We also had periods where certain managers previously had contributed higher than the market median may have been. So I would suggest that at least one of the groups was on a watch during that period. I believe it was a small cap investor, as I recall, but we were looking at what was happening in the marketplace and some of the changes that were occurring. 1085 As I say, median results based on -- not necessarily based on exactly the same mix of asset allocation that we have had. So we were looking when we evaluated the managers as to their performance over a longer period of time based on the asset that they were asked to invest in or that they had the specialty to invest in. 1086 MR. MORAN: All right. Now, as I understand, the minus 18 percent figure, that would have been as an average figure for all of the plans as a whole? 1087 MR. BODNAR: I think that would be a net figure for all of them. 1088 MR. MORAN: I see. And out of the assets that are in the plans, what are the assets that actually contributed the most to the underperformance? 1089 MR. BODNAR: It certainly would be in the equity side and my estimate on that would be it's likely it would have been a mid cap U.S. equity fund. 1090 MR. MORAN: And what kind of equities are we talking about, high-tech or Internet stock? 1091 MR. BODNAR: Well, mid-cap U.S. equity funds would -- mid-cap in the U.S. is a little different than mid-cap in Canada and as I recall, it's companies under a billion U.S. but more than -- I can't remember, 250, roughly, I think. So they would have a broad mix of companies that they would invest in. 1092 MR. MORAN: Have you made any changes to how your pension committee works and operates in selecting advisors and managers in the aftermath of the volatility that you just came through? 1093 MR. BODNAR: We certainly have gone through a period of volatility and with the benefit of the hindsight, we have reviewed our statement of investment policy and goals to ensure that it was appropriate, and that's something that I've undertaken to provide. 1094 As I recall, though, there were not a lot of significant changes that were made to that. 1095 MR. MORAN: All right. And we'll see what changes when you produce the two versions in the undertaking. 1096 MR. BODNAR: Yes, you will. The other thing I suppose that we could say about that is that we need to ensure -- or we have ensured that we don't respond erratically to the market changes. There are short-term changes, I mentioned the mid-cap U.S. market as an example. As I recall, pre-1999 there were more than 40 percent returns, greater than 40 percent returns in that particular group, they went through a downturn when they lost favour and then recently, that particular group have been performing well. 1097 One thing that we ensure that we do that now is that asset allocation between the funds are trimmed as they reach certain benchmarks and as we went through our asset allocation work, we saw minimums and maximums of investment within each of the assets that we maintained. That historically was there as well and we kept to that rigour, but it's something that we make sure and focus on as we go through in time. 1098 MR. MORAN: Thank you. 1099 I'd like to turn now to Mr. Witts' end of things. If you could turn up J.3.18. 1100 MR. WITTS: Yes, I have it. 1101 MR. MORAN: On page 2 of J.3.18, item E, what we see set out there is how you go about calculating the minimum required contribution; right? 1102 MR. WITTS: That's correct. 1103 MR. MORAN: And we have the actual minimum required contribution for the four years, 1999 through 2002, in this table; right? 1104 MR. WITTS: Yes. 1105 MR. MORAN: And as it says just above the table, these were the minimum required contributions recommended by the actuary, in other words, by you; right? 1106 MR. WITTS: That's correct. 1107 MR. MORAN: Now, they were recommended. Were these contributions actually made in this amount in those years? 1108 MR. WITTS: The company in some years, in fact, contributed more than these minimum amounts. 1109 MR. MORAN: All right. In 1999, what did the company contribute? 1110 MR. WITTS: 7 million. 1111 MR. MORAN: And for 2000? 1112 MR. BROEDERS: I'll have to thank Mr. Shepherd for this since he provided the financial statements in that booklet that he provided. The employee contributions are shown in there, that was tab 4, so I'm going to refer to that. The employee contributions for 2000 was 10 million. 1113 MR. MORAN: 10 million. 1114 MR. BROEDERS: 2001, 11 million; 2002 was 11 million again. 1115 MR. SOMMERVILLE: Sorry, I didn't catch that answer. 1116 MR. BROEDERS: Sorry, 2002 was 11 million again. 1117 MR. MORAN: And for 2003 -- 1118 MR. BROEDERS: We're currently project about 14. 1119 MR. MORAN: 14. And 2004? 1120 MR. BROEDERS: About the same number, 13 or 14. 1121 MR. MORAN: All right. Just touching on 2002, the minimum required contribution is indicated to be 11.8, but I think is 11 is what is disclosed by the financial statements. It seems to be less than what you recommended. Is that an issue? 1122 MR. WITTS: Because the company had, in fact, contributed more in the prior year, they were able, within the requirements, to fund slightly less than what was required. 1123 MR. MORAN: Okay. So this is the cash contribution and, as you've indicated, that's different from the expense, which is what you end up seeking to recover in rates. 1124 MR. WITTS: That's correct. 1125 MR. MORAN: All right. So to get from the cash contribution to the expense, can you just walk me through the process, say, for -- let's take 2001, with the 6.6 calculated contribution and actual, I guess, of 11 million. How do you -- first question: For the expense, do you use the minimum required contribution or do you use the actual? 1126 MR. WITTS: There really is no direct relationship between the minimum required contribution and the pension expense. The pension expense is recorded in the company's income statement and then there is an off-balance-sheet reconciliation that shows the different between funding and the expense, so the difference between cash contributions and expense, and that appears on the balance sheet on a cumulative basis. 1127 In the fullness of time, over time, cash funding will exactly equal expense. But in any given year, the cash requirement could be higher or lower than the expense. 1128 MR. MORAN: All right. So what we have is two stream; we have an accounting stream and we have a cash stream and, as you indicated, in the fullness of time, they should be identical, but year over year they may not necessarily be the same. 1129 MR. WITTS: That's correct. And, in fact, the company's accounting policy has always aimed to minimize the differences between cash funding and expense, wherever possible. 1130 MR. MORAN: Right. 1131 MR. WITTS: But with the extreme volatility that's occurred in the period since 2000, it's just simply gotten out of kilter. 1132 MR. MORAN: And the accounting stream is regulated by the CICA rules; right? 1133 MR. WITTS: That's correct. 1134 MR. MORAN: All right. So given that, then, if I wanted to supplement the table that we're looking at and put an expense figure beside the years, what would I put for 1999? 1135 MR. WITTS: Perhaps -- Mr. Broeders is just looking for that. But to just go a little further than -- in attempting to answer your question about how do you get from the cash contribution to the expense, if you look at the table E and the elements that are there, one element that's included in expense and in the cash is the normal cost. There is then an interest adjustment which effectively is equal to the difference between the expected return on assets and the interest on the accumulated obligation, and then there are various pieces of amortization. Those are the components that make up the pension expense. 1136 MR. MORAN: And then you apply the smoothing methodologies as well at some point? 1137 MR. WITTS: The smoothing methodologies effectively change or determine the amount of amortization that's included in the expense. 1138 MR. MORAN: That you just referred to. 1139 MR. WITTS: Yes. 1140 MR. BROEDERS: For 1999, zero; for 2000, it was 6; for 2001 and 2002, it was 2 each period. 1141 MR. MORAN: I'm sorry? 1142 MR. BROEDERS: 2 million in each of those years. That is just for the defined benefit plan. 1143 MR. MORAN: Would you add anything for the defined contribution? 1144 MR. BROEDERS: Defined contribution? 1999, there wasn't one; in 2000, it was 2 million. 1145 MR. MORAN: Sorry, for 2000, it's 2 million? 1146 MR. BROEDERS: Yes. 2001 was 3 million. 3 million again in 2002. 1147 MR. MORAN: And for 2003, what's the expense? 1148 MR. BROEDERS: For defined benefit, 9 million, and for the defined contribution, about 2 million. Again, the amounts that I've stated for the defined contribution from the financial statements have that DC benefit classification problem that we've had in the past, so that's why there's an apparent drop. 1149 MR. MORAN: And projected for 2004? 1150 MR. BROEDERS: I believe I'm grabbing the latest numbers. With the 6 percent discount rate and 7 and a half rate of return, the defined benefit is estimated at 17, and defined contribution at 2 again. 1151 MR. MORAN: And your reference just now was to the numbers that are currently being reviewed and we're awaiting the formal update? 1152 MR. BROEDERS: That is correct. 1153 MR. MORAN: All right. 1154 MR. SOMMERVILLE: Mr. Moran, should we take 10 minutes? 1155 MR. MORAN: Yes, this will be fine, Mr. Chair. 1156 MR. SOMMERVILLE: We'll adjourn for ten minutes. 1157 --- Recess taken at 3:30 p.m. 1158 --- On resuming at 3:45 p.m. 1159 MR. SOMMERVILLE: Thank you, please be seated. 1160 Mr. Penny, we have a couple of more undertaking responses, I believe. 1161 MR. PENNY: That's right, there should be three, Mr. Chairman. One is N.3.5, dealing with the regression calculations for the 20-year trend, and then there is N.4.7 and N.5.4 which were given by Mr. Rogers. 1162 MR. SOMMERVILLE: Thank you very much. 1163 Mr. Penny, it seems unlikely that we are going to get to your O&M panel today. 1164 MR. PENNY: Yes, you had indicated that you needed to break at roughly four or so today, so that seemed like where we were headed to us as well. 1165 MR. SOMMERVILLE: We apologize for any inconvenience that causes, but it would seem to be futile, unless there is some other indication, to commence with that panel today. 1166 MR. PENNY: I think that's appropriate. We should finish with this panel and break for the day and we can actually usefully use the time to catch up on some of the undertakings. 1167 MR. WARREN: Mr. Chairman, as hesitant as I am to suggest that this is not the one place in the world I always want to be, I was naive in believing the time estimates and so have been sitting here waiting for the O&M panel to begin and I wonder, in light of that most recent exchange, I might be excused and I will return tomorrow morning ready. 1168 MR. SOMMERVILLE: Certainly, Mr. Warren. It seems that all of the intervenors were drinking from the same spring when they made their estimates for this witness panel. 1169 MR. WARREN: Myself included, sir. 1170 MR. PENNY: Spring of eternal youth. 1171 MR. SOMMERVILLE: Mr. Moran. 1172 MR. MORAN: Thank you, Mr. Chair. 1173 Mr. Broeders then, just to follow up from where we left off, you've given me the actual expense amounts for the years 1999 through to 2004, and to put those into the grand scheme of things, if you could just turn up Exhibit J.26.56. 1174 MR. BROEDERS: I have it. 1175 MR. MORAN: All right. The numbers that you just gave me for the defined benefit and defined contribution expense for various years, those numbers should line up, I understand it, with line 10 on page 2 of this exhibit, J.26.56. 1176 MR. BROEDERS: They should, yes. 1177 MR. MORAN: All right. So when I go to compare those two sets of numbers, for the year 2000, you indicated the expense was 6 plus 2 for a total of 8, what I see on line 10 is 7.9, so it lines up; right? 1178 MR. BROEDERS: That's correct. 1179 MR. MORAN: All right. And we can do the same thing for the next set of numbers but just going to 2003, 2003 in J.26.56, the number is 13.12 million and you indicated the expense for 2003 was in the order of 9 plus 2 for a total of 11, which is about 2 million off. 1180 MR. BROEDERS: 26.56 shows the 2003 budget, the numbers we gave you are our latest projection. 1181 MR. MORAN: So this is the issue of budget versus actual, in other words, projected actual? 1182 MR. BROEDERS: Yes. 1183 MR. MORAN: And then the 17 plus 2 for 2004, that's going to be the subject of a further update so we don't have to worry about it lining up with the 21 million that we see in J.26.56. 1184 MR. BROEDERS: Certainly not. 1185 MR. MORAN: All right. Thank you. 1186 MR. PENNY: I think the 21 is 19 again. 1187 MR. MORAN: Yes. Okay. I think that then takes us to Exhibit M.6.1. And as I understand M.6.1, when we look at the total net increase or decrease in pension expense, that's the change from year to year that we've just been discussing, right? For 2002, we see two and a half million. 1188 MR. WITTS: The changes in M.6.1 are solely the changes that are related to asset items. 1189 MR. MORAN: All right. So what's the relationship between this and the pension expense? 1190 MR. WITTS: This was designed to show how the pension fund investment losses occurred and how, through the application of the methodology that's prescribed in section 3461 they are recognized in pension expense. 1191 MR. MORAN: Right. 1192 MR. WITTS: So the increase's former component of the overall pension expense. 1193 MR. MORAN: Thank you. All right. Then turning back to then J.26.56, under the 2000 actual column for pension, the 7.9, I think you indicated earlier that that 7.9 is reflected in the rates that came out of the 0017 case; is that correct? 1194 MR. BROEDERS: The 7.9 in the 17 case is the number that represents post-retirement benefits and pension. 1195 MR. MORAN: Okay. So that total expense of 7.9 is not reflected -- 7.9 million is not reflected in -- 1196 MR. BROEDERS: It's not a one to one comparison, it's coincidental it is the same. 1197 MR. MORAN: Okay. 1198 MR. BROEDERS: Union Gas would have expensed 6 and a half million more than what was in rates for 17. 1199 MR. MORAN: Then perhaps you could just then set out for me how the expense then gets turned into rates or into a rate request, I should say. 1200 MR. PENNY: Just so I understand the question, we're of course under a PBR regime for 2001, 2002, 2003, and so the rate setting is done by the formula, not by the Board approving specific line items on a budget. 1201 MR. MORAN: Yeah. 1202 MR. PENNY: So I just want to make sure that we're getting at what it is you want. 1203 MR. MORAN: I'm looking at the year 2000, the pre-PBR year. 1204 MR. PENNY: So that's the year in which the adjustments were made to the 1999 base. 1205 MR. MORAN: Right, and in the year 2000 there's an expense, Mr. Broeders, a pension expense of $8 million; right? 1206 MR. BROEDERS: Yes. 1207 MR. MORAN: Which is reflected at 7.9 in the undertaking we just looked at, J.26.56, so my question is, how do you get from that expense figure to what goes into rates? 1208 MR. BROEDERS: Are you asking what was put into rates per 1999-0017 or are you asking for what we're asking for in rates for the 2000 -- 1209 MR. MORAN: Back for the 2000 rates. 1210 MR. BROEDERS: Okay. These are the 2000 actuals. What was done for the 1999-0017 case was an estimate that would have been prepared prior to 2000. When that was being prepared, we were still very early on in establishing the effects of section 3461, and the estimates that we received were only in the 7.9 range. And as you can see, it was significantly underestimated. 1211 MR. MORAN: The budget was -- the forecast was what? 1212 MR. BROEDERS: 7.9. 1213 MR. MORAN: 7.9 million? 1214 MR. BROEDERS: Yes. 1215 MR. MORAN: And the actual, was it not also 7.9, when we look at Exhibit J.26.56? 1216 MR. BROEDERS: The 7.9 that was estimated for the effects of 3461 in total encompassed the post-retirement benefits as well as the pension expense. 1217 MR. MORAN: Right. And you said before that's just coincidence, that they're the same numbers. 1218 MR. BROEDERS: Right. 1219 MR. MORAN: So the component of 7.9, as we see it, for the year 2000 in J.26.56 that has to do with pension, what was that component? 1220 MR. BROEDERS: What was the -- 1221 MR. MORAN: Was that the 1.3 million you referred to earlier today? 1222 MR. BROEDERS: I believe so. When the decision was made in 17, it was just a launching-off point from the amount approved in the 499. 499 had 6.3 approved. The Board decided that 1.6 was the appropriate level to increase to get to 7.9. There wasn't a specific mention as to what the pension or non-pension split was. When I spoke earlier, those were the numbers that we had when we asked for the 7.9. But what is approved for the specific components, I don't know. 1223 MR. MORAN: All right. So going into 2000 rates, what was the pension component coming out of the forecast? 1224 MR. BROEDERS: It would have been the 1.3 that was mentioned earlier. 1225 MR. MORAN: 1.3. And the actual expense is the 8 million that you -- 1226 MR. BROEDERS: Correct. 1227 MR. MORAN: -- mentioned a few minutes ago. All right. 1228 And as I understand your explanation, that has to do with the switch in the accounting methodology and lack of familiarity with how it worked; is that what you're suggesting? 1229 MR. BROEDERS: When we were developing this, we were very early on in understanding 3461. I think it was early in 1999. The standard didn't come into effect until January of 2000 -- 1230 MR. MORAN: 2000. 1231 MR. BROEDERS: -- which was a large time discrepancy that we had to deal with. 1232 MR. MORAN: Now, when new standards are being developed by CICA, there is a lead-up time to the actual coming into force; is that not correct? When there's a change? 1233 MR. BROEDERS: Yes. 1234 MR. MORAN: And for this particular change, when did the consultation process first start leading to a new section 3461? 1235 MR. BROEDERS: About late '98, when the consultation started. 1236 MR. MORAN: 1998? 1237 MR. BROEDERS: Late 1998. 1238 MR. MORAN: All right. And when was the rule finalized prior to coming into effect? 1239 MR. BROEDERS: March 1999. 1240 MR. MORAN: And in March 1999, you knew what the rule was and you knew the date when it would become effective, being January 1st, 2000; right? 1241 MR. BROEDERS: That's correct. 1242 MR. MORAN: Okay. 1243 All right. I have just one last minor question, then, and that has to do with the CICA section 3461. 1244 Mr. Witts, you indicated earlier that the two smoothing methodologies were discretionary and I think you indicated that the 10 percent corridor was discretionary on a one-time basis; and then once you decided to use it, you had to stick with it. And then you went on to say, as I recall, that the three-year averaging, or up to five years, as I understand it, that was also discretionary. Is that also a one-time choice; once you've made it, you're stuck with it, or have to stay with it, to be more neutral? 1245 MR. WITTS: I don't believe that there is any written guidance that you have to stay with those policy decisions; however, my understanding of accepted practice, and particularly how the auditors would look at this, is that you make your policy and you stick with it because you want to have year-to year-comparability with the results. 1246 MR. MORAN: All right. So it's an issue of, I guess, preference for auditors. It's nothing actually in the rule that would say that you get to make the election and then you stay with it. 1247 MR. WITTS: The standard states, at paragraph 77, that: 1248 "For example, an entity may use a fair value for bonds and a five-year moving value average for equities, but the basis of determining market-related value must be applied consistently from year to year for each asset class." 1249 MR. MORAN: All right. And the interpretation to be given to that, then, is you make your election and then you stay with it. 1250 MR. WITTS: Yes. The authorities in the United States have actually been a little bit more definitive with respect to that; for example, the Securities and Exchange Commission will not permit companies there to change their method of smoothing. 1251 MR. MORAN: All right. Now, the section that you were just referring to is the section that deals with the averaging method, the choice of three years by Union, for example. 1252 MR. WITTS: That's correct. 1253 MR. MORAN: And that's where we see the maximum period of five years. 1254 MR. WITTS: That's correct. 1255 MR. MORAN: And does the same apply to the 10 percent corridor, that that has to also be applied consistently, once chosen? 1256 MR. WITTS: Yes, it does. 1257 MR. MORAN: The rule says the same thing? 1258 MR. WITTS: Yes. 1259 MR. MORAN: Thank you. 1260 Those are all my questions, Mr. Chair. 1261 MR. SOMMERVILLE: Mr. Moran. 1262 Mr. Birchenough. 1263 QUESTIONS FROM THE BOARD: 1264 MR. BIRCHENOUGH: Just a couple of questions for Mr. Witts. 1265 I believe you mentioned that for salaries and wages you do a comparison with a group of 94 companies that are in the billion-dollar-plus range. I have the wrong person. 1266 MR. NEILLY: That's me. 1267 MR. BIRCHENOUGH: You do a similar comparison or survey for benefit packages. 1268 MR. NEILLY: I'm sorry, I didn't hear the last thing you said. 1269 MR. BIRCHENOUGH: For benefit packages. You do a similar comparison with a similar group or the same group of companies. 1270 MR. WITTS: The group of companies that we use to benchmark the pension and benefits program is not exactly identical to the comparison group that's used for salary, but it is similar. And we benchmark -- our goal is to design the programs in such a way that the company is positioned around the median of that group. 1271 MR. BIRCHENOUGH: Is that something that is documented and could be made available, similar to the comparison on salary and wages? 1272 MR. WITTS: We can undertake to provide a summary that shows Union's position relative to the comparator group, but we would have to redact it to ensure the confidentiality of the positioning of the other companies. 1273 MR. MORAN: Mr. Chair, that would become Undertaking N.7.10, an undertaking to provide a comparison between Union's incentive packages and the comparator group. 1274 MR. BIRCHENOUGH: Not just incentive packages, benefit programs. 1275 MR. PENNY: Benefits. Pension and benefits. 1276 UNDERTAKING NO. N.7.10: TO PROVIDE A COMPARISON BETWEEN UNION'S PENSION AND BENEFITS PACKAGES AND THE COMPARATOR GROUP 1277 MR. BIRCHENOUGH: I have just one other question related to Exhibit J.7.22. 1278 MR. BODNAR: We have it. 1279 MR. BIRCHENOUGH: I think it was Mr. Shepherd this morning that noted that in 1999, EBRO 499, the percentage of benefits over wages was about 20 percent growing to the order of 35 percent in the blue-page update. A further analysis of that those numbers indicates that, in fact, the percentage has stays in the low 20s, and I think it grows to about 22, 23 percent in the 2003 budget, and then jumps to the order of 30, 35 percent thereafter. What accounts for that jump from the low 20s to 30 percent or so at that point on this schedule? 1280 MR. WITTS: There are two primary reasons for the significant increase that's occurred. First, the Board-approved number for the benefits in '99 and indeed the 2000 budget, as Mr. Broeders mentioned earlier, did not include the full estimate of the impact of adopting the new standard for pension benefits. 1281 And then secondly, the 2004 estimate reflects, again, the application of section 3461 and the significant increase in both pension and post-retirement benefits other than pension. 1282 MR. BIRCHENOUGH: That's all I have. 1283 MR. SOMMERVILLE: Mr. Witts, I have a question with respect to the comparator group and I wonder, perhaps, do you have a comparison that's related to incentive programs as we've been talking about them in this proceeding? Do you do a comparison using a comparator group in Union with respect to those programs? 1284 MR. NEILLY: We can use the same comparator group and we can compare Union Gas's target bonus opportunities with the marketplace and we can also benchmark the actual pay-outs against the marketplace. 1285 MR. SOMMERVILLE: Did you do that, have you done that analysis already for Union? 1286 MR. NEILLY: Historically, but not in connection with this process and not for some time. 1287 MR. SOMMERVILLE: When was the last time that you performed that comparison? 1288 MR. NEILLY: The last time we performed that comparison was '99, 2000, we did an exhaustive market analysis for Union Gas at that time. 1289 MR. SOMMERVILLE: I'd like to get some idea as to where the incentive programs that Union has fits into a broader context, can you help us understand that? 1290 MR. NEILLY: Union Gas's, I guess, position with respect to the market is to pay base salary at the 50th percentile of that comparator group that we've been talking about and at the 75th percentile on a total cash compensation basis. And so their bonus targets have been designed to enable their employees, their managers, their executives, to be compensated at that 75th percentile of that comparator group. 1291 MR. SOMMERVILLE: How does that compare to the comparator group? How does that process, or strategy if you like, from an incentive point of view, compare to the strategies of like companies? 1292 MR. NEILLY: It would be consistent with an organization that wanted to attract and retain a high level of talent, what I would call a high-performing organization. The fact that they're benchmarking their fixed costs or their base salaries at the 50th percentile is fairly prudent because what it says is they want to pay around the middle of the pack, so to speak, in base salary but they are paying more aggressively on a total cash basis to give employees that opportunity, if the company performs and if the individual performs, give the individual the opportunity to pay essentially three-quarters of the way up the scale based on equivalent positions across those 94 companies. 1293 MR. SOMMERVILLE: And that's a typical approach for like companies? 1294 MR. NEILLY: Yeah. I would say typical for companies that strive to be a high-performing company and want to attract top-flight people. 1295 MR. SOMMERVILLE: Has there been an evolution in Union's approach to incentive programs from, say, '99 through to 2003, 2004? Is there an evolution in their approach to that subject? 1296 MR. BODNAR: I think I could perhaps help with that. 1297 MR. SOMMERVILLE: Thank you. 1298 MR. BODNAR: I think as my colleague here mentioned, in 1999 we did a complete review of the compensation plans with a full-fledged market assessment of how we were paying to the marketplace. And as a part of that, we reviewed the incentive plan structure. We have since not changed that structure. We're paying -- and I think I mentioned earlier sort of the percentages that people can achieve if they achieve the objectives. 1299 But we feel confident that that is competitive with a number of the companies that we compete with directly; in fact, right within the group of companies that might be seen as most likely to attract our employees, and it's comparable, it's not at the top, there are others that do better, I know that there are, but it's one that -- it's a reasonable amount. 1300 We've also kept base pay structure relatively thin, if you will, at the 50th percentile, and then as you see from some earlier evidence, in fact, we're behind slightly in terms of the marketplace. But we felt incentive pay is a powerful tool to promote the kinds of direct objectives that the company may have and if they're successfully achieved it's good for the company and good for the ratepayer. 1301 MR. SOMMERVILLE: Those are the Board's questions. Mr. Penny, any redirect? 1302 MR. PENNY: Yes, thank you, Mr. Chairman, I just have a few minutes in re-examination. 1303 RE-EXAMINATION BY MR. PENNY: 1304 MR. PENNY: Mr. Broeders, I think this question is for you. It's on an issue that's come up a number of times and it's gradually -- it's an evolving set of numbers that was most recently touched on by Mr. Moran, but it's come up before and it has to do with getting the actual pension contributions, the minimums and then what was expensed. 1305 I think just two things. First of all, when you gave the list of numbers for actual contributions for 1999 through to 2002 and then the forecast actual contributions for 2003/2004, did those numbers include the defined benefit and defined contribution or just defined benefit? 1306 MR. BROEDERS: They included only the defined benefit. 1307 MR. PENNY: And so if you were to compare -- all right. And so just so we can complete the picture, can you give us the -- and sorry, before that, Mr. Witts, when you, in the interrogatory that listed -- it was J.3.18, I think, that listed the minimums, were those just the -- your recommendations, I should say, were those just defined benefits or did they include DC as well. 1308 MR. WITTS: They were just defined benefits, they didn't include the DC. 1309 MR. PENNY: So then, just so we have the complete picture to compare the actuals versus the expense and so on, you've given us, as I understand it, Mr. Broeders, you've given us for the expensed portion both the defined benefit and the defined contributions, so can we have those numbers for the actual and for the recommended? The cash contribution? 1310 MR. BROEDERS: The -- sorry, which year to start with, 2000? 1311 MR. PENNY: In 1999, right through. In other words, just give us what the DC portion would have been in those years. 1312 MR. BROEDERS: For 1999, you have the number that was set for that? 1313 MR. PENNY: You said -- my note was 7 million, was the cash contribution -- the actual cash contribution. 1314 MR. BROEDERS: For defined benefits. So the defined contribution would be 1 million. For 2000, it's approximately 2 million; for 2001, 3 million; 2002, 3 million; 2003, 2 million. 1315 MR. PENNY: And what was proposed for 2004? 1316 MR. BROEDERS: About 2 million again. 1317 MR. PENNY: All right. And, Mr. Witts, would your recommendation -- what would your recommendation have been if it was extended to the direct -- to the defined contribution portion, when we were looking at that interrogatory that had your recommendations? 1318 MR. WITTS: That the required contributions would be made at the levels just mentioned by Mr. Broeders. You can recognize that, for a defined contribution plan, pension expense is exactly equal to the company's contribution. 1319 MR. PENNY: So it's pay as you go. 1320 MR. WITTS: Yes. So those numbers can be simply added to both the defined benefit pension expense and the defined benefit cash contributions to get the total pension expense and total cash contributions. 1321 MR. PENNY: Mr. Chairman, would it assist the Board to have -- rather than piece this together from the transcript, would it be of assistance to have a table prepared which contains all of these? 1322 MR. SOMMERVILLE: I think that would be very useful. I've got more scratchings than I care -- 1323 MR. PENNY: So this is -- I mean we can give it a number, I guess, so it's identified, but we will volunteer to do that, pull all those things together. 1324 MR. MORAN: Mr. Chair, maybe we could just give it an undertaking number, then. N.7.11, this would be an undertaking to produce the table in J.3.18 on page 2, including actual cash contributions as well as actual expenses for 1999 through 2004, for both defined contribution and defined benefit. 1325 MR. PENNY: Right. Thank you. 1326 UNDERTAKING NO. N.7.11: TO PRODUCE THE TABLE IN J.3.18 ON PAGE 2, INCLUDING ACTUAL CASH CONTRIBUTIONS AS WELL AS ACTUAL EXPENSES FOR 1999 THROUGH 2004, FOR BOTH DEFINED CONTRIBUTION AND DEFINED BENEFIT 1327 MR. PENNY: Thank you. 1328 MR. SOMMERVILLE: Thank you. 1329 MR. PENNY: And then, Mr. Broeders, one further follow-up question that relates to that, and that is you were -- you gave some evidence about what was -- about the expense that was in rates in 2000, and I think you said that it was 1.3 million. 1330 MR. BROEDERS: For pension, yes. 1331 MR. PENNY: For pension only, and that's what I'm asking about. Are you able to tell us what the pension expense only was in the 1999 rates? 1332 MR. BROEDERS: 5.1. 1333 MR. PENNY: All right. Thank you. 1334 Exhibit M.7.2, that was the article from The Globe and Mail - I think this is a question for you, Mr. Witts - my question is: Are the concerns that fuel the debate about smoothing that are reflected in The Globe and Mail article concerns that apply in this particular case to Union Gas and concerns that should be of concern to this Board, is my question? 1335 MR. WITTS: The Board, I believe, in the 1999 decision approved the use of generally-accepted accounting principles, Canadian generally-accepted accounting principles, in terms of measuring the pension expense and post-retirement benefit expense. And the application includes expense calculated in just that way, in accordance with the current standard which is section 3461 of the handbook. 1336 The issues that are expressed in this article in relation to smoothing are ones that we have heard before, but as yet, the Canadian Institute of Chartered Accountants has not come forward with changes to the standard. We don't know if they will come forward with changes to the standard. 1337 The principle of using smoothing has been in place for many years in North America and it continues to be the standard that applies and is used by most Canadian companies. 1338 MR. PENNY: And as I read the article, the essence of the concern seems to be around shareholder disclosure. Is disclosure an issue in this case? 1339 MR. WITTS: I would suggest not for Union Gas because of this very process that we go through, disclosing all of the information to the Board and the intervenors. The company does disclose, also, in accordance with the standard in its financial statements and we've reviewed some of those financial statements today. 1340 That said, the level of disclosure, generally, in Canada has not been perhaps as good as it could be, and the accounting standards board has just released an exposure draft that will significantly extend those disclosures that are required in corporate financial statements. And Union will obviously comply with that, but likely has already met that higher level of disclosure through this process. 1341 MR. PENNY: All right. Thank you. 1342 MR. DINGWALL: Mr. Chairman, I think in Mr. Penny's last number of questions relating to The Globe and Mail article, that we may have extended somewhat beyond the boundaries and premise to redirect. I speak specifically because Mr. Penny asked Mr. Witts with respect to the implications of the smoothing issue on regulatory accounting, and in his response, Mr. Witts made reference to a previous Board decision that -- well, a partial reference, frankly, to a previous Board decision, that set out some of the bases for regulatory accounting. And had I known, I think had anyone known that Mr. Witts would embark upon this new ground and comment upon that particular decision, they, frankly, might have some questions on this new ground; I certainly might as well. 1343 So I'm wondering how we can deal with this at this late hour of the day and with this kind of arising in the matter of moving beyond redirect into establishing a new area of evidence. 1344 MR. PENNY: It was not me, Mr. Chairman, that introduced this exhibit, it was Mr. Shepherd. Mr. Dingwall had already concluded his cross-examination. And this having been introduced in Mr. Shepherd's cross-examination, it is entirely appropriate re-examination to ask the witness about it and to ask for his explanation. 1345 Mr. Dingwall had already concluded his cross-examination and so his turn is over, in my respectful submission. 1346 MR. DINGWALL: I guess my concern arises from Mr. Witts' only partial reference to the decision in the 499 case, and had I the opportunity, I would, of course, find the full quote, but I believe that decision, while accepting CICA standards as appropriate, also makes reference to the Board's preference on that -- in that decision to actually tying expenses to the period in which they were incurred within the same paragraph, which, frankly, raises some questions as to Mr. Witts' interpretation and his response to Mr. Penny's questions. 1347 MR. PENNY: Well, that's entirely a matter of argument, Mr. Chairman. 1348 MR. SOMMERVILLE: Mr. Dingwall, one of the perils of introducing materials of this nature, and I have some sympathy for your position here, but when material of this nature is introduced and there is some reliance upon it by the person who introduces it, it does, I think, become a proper subject for redirect. And I think -- I don't think that Mr. Penny's question was inappropriate. 1349 The answer that Mr. Witts gave was expansive, certainly, and you are certainly free to comment in your argument - and should you see any other opportunities with other panels to explore the idea as to the appropriate accounting practices that ought to govern this situation, you'll be free to argue those - but I don't think that Mr. Penny's question is, per se, out of line, given the introduction of this document and some level of reliance placed on it by Mr. Shepherd. So I'm not going to -- I don't think that there is any particular redress that would be appropriate. 1350 MR. DINGWALL: I thank you, sir, for also pointing out the opportunity to raise this with other panels for interpretation and in argument. 1351 MR. SOMMERVILLE: Well, I think that opportunity was always there, Mr. Dingwall. 1352 Mr. Penny. 1353 MR. PENNY: Thank you, sir. 1354 Mr. Witts, with respect to M.6.1, that was the document entitled "Union Gas Limited Effective Asset-Related Experience Gains (Losses) On Pension Expense," I just have a generic question about that document which is whether there's any difference in the application of the pension accounting rules to Union between the 2001 to 2003 period, on the one hand, and the 2004 period, on the other? Is there any methodological difference in the application of the rules to those two periods of time? 1355 MR. WITTS: No. The same methodology has been applied to each of the years that have been presented in the analysis. 1356 MR. PENNY: And what would the impact on 2004 revenue deficiency be if there were no smoothing techniques applied insofar as it would result from pension expense matters? 1357 MR. WITTS: The impact would actually be to increase the level of pension expense in that year by approximately 3 million. 1358 MR. PENNY: And can you just explain why that is so to the Board. 1359 MR. WITTS: Because the experienced gains and losses that are effectively being deferred into the future by the smoothing mechanisms, if they were not applied, we would have to recognize and begin to amortize the outstanding balance beginning at the beginning of 2004. 1360 MR. PENNY: All right. And then, Mr. Broeders, this issue of surplus came up a number of times and there were some questions put to you in relation to, I think it was, J.7.27 in M.7.1. And you don't need to turn it up, but my question to you is simply: What was the impact of the fact that there were historic surpluses back in the late '90s in the Union pension plan on the costs that Union was seeking to recover as part of its cost of service in those years? 1361 MR. BROEDERS: The surpluses or the favorable position or the excessive return on the assets over the liability growth would have created a downward pressure on the pension expense calculated as a whole. So in 1999, that number would have been lower than otherwise would have been if there was not such a surplus. 1362 MR. PENNY: All right. Thank you. 1363 And then my final question is, I think, for both you, Mr. Broeders, and Mr. Witts, and it arises out of the cross-examination on the combination agreement which was in Exhibit M.7.1. Again, I don't think you need to turn it up because my question is a very general one. I simply want to know whether the pending -- if you could both address this -- did the pending Duke acquisition influence or have any impact on the application or methodology of the pension accounting rules to Union's pension plans in 2001? 1364 MR. WITTS: To my knowledge, there was no impact at all upon the pension expense reporting by Union Gas. 1365 MR. BROEDERS: To my knowledge as well, there was no impact. 1366 MR. PENNY: All right. Thank you. 1367 Those are all my questions, sir. 1368 MR. SOMMERVILLE: Thank you, Mr. Penny. 1369 We'll adjourn until tomorrow morning at 9:30, at which time we'll take up the operations and maintenance panel. 1370 MR. PENNY: Yes. 1371 MR. SOMMERVILLE: And is there anything we need to deal with before we adjourn today? Thank you. Until 9:30. Oh, I'd like to thank the panel for its participation. Thank you very much. You are excused. Thanks. 1372 --- Whereupon the hearing adjourned at 4:30 p.m.