Rep: OEB Doc: 12WW3 Rev: 0 ONTARIO ENERGY BOARD Volume: 8 16 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 16 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 CRAWFORD SMITH Union Gas Limited 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 SUE LOTT VECC PETER SCULLY City of Timmins, City of Sudbury, FNOM 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [15] UNION GAS LIMITED - PANEL 7; ELLIOTT, BRODIE LUMLEY [24] EXAMINATION BY MR. PENNY: [27] CROSS-EXAMINATION BY MR. WARREN: [170] CROSS-EXAMINATION BY MS. LOTT: [452] CROSS-EXAMINATION BY MR. THOMPSON: [550] CROSS-EXAMINATION BY MR. SHEPHERD: [970] 10 EXHIBITS 11 EXHIBIT NO. M.8.1: CROSS-EXAMINATION MATERIAL FOR THE O&M PANEL, FILED BY VECC [451] EXHIBIT NO. M.8.2: O&M PER-CUSTOMER COMPARISON, FILED BY MR. SHEPHERD [943] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.8.1: TO IDENTIFY WHAT THE OFFSETTING SAVINGS HAVE BEEN FOR THE INCREASE FROM THE BOARD-APPROVED EBRO 499 NUMBER TO THE BLUE-PAGE UPDATE FOR FISCAL 2004, FOR THE INCREASE IN CONTRACT SERVICES [314] UNDERTAKING NO. N.8.2: TO PRODUCE THE FINANCIAL TARGETS FOR EACH OF THE PBR YEARS, 2000 TO 2003 [368] UNDERTAKING NO. N.8.3: TO ADVISE WHETHER THE CHANGE IN SECURITY DEPOSIT WAS FACTORED INTO BOTH THE 2003 AND 2004 BAD-DEBT FORECAST [511] UNDERTAKING NO. N.8.4: TO PRODUCE A CONSOLIDATION OF THE INFORMATION IN EXHIBITS D.5, TAB 3, SCHEDULE 2; D.4, TAB 3, SCHEDULE 2; AND D.3, TAB 3, SCHEDULE 2 [674] UNDERTAKING NO. N.8.5: TO PROVIDE THE BASE-DELIVERY REVENUE FOR 1999, TO WHICH A PERCENTAGE WAS APPLIED TO PRODUCE THE 2000 PRICE CAP, AND CARRY IT THROUGH TO 2003 [712] UNDERTAKING NO. N.8.6: TO ADVISE WHETHER THE MILLION DOLLARS IN LOAD-BALANCING CHARGES INCLUDED THE 21 MILLION BAD-DEBT AMOUNT FOR THE 2002 ACTUAL [742] UNDERTAKING NO. N.8.7: TO DIVIDE LINE 1 IN N.6.11 BETWEEN SALARIES AND WAGES AND INCENTIVES, AND LINE 3 IN N.6.11 BETWEEN THE AVERAGE FOR FTE FOR SALARIES, WAGES AND INCENTIVES, AND TO SHOW THE PERCENTAGE LINE FOR SALARIES AND WAGES AND INCENTIVES [862] UNDERTAKING NO. N.8.8: TO PROVIDE TO WHAT EXTENT THE RATE RIDER AND GDAR ARE INCLUDED IN THE NUMBER $26,565,000 ON EXHIBIT J.7.55, AND WHAT THAT NUMBER WOULD BE IF THEY WERE TOTALLY INCLUDED IN THAT NUMBER [1123] 14 --- Upon commencing at 9:40 a.m. 15 PRELIMINARY MATTERS: 16 MR. SOMMERVILLE: Thank you, please be seated. 17 This is the continuation of the Union Gas Limited rates application for rates for 2004. 18 Are there any preliminary matters? I note, Mr. Penny, that we have Exhibit N.6.11. 19 MR. PENNY: Yes, Mr. Chairman. That is in response to an undertaking that was given, but I intend to ask Ms. Brodie Lumley to walk us through this in the examination in chief, so we'll deal with that in some detail in a minute. But otherwise, there are no preliminary matters. 20 MR. SOMMERVILLE: Any preliminary matters from anyone else this morning before we begin? 21 Mr. Penny. 22 MR. PENNY: Yes, thank you, sir. 23 We have Ms. Elliott and Ms. Brodie Lumley from Union Gas here to speak to the O&M issues. If they could come forward and be sworn. 24 UNION GAS LIMITED - PANEL 7; ELLIOTT, BRODIE LUMLEY 25 P.ELLIOTT; Sworn. 26 W.BRODIE LUMLEY; Sworn. 27 EXAMINATION BY MR. PENNY: 28 MR. PENNY: Thank you. 29 Just by way of introduction, Ms. Elliott, just let me start with you, you are currently the director of accounting for Union Gas. 30 MS. ELLIOTT: That's correct. 31 MR. PENNY: And you've been with Union Gas since 1981, I understand. 32 MS. ELLIOTT: Yes. 33 MR. PENNY: And you've held various auditing, accounting and cost allocation and rate design and financial planning positions with Union since that time? 34 MS. ELLIOTT: Yes. 35 MR. PENNY: You were also with Clarkson Gordon for a period of time, prior to joining Union Gas? 36 MS. ELLIOTT: Yes, I was. 37 MR. PENNY: And you are a chartered accountant? 38 MS. ELLIOTT: Yes. 39 MR. PENNY: And you have a Bachelor of Mathematics from the University of Waterloo? 40 MS. ELLIOTT: Yes. 41 MR. PENNY: And I understand you are both a member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants? 42 MS. ELLIOTT: Yes, I am. 43 MR. PENNY: And you have appeared before this Board on more times than you probably care to remember and I won't list them all, but that includes appearances before this Board in the 1999 rate case EBRO 499 and the RP-1999-0017 case, and in the customer review case RP-2002-0130. 44 MS. ELLIOTT: Yes, that's correct. 45 MR. PENNY: And you, Ms. Elliott, were responsible for the preparation of the evidence on the operations and maintenance expenses which appear at tab D.1, tab 5? 46 MS. ELLIOTT: Yes. 47 MR. PENNY: And do you adopt that evidence for the purposes of these proceedings? 48 MS. ELLIOTT: Yes, I do. 49 MR. PENNY: And you also participated in the preparation of answers to written interrogatories that dealt with the subject of operating and maintenance expenses? 50 MS. ELLIOTT: Yes. 51 MR. PENNY: And do you adopt those as well? 52 MS. ELLIOTT: Yes, I do. 53 MR. PENNY: Thank you. 54 Ms. Brodie Lumley, you are currently the manager of plant and general accounting for Union Gas? 55 MS. BRODIE LUMLEY: That is correct. 56 MR. PENNY: And you work with Ms. Elliott in the finance group? 57 MS. BRODIE LUMLEY: Yes, I do. 58 MR. PENNY: You've been with Union Gas since 2002, I gather. 59 MS. BRODIE LUMLEY: That is correct. 60 MR. PENNY: And prior to that you were the financial and administration manager for Cargill Limited? 61 MS. BRODIE LUMLEY: Yes, that is correct. 62 MR. PENNY: And you also, for a period of time, were a staff accountant with Deloitte & Touche? 63 MS. BRODIE LUMLEY: That is correct. 64 MR. PENNY: You have a Bachelor of Commerce obtained in 1988? 65 MS. BRODIE LUMLEY: That's correct. 66 MR. PENNY: And you are a certified management accountant? 67 MS. BRODIE LUMLEY: Yes, I am. 68 MR. PENNY: And you are, I understand, a member of the Society of Management Accountants of Ontario? 69 MS. BRODIE LUMLEY: That's correct. 70 MR. PENNY: Now, you have not had the pleasure of appearing before this Board, I gather? 71 MS. BRODIE LUMLEY: That is correct. 72 MR. PENNY: Welcome. 73 And you also participated in the preparation of the operating and maintenance evidence that's at D.1, tab 9 -- I'm sorry, tab 5. 74 MS. BRODIE LUMLEY: That is correct. 75 MR. PENNY: And you also participated in the preparation of responses to written interrogatories on the operating and maintenance issues? 76 MS. BRODIE LUMLEY: That is correct. 77 MR. PENNY: And do you adopt that evidence for the purposes of these proceedings? 78 MS. BRODIE LUMLEY: Yes, I do. 79 MR. PENNY: Thank you. 80 Now, Ms. Elliott, you won't be surprised to know that your name has come up in connection with a number of matters in these proceedings to date and a number of issues have been deferred to you, and I just want to touch on a few of those. 81 First of all, there's been quite a bit of reference to Exhibit J.7.1 corrected, which is an answer to a Consumers' Association of Canada interrogatory that dealt with a variance explanation of the revenues deficiency. 82 Now, that deals with a revenue deficiency of 104 million in contrast '99 over 2004, and 106 million, 2003 over 2004. Can you first of all, start by explaining to us what the revenue deficiency is and where it comes from for 2004? 83 MS. ELLIOTT: Yes, the revenue deficiency for 2004, quite simply, is the difference between the revenues as forecast for 2004 using current 2003 rates and the costs as forecast for 2004, and that calculation and the breakdown of that is actually found in evidence at Exhibit F.3, tab 1, schedule 1. It is a schedule that presents total operating revenue for the forecast test year, total cost of service for the forecast test year and calculates a difference between the utility income and the utility income at the requested rate of return. 84 What that schedule shows in its updated version -- 85 MR. PENNY: Sorry, are you still with F.3, tab 1? 86 MS. ELLIOTT: Exhibit F.3, tab 1, schedule 1. It will show a revenue deficiency of $2,188,000. There are then a series of adjustments to remove S&T revenues and place them in the deferral account, which will increase the total revenue deficiency to 23,499,000. 87 The 104 is the delivery-related component of that revenue deficiency. So the revenues as forecast were forecast using rates in place at the time of the update, they would have been the May rates. 88 MR. PENNY: That's the approved 2003 rates including the May QRAM. 89 MS. ELLIOTT: May QRAM. The costs, however, were updated to reflect the July QRAM, so there is approximately $80 million of revenue sufficiency resulting from the gas supply. 90 If you take the $80 million sufficiency and adjust the deficiency, you get the $104 million that we're referring to in 2004 which is the deliver-related revenue deficiency. 91 What we attempted to do in J.7.1 is to explain what some of the contributing factors were that gave rise to that revenue deficiency and we did it really in two parts. The first page is a comparison of revenues and costs from 2004 to 1999 and what's listed there is the major or the key variances between the forecasted revenues and costs during that period. With the exception of the first, and the four items listed are the requested rate of return that Union's proposed for the 2004 case, the impact of reducing revenues as a result of the forecast for heating degree days, the impact over that time of the declining use in the customers, and a significant increase in the pension costs. 92 Those are all factors that are different between 1999 and 2004. With the exception of the revenue or the return on equity piece, the other three items are items that have been accumulating over time, so the company has been managing those impacts as we've gone from 1999 to 2003. 93 The second part of the analysis really was directed at looking at 2003 rates which, in 2003, are generating a regulated rate of return. In fact, if you turned up the evidence at Exhibit F.4, tab 1, schedule 1, you would see that the current rates in 2003 generate a $2 million sufficiency, so $2,496,000 of sufficiency in 2003. 94 Taking those same rates and applying them to the forecast for 2004, comparing them to the 2004 costs, generates a deficiency of $104 million in delivery-related. So the difference between 2003 and 2004 is the $106 million that you see on J.7.1, page 2. 95 And, again, comparing costs and revenues between '04 and '03, there are a number of factors contributing to that change. The first is a decrease in the distribution margin between '03 and '04 and that really is a combination of number of things, including the difference between weather in '03 and '04, contract market decreases, and we have in '04 some additional costs for the March park service. So that $24 million is a collection of things that are resulting in decreased margin in the distribution area. 96 The item that we're here to address today is the next item, which is an increase in operating expenses between '03 and '04 and that totals $42 million. The exhibit reference, which we probably don't have to turn up, but Exhibit D.3, tab 3, schedule 2, lists all of the components of that $42 million, some of which are pensions and salary-related that the previous panel discussed. 97 The last two items, again in '04, there is increase in the revenues or margins being deferred. Because it's a cost-of-service test year and all the costs are going into rates, we are putting $19 million into the deferral account, so that's a difference between '03 and '04. And then there's some favorable variances in terms of rate-base reductions, income tax reductions, other revenues, the depreciation expenses decreasing for the period, so those combine to reduce the deficiency by $14 million. 98 The point of J.7.1 was really to do a variance explanation in an attempt to explain why, in 2004, the company is not earning a regulated rate of return. 99 MR. PENNY: All right. Thank you. Now, you mentioned that the company had been managing between 19 -- on page 1, showed costs that the company had been managing between 1999 and 2003. With respect to O&M, please give us an overview of what has been happening with O&M generally since the Board's decision in RP-1999-0017 and what the events are that are driving the O&M-related revenue deficiency in 2004. 100 MS. ELLIOTT: The O&M evidence, prefiled evidence is at Exhibit D.1, tab 5. There are two sections to that evidence; the original filing is ten pages and the updated evidence is seven pages. 101 What this evidence describes is a number of items in the O&M category that are increasing as a result of external factors, and those items have been specifically identified and listed. The majority -- the biggest item there is the pension and benefits, which I said the previous panel was here to discuss. 102 Another significant cost that's increased over time due to external factors is the insurance expense. We've also had to deal with a pipeline integrity program and increase the costs for that, as well as a number of compliance issues, costs for the gas distribution access rules and to implement some -- to be able to implement a rate rider. 103 Those costs have been separated from this analysis because they're increasing as a result of factors external to the company. 104 What the analysis on page 8 of the original evidence and page 7 of the updated evidence shows is that the remaining costs that the company is incurring over the period 1999 to 2004 on a per-customer basis have actually increased only slightly. The 1999 costs, excluding those items that are subject to the external factors, costs per customer were $237 per customer, and our current forecast for O&M produces a cost per customer of $246 per customer, which is an increase of $9 over a five-year period, which is about three-quarters of a percent her year in a period where inflation was averaging about two and a half percent per year. 105 So the company's been managing those other costs at a rate below the rate of inflation. 106 MR. PENNY: All right. Thank you. And then the subject of full-time equivalents came up and there was some punting of that to this panel, to use the vernacular. 107 Now, this was mentioned this morning, there's an Exhibit N.6.11 which was an undertaking that was given by the previous panel, but I understand, Ms. Brodie Lumley, that you, in fact, prepared this response. 108 MS. BRODIE LUMLEY: Yes, I did. 109 MR. PENNY: And why don't you walk us through this. Let's start with the analysis on page 3 of the FTEs, and why don't we stick, for the purposes of explanation, let's start with the 1999 actual block and perhaps you can take us through each of the columns and explain what they are. 110 So looking at the heading "1999 Actual," under column A that's headed "PeopleSoft December 31," can you just explain to us what that is and what's shown there. 111 MS. BRODIE LUMLEY: Column A shows a summary of the data from Union's human resource tracking and reporting system which was used to respond to interrogatories J.17.1 and J.17.37. 112 MR. PENNY: And what's the effective date of the information that was taken from PeopleSoft. 113 MS. BRODIE LUMLEY: The effective date of the information taken from PeopleSoft was December 31st of each year, 1999 through 2002. 114 MR. PENNY: And that, I gather, gives you both full-time -- gives you the positions, the vacancies -- sorry, the positions as well as the vacancies. 115 MS. BRODIE LUMLEY: That's correct. 116 MR. PENNY: And under column B, we've got a -- they use the word "Roles/Headcount," and it says Exhibit J.17.1, so what's shown in Exhibit J.17.1? 117 MS. BRODIE LUMLEY: J.17.1 shows all roles, whether vacant or active. So as you can see, going across from line 2, full-time positions in 1999 were 2,499; going across to column B, full-time roles were 2,499. 118 MR. PENNY: All right. So B has no adjustment for vacancies? 119 MS. BRODIE LUMLEY: That is correct. 120 MR. PENNY: Okay. And then under column C we have "Employees or People Count." Can you explain that. 121 MS. BRODIE LUMLEY: Column C is active roles only, so the 2,499 full-time positions is reduced by the number of vacant positions to arrive at full-time active roles of 2,231. 122 MR. PENNY: All right. And then I gather -- under column D you've got "Conversion Factor," and I gather that you don't convert full-time positions because they're already full-time positions; but in order to translate part-time or temporary positions into full-time equivalents, you have to apply a conversion factor? 123 MS. BRODIE LUMLEY: That is correct. 124 MR. PENNY: And so explain to the Board, would you, what the basis for the conversion factor is that you have used to convert part-time and temporary seasonals to full-time equivalents. 125 MS. BRODIE LUMLEY: The conversion factor is as described in note 1, the bottom of the page, "Conversion factors shown for part-time and temp/seasonal is actual hours paid as a percent of standard hours for a full-time position in that year." 126 So, for example, standard hours for a full-time staff is 37.5 hours per week. On average, part-time staff were paid for 25.32 hours, which is 67.52 percent of 37 and a half. 127 MR. PENNY: All right. And then explain the temporary and seasonal conversion factor. 128 MS. BRODIE LUMLEY: Temporary and seasonal is calculated using the same conversion factor as described in the note, but for example, seasonal people doing similar roles, the seasonal people on average work 40 hours a standard work week for full- time staff, so the seasonal people were paid, on average, for 75.5 percent of 40 hours which is 30.2 hours. 129 MR. PENNY: And I'm looking ahead to the further years, 2000 and forward, those conversion factors change to some extent each year; why is that? 130 MS. BRODIE LUMLEY: That would be because people would be paid for different numbers of hours in those years. 131 MR. PENNY: And so is the conversion factors you've used are based on actual experience in the year with respect to the part-time and the seasonal? 132 MS. BRODIE LUMLEY: That is correct. 133 MR. PENNY: All right, thank you. 134 And then we get to column E, which is the estimated full-time equivalents, can you just explain then how column E is derived from the prior information? 135 MS. BRODIE LUMLEY: Column E starts with column C, it then uses the conversion factor shown in column D to calculate across to column E. 136 MR. PENNY: And so your calculation for total full-time equivalents for 1999 is, what? 137 MS. BRODIE LUMLEY: For 1999 is 2,515. 138 MR. PENNY: All right. And then I take it that you followed a similar methodology and pattern with respect to 2000, 2001, and 2002? 139 MS. BRODIE LUMLEY: That is correct. 140 MR. PENNY: And then I see that there's a note 3 that relates to 2002 and the information that is under columns B and C, the totals. And that note reads: 141 "Reflects a correction in the database that results in a correction to interrogatory responses previously filed." 142 And then it lists 7.54, 17.1, 17.37, and 34.98. 143 Can you first of all, explain what the data error was that you discovered and what you did to correct it? 144 MS. BRODIE LUMLEY: While preparing for the rate hearing, it became evident that there was a double-count in the PeopleSoft data that was used to provide responses to those interrogatories noted in number 3. 145 MR. PENNY: And did this occur only in 2002? 146 MS. BRODIE LUMLEY: That's correct. 147 MR. PENNY: And what did you do to investigate and cure that particular problem? 148 MS. BRODIE LUMLEY: What we did was we reran the PeopleSoft queries to provide us with the actual number of PeopleSoft counts at December 31st. 149 MR. PENNY: And are you satisfied now that the data that you have for all of these years is appropriate and accurate? 150 MS. BRODIE LUMLEY: Yes, I am. 151 MR. PENNY: And are corrected versions of those interrogatories that I mentioned in the process of being prepared? 152 MS. BRODIE LUMLEY: Yes, they are. 153 MR. PENNY: Thank you. And then you, I gather, took the estimated -- your calculations for full-time equivalents, and going back to page 1 of N.6.11, applied that to total salaries to determine -- well, why don't you tell me, what is the point of the discussion and the table on the first page of N.6.11? 154 MS. BRODIE LUMLEY: Starting with line 1 in N.6.11, that is the salary and wages as described at note 1, it includes incentives and excludes severances. We then used the full-time equivalent positions as calculated on page 3 to derive an average salary per FTE. And then we arrived at line 4 as described at the bottom of page 2 -- the top of page 2, to calculate an average salary increase per FTE as a percent of their yearly wage. 155 MR. PENNY: So, first of all, on line 2, if I go across to the end, the column under 2004 versus EBRO 499 variance, on line 2 I've got full-time equivalent, so what does the bracketed 402 indicate? 156 MS. BRODIE LUMLEY: 402 shows us that there has been full-time equivalent role reductions at Union Gas of 402 for the period EBRO 499 through to 2004. 157 MR. PENNY: And then what is line 5 showing us? 158 MS. BRODIE LUMLEY: Line 5 shows us the dollar value of those role reductions by calculating the average salary per FTE times the number of role reductions adding across to arrive at 23 million. 159 MR. PENNY: All right, thank you. 160 And then Ms. Elliott, just coming back to you, I may not have a complete list here, but the other issues that have been mentioned in connection with you previously or the financial group, the main ones at least were the accounting treatment of the weather hedge, the accounting treatment of the Enron gas loan as a result of Enron's insolvency and the effect of weather normalization methodology on earnings and it's implications for whether Union historically earned its allowed rate of return. First of all, are those O&M items? 161 MS. ELLIOTT: No, they're not. 162 MR. PENNY: And are you in a position to speak to those items on this panel? 163 MS. ELLIOTT: It would be my preference to delay the examination of those items until the finance panel comes up either the end of next week or early the following week. 164 MR. PENNY: All right because I see that you're scheduled for a return appearance with the rest of your financial panel. 165 MS. ELLIOTT: I am. 166 MR. PENNY: All right. By popular demand, I'm sure. 167 And so with that, Mr. Chairman, that concludes my examination in chief, so the witnesses are available for examination by the intervenors. 168 MR. SOMMERVILLE: Thank you, Mr. Penny. 169 Mr. Warren. 170 CROSS-EXAMINATION BY MR. WARREN: 171 MR. WARREN: Thank you. Ms. Brodie Lumley, since Ms. Elliott knows me far better than I'm sure she cares to, let me introduce myself to you. My name is Robert Warren, I appear for Consumers' Association of Canada, and contrary to everything Mr. Penny will have told you, I'm always fair and always kind. 172 Having said that, panel, could I ask Ms. Elliott, I just want to stay with the Exhibit J.7.1 matter because it's fresh in everybody's mind, and if you could turn that up, please. And at the same time, if you could have in front of you a further interrogatory response delivered to my client, and that's Exhibit J.7.22. 173 MS. ELLIOTT: I have those. 174 MR. WARREN: Thank you. Now, as I understood your response to my friend in chief this morning, in talking about J.7.1, you said that the four items listed there were the -- I don't want to put words in your mouth, but as I understand it, they are the principal drivers of the increase in the deficiency when you compare 1999 with 2004; is that a fair summary of it? 175 MS. ELLIOTT: They are certainly the key variances between revenues and costs when you compare 1999 and 2004, so the fact that they were not in the underlying forecast in 1999 basically contributes to the deficiency we have in 2004. 176 MR. WARREN: Is it a function of the fact that they weren't in 1999 or the magnitude of the increase between 1999 and 2004 that gets them pride of place in Exhibit J.7.1. 177 MS. ELLIOTT: It's the magnitude of the change between '99 and 2004, and I guess the other reason we have the deficiency in 2004 is that, although these variances are things we appear to have managed between 1999 and 2003, there are significant changes in circumstance in 2004 that are giving rise to the deficiency. So while we've managed the impact of, well, everything except the ROE proposal, in the intervening period, the variances in 2004, between 2003 and 2004, give rise to a deficiency. 178 MR. WARREN: I'd like you, if you would, to turn to J.7.22 - and I'm confident that your eyes and, no doubt, almost every other sensate human being's eyes are better than mine - but if you could just put your hands on the 1999 actual numbers, which is column B, and your other hand on the final column, which is column M, I guess. 179 MR. MORAN: Is that .2 or .22? 180 MR. WARREN: .22, I'm sorry, J.7.22. 181 And the exercise I'm going to go through briefly with you, Ms. Elliott, is to identify some of the large changes numerically - the numbers in one column are much larger than the other - and ask you why it is that they wouldn't appear on J.7.1. 182 The first one I want to take you to is line number 29, it's the management fee. I appreciate that there is another panel that will talk to the details of the management fee issues, but I just want to deal with it simply in the context of your comments on J.7.1. 183 As I look at 29, it would appear that the management fee number for the 1999 actuals was about $2.7 million; do you see that? 184 MS. ELLIOTT: Yes, I do. 185 MR. WARREN: And I see, when I go to the blue-page update in column M, the number for 2004 is about 28.6, which, roughly speaking, is a change of about $26 million, if you'll take that rough calculation. 186 MS. ELLIOTT: Yes. 187 MR. WARREN: Now, in terms of magnitude, a change of $26 million, if magnitude were the sole criterion for an appearance on J.7.1, can we agree that it would, all other things being equal, on a magnitude basis alone, appear on J.7.1. 188 MS. ELLIOTT: If it was an isolated variance. The management fees really do have offsetting variances in other cost components. 189 MR. WARREN: So it's because there are offsets. Is that the reason why it doesn't appear in J.7.1? 190 MS. ELLIOTT: That's correct. 191 MR. WARREN: And the nature of those offsets is a subject that will be spoken to by not the next panel but the one after that. 192 MS. ELLIOTT: There is a panel to follow that will speak to the changes in the management fee. 193 MR. WARREN: Thank you. 194 Now, the second item I'd like you to look to on J.7.2 is just run your finger up to line item number 5 under the heading "Contract Services," and if I compare the number there for the 1999 actuals, it was 25 million roughly, and the blue-page update, going all the way over to column M, is $42.3 million; do you see that? 195 MS. ELLIOTT: Yes, I do. 196 MR. WARREN: And, again, on a magnitude basis, if it were the sole criterion, the difference of approximately $17 million might qualify it for an appearance on J.7.1. What's the reason it doesn't appear there? 197 MS. ELLIOTT: That's another category where I believe there are some offsets, if you will just -- there are three pieces of evidence that would go from 1999 to 2004 explaining the variances. The first piece is Exhibit D.5, tab 3, schedule 2, on page 3 of 7. That takes 1999 to 2002. 198 The single biggest item there is the billing system contract for Banner which, in fact, is offset by a reduction in leasing costs. 199 MR. WARREN: So you don't need to take me to the others, but just generically, am I to understand that the reason it wouldn't appear in J.7.1 is that there are explanations for the increase or because there are offsets in other areas? 200 MS. ELLIOTT: There are offsets in other areas, either through cost reductions or revenue increases in the case of customer attachments, so that's why it doesn't appear in the comparison between 1999 and 2004. 201 MR. WARREN: And the final item I wanted to take you to was line item, this is on J.7.22, is line 18, the bad debt difference, 2, -- sorry, 1999 actuals was about 2.9 million, and it rises to 13.3 in 2004. 202 Again, would the explanation of why it wouldn't appear as a major contributor to the increase be because there are offsets or other explanations for the change? 203 MS. ELLIOTT: This is probably one where there aren't any direct offsets. But in looking at the pluses and minuses over the forecast period, it didn't come up as an item that basically made the list. 204 MR. WARREN: Is that a magnitude issue? 205 MS. ELLIOTT: There were probably offsetting favorable variances but unrelated to bad-debt expense, so they were just netted together. 206 MR. WARREN: Thanks for that, Ms. Elliott. 207 The first area of inquiry for you in my cross-examination, Ms. Elliott and Ms. Brodie Lumley, is really to get an understanding of some numbers that appear at various points in the evidence and I just want to make sure that I've got -- I'm able to make apples-to-apples comparisons. And the two exhibits that I'd like you to turn up, if you could keep in front of you Exhibit J.7.22, which we've just been talking about, and also an interrogatory which was delivered by my friend, Mr. Thompson, at J.17.32, which was IGUA No. 32. 208 MS. ELLIOTT: We have those two interrogatories. 209 MR. WARREN: Now, the first thing -- thank you, Ms. Elliott. 210 The first thing is I want to make sure that I'm talking about the same items so that the proper descriptor, I guess, is the first issue. 211 In J.7.22, you've got operating and maintenance expense by cost type for the period 1999 to forecast 2004. Now, in J.17.32, the discussion there is with respect to some internal O&M reports that were generated by Union, and if you turn up the attachment pages to 17.32, you'll see, for example, in the first attachment page, "2003 Budget, 2002 Actual." Is the number at the bottom of that first attachment page under the heading, for example, "2003 Budget, 2002 Actual," are those O&M numbers? 212 MS. ELLIOTT: Yes, they are. 213 MR. WARREN: Okay. Now, given that, can I take a look at the -- ask you a take a look at the fourth -- sorry, the final attachment page to J.17.32. And what we've got there, let's take a look at the year 2000. You've got a -- first of all, again in terms of vocabulary, that page uses in connection with 2000, the word "outlook," what does that word mean and, in particular, as a subclause of this, what's the relationship between the outlook number and the actual numbers for 2002? 214 MS. ELLIOTT: The outlook is a revised estimate of the budget, so what this page is is the 2001 budget which would have been prepared midway through 2000. At the time the budget was being prepared, it would have been updates or variances known to impact the 2000 budget. The outlook is a revised version of the 2000 budget so it would be -- depending on the time of year, it would be coming close to actuals, depending on the accuracy of the forecast. 215 MR. WARREN: But we're clear that it is not actuals? 216 MS. ELLIOTT: It is not actual and it is not the budget. It should be somewhere between them. 217 MR. WARREN: So for example, for the years -- I'm going backwards, I apologize, the last attachment page on the penultimate, second last attachment page for both 2000, 2001 use the word "outlook." 218 Can I then conclude then -- sorry, keeping an eye on J.7.22, I cannot compare the figures for 2000 actuals and 2001 actuals as they appear on J.17.22 with the 2000 and 2001 outlook numbers as they appear on this exhibit; correct? 219 MS. ELLIOTT: The 2000 and 2001 outlooks are not equal to the actuals, that's correct. 220 MR. WARREN: Now, when I looked up the next of the attachments, again going backwards, 2002 actuals, have you got the page in front of you, it's the second of the two attachment pages, Ms. Elliott, and it compares the 2003 budget and the 2002 actuals. 221 MS. ELLIOTT: Yes. 222 MR. WARREN: Now, the figure for the 2002 actual is $281.6 million; do you see that? 223 MS. ELLIOTT: Yes. 224 MR. WARREN: Now I'd ask you to take to look at J.7.22 and in column H, I think it is, the 2002 actual is expressed as 351, do you see that? 225 MS. ELLIOTT: At line 33, that's the operating and maintenance costs before capitalization. 226 MR. WARREN: Okay. 227 MS. ELLIOTT: The schedule you're looking at is after capitalization and excludes compressor fuel, so if you go to line 37, column H, you'll see 281,634,000. 228 MR. WARREN: So it's net to net; is that fair? 229 MS. ELLIOTT: Yes. 230 MR. WARREN: Okay. Thanks for that explanation. 231 Now, staying with Exhibit J.7.22, Ms. Elliott, there were two particular line items on this exhibit that I'd like to deal with next. The -- 53, I apologize for that. 232 Let's just, if we can, take a look at a comparison of the gross O&M figures from '99 forward. It would appear, looking at line item 37, again comparing the net numbers and actuals, you had an actual for 1999 of 254.7; correct? 233 MS. ELLIOTT: Yes. 234 MR. WARREN: That dropped for 2000 actuals to 252.1; is that correct? 235 MS. ELLIOTT: Yes. 236 MR. WARREN: It increased slightly in 2001 to 254.457; correct? 237 MS. ELLIOTT: Yes. 238 MR. WARREN: There then is, and this is my modifier not yours, but there then appears to be a significant increase going to 2002 actuals to 281 million, 281.6; is that correct? 239 MS. ELLIOTT: Yes. 240 MR. WARREN: Now, if we look for the explanation for that, Ms. Elliott, if we can go up the 2002 actual numbers in -- this is column H above it, and look first to the bad debt number and comparing 1999 actuals with 2002 actuals. 1999 actuals in that category were 2.9 and in 2002, they were 21.3; do you see those numbers? 241 MS. ELLIOTT: Yes. 242 MR. WARREN: And as I understand the prefiled evidence, the explanation for that is that the actual bad debt experience of Union increased by that amount in that year; correct? 243 MS. ELLIOTT: That's correct, yes. 244 MR. WARREN: And have I also understood the evidence correctly, and correct me if I am wrong, that that is in substantial measure a function of the spike in the gas costs that year, in the commodity cost? 245 MS. ELLIOTT: There are two factors contributing to it. The one, the increase in the gas cost is certainly a contributing factor, and because gas bills are higher, we are experiencing a higher percentage of baddebt expense and write-offs. What you see in 2002 is really an accumulation, it's really a lagging factor. The spike in the gas costs was in 2001 and after following up and collection activities for the 2001/2002 period, these accounts were written off in 2002. 246 MR. WARREN: Okay. But there is an accounting, if I can call it a process lag that is due to the time it takes to deal finally with the bad debts, but in terms of the primary driver for why there are bad debts, have I understood it that it's a spike in the commodity costs? 247 MS. ELLIOTT: It's the higher costs, yes. 248 MR. WARREN: Now, did you or did Union undertake an analysis to come up with -- sorry that seems imprecise -- is there a calculation of the relationship between the amount of the increase in the commodity cost and the level of bad-debt expense? In other words, Ms. Elliott, is it formulaic or can it be formulaic? 249 MS. ELLIOTT: We have attempted to quantify what the impact of the gas cost is, and I don't have it off the top of my head, it's not a precise formula, but in terms of relationship of total revenue, we traditionally are looking at half a percent write-offs of total revenue, so to the extent that the revenue goes up, the write-offs will go up correspondingly. When gas bills go to a point where more customers are not paying them what we're seeing on an experience basis is that half a percent moved to three quarters of a percent and almost to one percent in those periods, so it's a two-fold analysis; gas costs and the relationship on revenue being one and then the higher experience as the bills get higher. 250 MR. WARREN: Okay. Sorry, if you could just run me through that again. It's two-fold. Correct me if I am wrong about this, that you've done an analysis between the increases in your revenue stream and bad debt expenses. 251 MS. ELLIOTT: If you just took our historic experience and applied that to the increase in revenue, that would give you a quantification of what the impact of the gas costs are at the historic level of write-offs. 252 MR. WARREN: What I don't understand in that calculation was the link to gas -- to commodity cost increases. 253 MS. ELLIOTT: It's a percentage basis, so if historically we've written off half of one percent, or half of one percent of our accounts are subject to write-off, as revenues increase, then half of one percent of those increasing revenues linked to gas costs or otherwise would contribute to higher bad-debt expense. 254 Secondly, the level of experience actually goes up when the bills get higher, so instead of just half of one percent, it has been growing to almost a full percentage of our revenues being written off. I think both are due to the gas prices; one is a more direct relationship. 255 MR. WARREN: Staying with this issue, bad-debt expense, again, on J.17.22, if you run your finger over to the blue-page column, the last column which is column M, I guess, and the forecast for bad-debt expense for fiscal 2004 is $13.3 million; correct? 256 MS. ELLIOTT: Yes. 257 MR. WARREN: And you're seeking, in this application, to recover in rates that forecast amount; correct? 258 MS. ELLIOTT: Yes. 259 MR. WARREN: Now, does the 13.3 million -- you tell me how that figure is derived, what calculation is used to derive that figure. 260 MS. ELLIOTT: It's really a combination of the impact of the gas prices, so a percentage of total revenue that has been subject to write-off. And I think what we've used to verify -- the calculation is a percentage of revenue. 261 The problem is I've got two different numbers here; I may need some time to just make sure that I'm going to give you the right one in terms of a factor of the revenue that we are forecasting for 2004. 262 MR. WARREN: Thanks for that, Ms. Elliott. I was less interested in the actual numbers you were using than in the factors that are considered, and perhaps I can get at it this way: Is the 13.3 derived, in part, from your forecast of what gas commodity costs are likely to be in fiscal 2004? 263 MS. ELLIOTT: Yes. 264 MR. WARREN: Now, going back for a moment to 2002, under this heading "Bad-Debt Expense," the spike, we can agree, the spike in the bad-debt expense was abnormally high that year, looking at the data that we have in front of us; correct? 265 MS. ELLIOTT: Yes, it was a very high expense that year. 266 MR. WARREN: And have you done an analysis, or has Union done an analysis of the extent to which the bad debt -- that spike - I want to be careful in the use of language in these circumstances - to which it may have affected, in particular, the most economically vulnerable of your consumers, those people on fixed or low incomes? In other words, what I'm driving at, Ms. Elliott, is the extent to which that spike in commodity cost may have taken out of your market the most vulnerable cluster of consumers, and that thereafter the people who are left in the residential class, in particular, may not be as vulnerable to spikes in commodity costs as those in 2002 or 2001. 267 MR. PENNY: The expression "take out" in this context has a somewhat ominous connotation. 268 MR. WARREN: Well, I apologize, Mr. Penny, for the use of that vocabulary, and I was quite conscious of trying to avoid that, and I don't mean to give offence by doing that, but I think Ms. Elliott will grasp the concept of what I'm trying to get at. 269 MS. ELLIOTT: I've not seen an analysis that would suggest -- I think what you're suggesting is that those accounts that we wrote off in 2002 are now permanently off the system and the remaining population is a lower credit risk. That's not an analysis that we've done or could support. 270 MR. WARREN: Thanks, Ms. Elliott. 271 My final question on this is: Would it be possible to deal with bad-debt expense by treating it as -- rather than as an O&M expense, which is embedded in rates, using a deferral account, given the variability of commodity costs which, in turn, are a function, in part, a function of weather? Can we agree on that; commodity costs may be a function of weather, may be a function of economic circumstances here and in the United States, those variables coming into play. Would it not be more reasonable to allowing for those variables to treat bad-debt expense using a deferral account mechanism rather than embedding it into rates? 272 MS. ELLIOTT: I think the preference is to forecast as accurately as possible what this expense will be for designing rates, and then it is an expense for which the company is subject to variances in as long as the forecast is set at the proper level, that variability should be much less. I think what we're dealing with in 2002 is certainly a -- I mean, it's a lagging factor. I would say that some of those expenses probably relate to 2001. But over the course of the five years, gas prices did increase and exposed the company to managing the higher cost of bad-debt expense. Given this opportunity to reforecast bad-debt expense, I think that's the preferable way of dealing with it on a go-forward basis. 273 MR. WARREN: Thanks, Ms. Elliott. 274 My next series of questions are a comparison of O&M expenses, calendar 2003 to calendar 2004 test, and in this context, if you could turn up in the yellow-page updates Exhibit D.3, tab 3, schedule 1, page 6. 275 MR. PENNY: Can we have that one more time, Mr. Warren? 276 MR. WARREN: Thank you for that opportunity, Mr. Penny, because I gave you the wrong one. 277 MS. ELLIOTT: I was going to say, I don't have a page 6. 278 MR. WARREN: D.3, tab 3, schedule 2. There are six pages in that, Ms. Elliott. 279 MS. ELLIOTT: Yeah, there are two pages in the yellow update. 280 MR. WARREN: D.3, tab 3, schedule 2, and the page I want you to turn to is page 2 of 6. 281 MS. ELLIOTT: That's the breakdown of cost type, comparing 2004 to 2003? 282 MR. WARREN: Yes, that's right. 283 MR. SOMMERVILLE: Sorry, Mr. Warren, what schedule was that? 284 MR. WARREN: D.3, tab 3, schedule 2. 285 MR. SOMMERVILLE: Thank you. 286 MR. WARREN: And they are in the yellow-page updates that were circulated, Mr. Chair. 287 MR. SOMMERVILLE: Thank you very much. 288 MR. WARREN: Now, if I look at this page, Ms. Elliott, I see in terms of the -- if I look at column C, in terms of the quantity, the major sources, if you wish, of the increase for 2004 or 2003, I see $5 million in salaries and wages; correct? 289 MS. ELLIOTT: Yes. 290 MR. WARREN: And I see pension benefits, $9.3 million. 291 MS. ELLIOTT: Yes. 292 MR. WARREN: And then in terms of, if you wish, a magnitude test, the next largest one, and indeed among the highest, is contract services line 5, 9.0; correct? 293 MS. ELLIOTT: That's correct. 294 MR. WARREN: And if you could take, subject to check, which is always a risky business with my addition, those three account for approximately 23.3 million of the $32.4 million increase. Will you take that, subject to check? 295 MS. ELLIOTT: Yes, I will. 296 MR. WARREN: Now, since we've dealt with the first two items, salaries and wages and pension and benefits, the one I want to talk to you briefly about is contract services. And my question, first of all is, the reasons for the increase is, and let me give you two opportunities to respond for this, are there more services provided by Union using outside or third parties, or is it the same services that are being provided by others? In other words, is it new services or the same services? 297 MS. ELLIOTT: There are more services. If you turn up Exhibit D.3, tab 3, schedule 2, page 4 of the blue pages, there's a breakdown of the increase in contract services. The single largest item on that list is $3,800,000 for enhancements to our banner system to add the functionality to the system to be able to implement a rate rider. 298 MR. WARREN: And the reason for that is what? 299 MS. ELLIOTT: There's been requests or it's been necessary to deal with rate changes through a rider mechanism that our current system cannot manage. In order to enhance the system, the costs to do that are estimated to be $3.8 million. 300 MR. WARREN: To the extent to which Union is using contract services, are there offsetting cost savings in other O&M categories? 301 MS. ELLIOTT: I'd say that's true in the base level of contract services that as we've moved from using internal resources to manage things like our buildings, janitorial services, those have been outsourced, but the reasons for the increase between 2003 and 2004 are really primarily more services from existing service providers. As I say, the other large increase is the integrity management program, which is a contracted service. 302 MR. WARREN: Can I ask you to do this, returning to J.7.22, which is one we dealt with earlier. If I look at line item 5 which is contract services and I compare what the Board approved in EBRO 499, which was an amount of about 14.8 million; do you see that? 303 MS. ELLIOTT: Yes. 304 MR. WARREN: Then I go over to the blue-page update column M, I see that contract services are now $42.3 million; do you see that number? 305 MS. ELLIOTT: Yes. 306 MR. WARREN: So approximately $27 million increase in that period in contract services. I don't know whether this is in the voluminous record or not. I haven't been able to find it, Ms. Elliott, but can you tell me for that increase of some $27 million, the amount of the savings that have been achieved by using contract services; in other words, what the offsets are? 307 If you don't know the answer to that, Ms. Elliott, as we sit here today, perhaps I could ask you for an undertaking to identify where the savings have been. 308 MS. ELLIOTT: I think that would be preferable to complete the list, yes. 309 MR. WARREN: Could I have an undertaking to do that, Mr. Chairman, and the request for information is this: Using Exhibit J.7.22 as a base and looking at line item 5, for the increase from the Board-approved EBRO 499 number for contract services to the blue-page update for fiscal 2004, for the increase in contract services, could the witness identify what the offsetting savings have been for that increase. 310 Is that a fair statement of -- 311 MS. ELLIOTT: Yes. 312 MR. WARREN: Okay. 313 MR. MORAN: Mr. Chair, that would be Undertaking N.8.1. 314 UNDERTAKING NO. N.8.1: TO IDENTIFY WHAT THE OFFSETTING SAVINGS HAVE BEEN FOR THE INCREASE FROM THE BOARD-APPROVED EBRO 499 NUMBER TO THE BLUE-PAGE UPDATE FOR FISCAL 2004, FOR THE INCREASE IN CONTRACT SERVICES 315 MR. WARREN: Ms. Elliott, thanks for those answers and I'd like to turn now, Ms. Elliott, to a different -- and I apologize in advance if it's a somewhat amorphous area of examination, but it's one that my client is interested in pursuing and in this context, Ms. Elliott, I'd like you to turn up three interrogatory responses. The first one of those is a Board Staff Interrogatory No. J.1.77. The second is an interrogatory response to an interrogatory of my client which is Exhibit J.7.30, CAC number 30. The third is an interrogatory response to my friend, Mr. Thompson, which appears as J.17.4. 316 MR. PENNY: Point. 317 MR. WARREN: J.17.4. 318 MR. SOMMERVILLE: This is not a criticism, Mr. Warren, but it would be helpful for future cross-examinations if the references could be extracted. It makes it difficult -- it is a simple logistical difficulty for the Board in spreading out the -- when we get to two it's bad enough, but when we get to three references, it gets dangerous and unwieldy. 319 MR. WARREN: Mr. Chairman, may I make this suggestion. Would it be helpful to the Board in this context if, in anticipation of cross-examination, I were, for the Board, at least, to photocopy all of the interrogatory responses, indeed all the evidentiary references? 320 I'm happy to do that, sir, I apologize, but I would be happy to do that. 321 MR. SOMMERVILLE: The apology is not necessary, it is a matter of convenience and effectiveness. Thank you, Mr. Warren. 322 MR. WARREN: Would it be easier, sir, if you want to take the morning break now, we can accomplish that very task. I can go through my notes and I can ask to photocopy them all. If that would be easier, we could do that. 323 MR. SOMMERVILLE: I think that would be helpful. We'll break now until 10 minutes after the hour. 324 --- Recess taken at 10:50 a.m. 325 --- On resuming at 11:20 a.m. 326 MR. SOMMERVILLE: Thank you. Please be seated. 327 MR. PENNY: Over the break, Mr. Chairman, we photocopied a package of material that Mr. Warren was going to make reference to, to avoid using the different binders. 328 MR. SOMMERVILLE: Thank you, Mr. Penny and Mr. Warren. 329 MR. WARREN: Panel, I'm going to turn to a second topic that I'd like to review with you, and a starting point for my questions is an answer to Board Staff Interrogatory No. 77, which is Exhibit J.1.77. I'd like you to turn, panel, to the third page of that response. 330 The third full paragraph on that page reads as follows -- first of all, do you have the document in front of you? 331 MS. ELLIOTT: Yes. 332 MR. WARREN: The third full paragraph reads as follows: 333 "In Union's view, the effectiveness of a PBR plan should be measured by the extent to which the plant accomplishes the objectives it was designed to achieve. Union's evidence in the RP-1999-0017 proceeding set out the objectives Union was attempting to achieve in the PBR plan that had been proposed. Cost reductions were not identified as an objective of the PBR plan proposed; however, sharing productivity improvement benefits between the company and its customers was." 334 Have I read that accurately? 335 MS. ELLIOTT: Yes. 336 MR. WARREN: Now, keeping that response in mind, particularly the last sentence, "... sharing productivity improvement benefits between the company and its customers...", I'd like you to turn, then, to two exhibits, the next two. 337 The first is an interrogatory posed by my client, and the answer appears as J.7.30. In that interrogatory, my client asked the question, asked you to provide a detailed explanation as to what productivity gains were achieved during PBR, and the answer given - this is my gloss on it, and please correct me if I am wrong, Ms. Elliott - the answer appeared to be that the company could not point to particular areas of productivity gains because the focus was more broadly on achieving certain financial results, in particular, achieving certain financial targets; is that fair? Is that a fair gloss on your response to that? 338 MS. ELLIOTT: Yes. The company's management is an integrated revenue cost management directed at earnings targets. 339 MR. WARREN: Now, again, in just setting kind of analytical framework for this area of inquiry, I would like you to turn, then, to the third of the exhibits which I referred to, which is Exhibit J.17.4. 340 In this interrogatory, you were asked to "list any and all changes in the manner in which Union provided utility services subsequent to December 31, 1999 which were expected to and did produce reductions in the level of O&M expenses then being incurred." 341 Now, the answer given was as follows: 342 "Union has implemented several utility services initiatives subsequent to December 30, 1999 that resulted in O&M reductions for the years 2000 to 2003, and are in included in the 2004 cost-of-service forecast." 343 Now, my first question, Ms. Elliott, is, and I'd ask you to comment on this: There appears to me to be a contradiction between the answer which is given in 17.4, Exhibit J.17.4 and the answer given in J.7.30. The answer in J.7.30 suggested that there were not specific cost-reduction initiatives but rather a more broadly-framed financial target approach to it. The answer given in J.17.4 suggests to me that there were, in fact, a number of specific initiatives that resulted in O&M cost reductions. 344 Would you agree with me that there is an apparent contradiction between those two answers? 345 MS. ELLIOTT: I don't think there's a contradiction, but clearly from overall financial management, we look at targets in total, that's revenues and costs. As you get into the organization, in order to manage to deliver on the earnings targets, there are groups and areas within the company that are focused on revenue generation and there are other groups within the company that are focused on cost management. 346 The listing in response to 17.4 specifically dealt with the operations group and the initiatives that have been undertaken in that area to impact -- that will impact service and affect the costs in that area. Their initiatives were undertaken in order to manage cost increases within that area. So in total, their costs are delivering on the target. At a detailed level within the group, they are performing and undertaking these initiatives. 347 MR. WARREN: Thank you for that answer. But let me just see if I can drill down through this a little further. 348 In Exhibit J.7.30, looking at the second full paragraph of the answer, the last sentence reads as follows: 349 "There was no value to be gained from documenting the areas where productivity improvements were being achieved, nor were the resources available to do so." 350 Now, if I then look at J.17.4, it would appear, then, that in at least four areas, the productivity improvements were documented. Is it possible for the company to produce a list of all of the areas where productivity improvements were achieved during the PBR period? 351 MS. ELLIOTT: The difficulty we would have in doing that is this is reconstructing from records that may or may not exist within each of the individual departments. What you have in the response to J.17.4 is the initiatives undertaken in what is known as the asset operations area, so it is one group that has stayed relatively intact over the five-year period and has been focused on managing operations and utility services and controlling costs in that area. So they clearly have been tracking and identifying the things that they're doing which have reduced their costs in order to mitigate cost increases that they're experiencing in other areas. 352 With the remaining groups of the company, there isn't the same consistency between 1999 and 2003 to go back and try to reconstruct -- what you're asking for is a listing. In some cases, the people in 1999 and 2000 doing those activities are no longer either there or associated with the activities that they were in 1999. And we would be looking to pull out work products to build this list and that's why it wasn't prepared. It wasn't something that -- it isn't something we maintain records of in a -- in one place, in the finance department to be able to produce what you're asking for, and creating it would be a fairly significant burden on the organization, if we could even do it. 353 MR. WARREN: Then let me -- I'm going to return to the -- rather than doing that, let me stay with J.17.4 for a moment. I'd like to parse the first sentence of the answer. It says: "Union has implemented several utility services initiatives subsequent to December 31, 1999 that resulted in O&M cost reductions for the years 2000 to 2003," and then the next word is the key word, "and are included in the 2004 cost-of-service forecast." 354 Now, am I to understand by that answer that the only O&M cost reductions in 2000 to 2003 that are included in the cost-of-service forecast are the four that are listed in the answer? 355 MS. ELLIOTT: No, I take this response to be -- these are changes that we have made within the organization during the period 2000 to 2003, and we're not doing anything in 2004 that would undo the impact. So the costs have been managed and have been reduced. Nothing is changing between '03 and '04 that would put those costs back into the forecast so it's just a continuation of cost savings that were achieved in prior periods. And that would be consistent in any group because each year when we look at the next year's budget, you are looking at building on the work that has been done to date in the area. 356 MR. WARREN: Let me see if I understand your answer, Ms. Elliott. Am I correct in understanding it that what J.17.4 does is it identifies four areas in which there were cost reductions which are being carried forward into 2004, but there may be a number of other areas where there are cost reductions that are also being care carried forward in 2004, is that a fair understanding? 357 MS. ELLIOTT: Yes, and in fact, if you look at the response, J.7.30, there's two initiatives that were identified in the response, the 1999 restructuring and those cost reductions came out in 1999 and have carried through during the term, and the supply chain or the wave initiative that was undertaken to reduce spending in a number of areas, all those savings continue to be built into the forecast. 358 MR. WARREN: But my reading of J.7.30, Ms. Elliott, and correct me if I am wrong, is that these were two examples of areas of cost savings. There is -- but there's no suggestion that this is in any way a comprehensive list, indeed, the burden of the answer is that you couldn't provide a comprehensive list; is that fair? 359 MS. ELLIOTT: That's fair, yes, this is not a comprehensive list. 360 MR. WARREN: All right. Now, I don't want there to be any magic or confusion about where I'm trying to go on this, Ms. Elliott. What I'm trying to get a sense of, looking at that answer that you gave in J.1.77 about cost savings, I want to try and identify, if I can, what cost savings were achieved during the PBR period that are being carried forward in 2004 for the benefit of consumers. 361 Now, going back to J.7.30, you talked about financial targets during the PBR period. I may well embarrass myself in asking this question, but I have not been able to find anywhere in the record what the financial targets were for the company during the PBR period; am I wrong about that? 362 MS. ELLIOTT: No, I don't believe that that is -- other than in the responses that include the budgets for the period, those would be the result of the budget process in each case. 363 MR. WARREN: Can you tell me on a company-wide basis for each of the PBR years, 2000 to 2003, first of all, what the overall financial targets were for each of those years? 364 MS. ELLIOTT: I don't have that information with me at this point. 365 MR. WARREN: Can I get an undertaking to get that answer, please? 366 MS. ELLIOTT: Yes. 367 MR. MORAN: Mr. Chair, this is Undertaking N.8.2 to produce the financial targets for each of the PBR years, 2000 to 2003. 368 UNDERTAKING NO. N.8.2: TO PRODUCE THE FINANCIAL TARGETS FOR EACH OF THE PBR YEARS, 2000 TO 2003 369 MS. ELLIOTT: Right. I believe the budgets are in evidence, I just need to get you the reference for all that information. 370 MR. PENNY: Sorry, before we move on on the time frame, the PBR years are 2001 to 2003. 371 MR. WARREN: Is there a difference between budgets, Ms. Elliott, and financial targets? 372 MS. ELLIOTT: No. 373 MR. WARREN: But the budgets that are included, there was an earlier exhibit, sorry, Mr. Chairman, I'm going to have to bruise your knees again because I'm going to have to turn it back up, it was one I referred to earlier, it was IGUA 17.32, J.17.32. 374 MS. ELLIOTT: Those are the budgets for operating and maintenance expenses for those years and they are also repeated, produced in response to J.7.22. 375 MR. WARREN: But those are budgets for O&M and they're -- what is the relationship between the budgets in specific O&M areas and the overall financial targets that were set for the company in any given year? 376 MS. ELLIOTT: We would also need too look at the revenue numbers for the same period and I think the income statements are in evidence. 377 MR. WARREN: That may be different, the income statements of what you actually achieved may be different from what the targets were in any given year; is that fair? 378 MS. ELLIOTT: The actuals will be different than the budget in each and every year, yes. 379 MR. WARREN: So in answer to my request for an undertaking it's the overall financial targets both on the expense side and the revenue side for each of the PBR years that I'm asking you to produce, okay? 380 MS. ELLIOTT: Yes. 381 MR. WARREN: Okay. As we look at the forecast of revenues and expenses, particularly as we look at the forecast of costs for 2004, Ms. Elliott, how is the Board to understand - and the text for this, again, is J.1.77 - how is the Board to understand whether or not the objectives of the PBR regime have been achieved; that is, sharing productivity improvement benefits between it's company and its customers? 382 MS. ELLIOTT: That's actually the information that's found in the prefiled evidence at Exhibit D.1, tab 5 where we look at the total, in this case, O&M expenses in 2004 on a per-customer basis and compare them to what the expenses were on a per-customer basis in 1999, and the fact is those costs have increased at less than the rate of inflation during that five-year period. 383 So while I can't list you all of the initiatives that led to that impact, I can tell you that on a per-customer basis our costs per customer, as calculated at Exhibit D.1, tab 5, page 7 in 2004, are $246 per customer. 384 MR. WARREN: So when we look at J.1.77, and that sentence I referred to on two occasions, sharing productivity benefits, the measure of the sharing or the success of the sharing from the perspective, for example, of my client, residential consumers, is maintaining a reasonable level of O&M expenses per customer; is that what you're saying? 385 MS. ELLIOTT: Yes. 386 MR. WARREN: Now, this is my gloss on the word "sharing," but I read it as a reasonable division of the productivity improvement benefits. Do we have a measure in the record or can we get a measure of the size of the productivity improvement benefits that Union has received in the PBR period? 387 MS. ELLIOTT: What you have in the record is Union's financial results for the period on an actual basis. So the shareholder has -- and it's in evidence what the return on the shareholder's investment has been for that same period and it's been around the regulated rate of return, in some years lower, in some years higher, so that's the impact on the shareholder. During the same period, a ratepayer saw rates, delivery rates - excluding the impact of gas costs - saw delivery rates decrease. 388 MR. WARREN: Thanks, Ms. Elliott, I have your answers on that. 389 My final area of examination, panel, has to do with the narrow and specific issue of capitalized overheads. And in that context, panel, if you could turn up in the prefiled evidence Exhibit D.1, tab 6. 390 Do you have that, panel? 391 MS. BRODIE LUMLEY: Yes, we do. 392 MR. WARREN: Now, in the first page, page 1 of 4 of that exhibit, there is what amounts to a definition of capitalized overheads in the second -- sorry, the third sentence that reads: 393 "These capitalized costs represent the portion of the company's O&M overhead costs associated with supporting capital activities (e.g., a portion of the procurement department's time is spent purchasing materials for capital projects.)" Correct? 394 MS. BRODIE LUMLEY: That is correct. 395 MR. WARREN: And do I understand that the regulatory treatment of capitalized overheads is that they are deducted from the gross O&M calculation. 396 MS. BRODIE LUMLEY: That is correct. 397 MR. WARREN: And crudely speaking, the higher the capitalized overheads, the lower the O&M figure; is that fair? 398 MS. BRODIE LUMLEY: The lower the net O&M figure. 399 MR. WARREN: The lower the net O&M figure. 400 MS. BRODIE LUMLEY: That is correct. 401 MR. WARREN: And do I understand it, panel, that -- I guess Ms. Brodie Lumley, do I understand it that the amount of the capitalized overheads varies in any year; is that fair? 402 MS. BRODIE LUMLEY: The -- yes, that is correct. 403 MR. WARREN: Now, if you turn to Exhibit J.7.25, a response to my client's interrogatory number 25, there's a description in there, panel, of how the amount of the O&M costs are capitalized, how that's done. Am I right, panel, that there are objective standards by which you determine the amount of capitalized overheads? 404 MS. BRODIE LUMLEY: By "objective standards," do you mean cost drivers? 405 MR. WARREN: No. What I meant was is there, for example, a CICA guideline on how you determine it? 406 MS. BRODIE LUMLEY: There is -- there are accounting practice guidelines that talk about using absorption costing to include overheads in the cost of -- in capitalized fixed assets. 407 MR. WARREN: But would I be correct in understanding that the calculation of capitalized overheads, in any given year, is largely within the discretion of Union; fair? 408 MS. BRODIE LUMLEY: I would not agree with that. I would say that the capitalized overheads are a function of the costs that are spent and those -- and the capital proportion of those costs that are spent. 409 MR. WARREN: Now, I don't remember the hearing - it may have been the EBRO 499 case; nothing turns on which docket number it was - but the Board was presented with a cost-driver methodology proposal for adoption of the cost-driver methodology which was approved by the Board; correct? 410 MS. BRODIE LUMLEY: Yes, that's correct. 411 MR. WARREN: All right. How the cost-driver methodology is applied in any particular year is, may I suggest, within the discretion of Union Gas; is that not fair? 412 MS. BRODIE LUMLEY: The cost methodology is consistent from year to year. It is a methodology. The cost drivers may be updated to reflect the proportion of those costs which are considered to be attributed to the capital activity. 413 MR. WARREN: Okay. Looking at Exhibit D.1, tab 6, and in particular, page 3 of 4, we're talking on that page, panel, about the major changes in the capitalized overheads between 2003 and 2004. And looking at, beginning at line 6: 414 "Reduction of 4.6 million in capitalized overheads in asset operations due to workload changes and update of the method used to allocate costs between O&M and capital." 415 Now, the update of the methods used to allocate, who undertook that updating? 416 MS. BRODIE LUMLEY: There was an updating of the cost drivers which Union undertook in 2003, looking forward at the expected capital activity for 2004. 417 MR. WARREN: Is that update anywhere in the record, ma'am? 418 MS. BRODIE LUMLEY: It is reflected in the capitalized overheads that are included in gross O&M. 419 MR. WARREN: I appreciate that, that it's reflected, but is the update anywhere in the record? 420 MS. BRODIE LUMLEY: Not to my knowledge. 421 MR. WARREN: Okay. And you then, on that same page, in that same number item 1, the final sentence says: 422 "A review was also done to ensure that the methods of allocating costs remain current, given the realignment of field operations and support functions within the operation, and to accommodate the implementation of a new workload planning and reporting system." 423 Two questions: Is the review that's referred to there, is it anywhere in the record? 424 MS. BRODIE LUMLEY: No, it is not. 425 MR. WARREN: And the new workload planning and reporting system, is there a description of that new workload planning and reporting system anywhere in the record? 426 MS. ELLIOTT: I'm not aware that there is, although it is certainly one of the initiatives listed in the interrogatory response J.17.4. And there would have been a capital budget, but I don't have that material in front of me to describe the costs of implementing that system. But beyond that, there's no specific discussion of the changes in workload planning and management. 427 MR. WARREN: My question, panel, then, in light of those answers, is this: When the Board comes to assess this claim or claim for -- with respect to capitalized overheads or, more fairly, the accuracy of the calculation of the forecast capitalized overheads, the Board has no information before it about the various changes in the methodology whereby you have derived this number. How can the Board assess whether or not you've accurately done what you say you've done without that information? 428 MS. BRODIE LUMLEY: The Arthur Andersen methodology, when it was presented to the Board, as I recall, there is a quote in the evidence that talks about for the methodology -- the drivers need to be kept current for the methodology to result in correct capitalization figures, and Union, as an ongoing activity, has made updates to those capitalization amounts by changing the cost drivers. 429 The cost-driver changes that were put in place in 2004 encompassed a change in capital activity between 2003 and 2004 which resulted in perhaps more significant changes than what we have seen in previous updates. 430 MR. WARREN: But again, all of that information about the changes in the cost drivers, none of that is before the Board; fair? 431 MS. BRODIE LUMLEY: That's fair. 432 MR. WARREN: My final question, panel, is -- two questions. One is a mechanical question, and this is in the context of the data which appears in J.7.22, which is an exhibit we've earlier referred to; it's the one with the spreadsheet showing O&M expenses between '99 and 2004. 433 MS. BRODIE LUMLEY: Yes, we have it. 434 MR. WARREN: My first mechanical question, Ms. Brodie Lumley, is in each year, looking at items -- line items 34, 35, there is a budget number for the capitalized overhead and then there's an actual number; do you see that? 435 MS. BRODIE LUMLEY: Yes, I do. 436 MR. WARREN: Can you describe for me the process by which you go from a budget number to an actual number in any given year? 437 MS. BRODIE LUMLEY: The budget specific to the capitalized overheads? 438 MR. WARREN: Right. 439 MS. BRODIE LUMLEY: The budget for the capitalized overheads would be driven by the capitalized portion of each one of those elements shown in line 1 through 31. The actual results would be driven by the capitalized overheads of the actual amounts shown in line 1 through 31. So the spending variances between elements would result in a change in the budgeted capitalized overheads to the actual capitalized overheads. 440 MR. WARREN: My second question, staying with this, is if I look at each of the years '99 through 2003, the capitalized overheads varied, if you just take this subject to check, between something like 42.4 million and 46.2 million. Will you take that, subject to check, that was by and large the range in that period? 441 MS. BRODIE LUMLEY: Yes, I do. 442 MR. WARREN: And the first year in which the capitalized overheads drop by any significant amount is forecast for 2004; correct? 443 MS. BRODIE LUMLEY: That is correct. 444 MR. WARREN: And am I to understand that it's purely accidental that the drop in the amount of the calculation of the capitalized overheads is at the end of the PBR period? 445 MS. BRODIE LUMLEY: What I can speak to is what resulted in the drop in the capitalized overheads and it's two things. One is that there is a reduction in the capitalized overheads which is reflected in the reduced capital activity which is resulting in a lower capitalized portion of those costs. There is an offsetting increase for the capitalized portion of increased costs for benefits, adding new customers to the system, inflation, the things that have changed between 2003 and 2004. 446 MR. WARREN: Thank you for that answer, panel. Those are my questions, Mr. Chairman. 447 MR. SOMMERVILLE: Mr. Warren. 448 Ms. Lott. 449 MS. LOTT: Yes, I'm ready to go. We actually have cross-examination material that we provided to Union Gas and that will be distributed to you if not already. There are copies there for you and I have extra copies here. 450 MR. MORAN: Mr. Chair, this becomes Exhibit M.8.1, cross-examination material for the O&M panel, filed by VECC. 451 EXHIBIT NO. M.8.1: CROSS-EXAMINATION MATERIAL FOR THE O&M PANEL, FILED BY VECC 452 CROSS-EXAMINATION BY MS. LOTT: 453 MS. LOTT: And just for the panel's reference, I'll just also let you know that I'm going to be making reference to Exhibit J.7.22 and Exhibit J.18.32, if you'd like to pull those up now. 454 MR. SOMMERVILLE: It was J.18? 455 MS. LOTT: Point 32. It's a supplemental from the Wholesale Gas Purchasers' Group. Does everyone have the materials? 456 I'll just start by introducing myself to the panel. My name is Sue Lott, I'm the counsel for the Vulnerable Energy Consumers Coalition, also known as VECC, and we represent the interests of low income and fixed income residential gas consumers. 457 I wanted to start by making reference to the exhibit that we filed, the table, it's called O&M Expense by Cost Type, which has been given the exhibit number. And just to let you know, first of all, that I have to make a minor correction in one of the numbers on the table. 458 This was taken from Exhibit J.7.22 and the line that contains bad debt, which is taken from line 18, and I'm talking about the 1999 actual, that's written as 2.99 million and it actually should be 2.9 million. So I've just transposed that. It doesn't really affect what I'm going to be asking you, but it does change that final -- that number at the bottom from 114,061 to 113,971. And then that therefore changes that percentage change that I'm doing year-by-year from minus 3.22 in the next column to minus 3.14. So my apologies for that. I just noticed it late last night. 459 So I'd like to just take you through this. This table that I've put together is really just a pulling out of some of the significant expenses, O&M expenses that have already been talked about, and I'll just sort of take you through it as we see the table. As you see from the top line, we've got the actuals from '99 to 2002, and then the 2003 update, gross O&M expense, as well as the 2004 test year update gross, and then I've got the percentage changes for those figures year-by-year in the highlighted area beneath. 460 Just to note that what we see from 2003 to 2004 is almost a 9 percent rate increase which is more significant than the other percentage changes in other years. So if you go through the table and we take away the compressor fuel expense, am I correct in stating that that's the natural gas commodity that's required for use in the distribution pipeline? 461 MS. BRODIE LUMLEY: That is correct. 462 MS. LOTT: And I gather during PBR this was a pass-through item? 463 MS. ELLIOTT: That's true, yes. 464 MS. LOTT: So if we take that -- 465 MS. ELLIOTT: Excuse me, I probably should maybe qualify that. It was a pass-through in terms of a price variance on the 1999-approved volumes so any volume variance over the term was a cost that had to be absorbed hopefully through increased activity and increased revenues. 466 MS. LOTT: Thanks. So if we take that out of the equation and we do the figure that is produced, the gross figure and then the percentage change, as you can see from that final percentage change, we still have a percentage change that's higher than other years, about 9 percent, and it's still higher than 2002 by a whole percentage point. As you can see, it's 8.26 under the 2002 actuals. 467 So then if we keep moving down the table and we take away the salaries and wages and as well as the benefits, and we know that in another panel, Union has talked about the drivers of those significant expenses, the pension injections required and the catch-up in salaries, and we also take away bad debt, and I gather that that's -- as you've identified already that this is a -- it's a cost that's somewhat related to the natural gas commodity price. 468 MS. ELLIOTT: It is related to revenues which are related to the gas pricing, yes. 469 MS. LOTT: Right. 470 And if we also take away insurance costs, we deduct that because it has already been identified in your evidence those costs are generally escalating overall across insurance industries partly as a result of September 11th aftermath. So if we take that away, after all of that, as you can see from my table, the percentage increase for all the other items still leaves you with an increase of about 13.9 percent which is still greater than in any other year of percentage change. 471 Would you agree that that's true? 472 MS. BRODIE LUMLEY: I would agree that that is as shown calculated here. 473 MS. LOTT: Okay. And again, just the very last line, if we take away the implementation costs of the gas distribution access rule and the rate rider costs -- and I'll let you know that that figure, the 2.9 million, I've actually taken from your evidence which is Exhibit D.1, tab 5, page 3, table 1 which I gather you have updated. 474 MS. BRODIE LUMLEY: We have. 475 MS. LOTT: Am I correct is that now 2.2? 476 MS. BRODIE LUMLEY: It is now 5.1, I believe, for the two programs again. 477 MS. LOTT: If you could just tell me where you're finding that figure. 478 MS. BRODIE LUMLEY: There is an exhibit, J.18.108 which shows the white page or the prefiled costs and the updated costs for rate rider and GDAR. Would you like me to go through that? 479 MS. LOTT: If you could just read off that amount. 480 MS. BRODIE LUMLEY: If we look at the O&M components of this interrogatory response, rate rider is shown, for the white page, as having costs of 2.0 million which were now updated to 3.8 million. GDAR, as described in paragraph B, had a cost of .9 million in 2004 for the white page which was updated to 1.3 million for the blue page, for a total cost of 5.1 as compared to 2.9. 481 MS. LOTT: So we're just working out what the percentage change would be with that figure. My apologies for the delay. 482 Well, even without the final tally on that percentage change, if we just -- without including the rate rider and the GDAR, we're still looking, if we look at the table, at a significant change of 13.86 percent over the years; and I guess I'm just trying to understand what, then, would be driving that, given that we've already factored out some of those sort of unusual and significant expense items? 483 MS. BRODIE LUMLEY: Yes. I'd like to, if I may, take you through the variance explanations attached to Exhibit D.3, tab 3, schedule 2. 484 MR. PENNY: That reference again? 485 MS. BRODIE LUMLEY: D.3, tab 3, schedule 2. The variance explanations start at page 3 of 6. 486 You've normalized for the salary and wages, the pension and the benefits, so I'll just go by the first part of that page 3. 487 MS. LOTT: Yeah. 488 MS. BRODIE LUMLEY: Starting on page 4, if we pick out some of the significant variances and continue to normalize, as you have done in this schedule, for the significant items, we should normalize for the pipeline integrity management program, which is shown at 2.2 million on line 5, and on the next page, page 5 of 6, at line 4, for a total of 3.9 million. 489 MS. LOTT: The only thing I wanted to add there about the pipeline integrity, though, I understand from the decision in EBRO 499, that that was -- that cost was amortized over a number of years. 490 MS. ELLIOTT: Those were -- 491 MS. LOTT: No longer -- 492 MS. ELLIOTT: -- those were costs during the PBR term that were deferred and recovered. But once we hit 2004, it's a full cost-of-service forecast so there's no longer a deferral account. Those costs get built into the cost of service and would be recovered from customers in rates. So the increase in 2004 over 2003 is $3.9 million related to that program in O&M. 493 MS. LOTT: So just to summarize, if you could just say it in layman's terms for me, your understanding of why there has been this significant percentage change, even though we've eliminated some of those other factors that I've identified in the table. So if you were to summarize your answer for me on that. 494 MS. BRODIE LUMLEY: There are additional costs which are driving the increase of that 11.60 percent, or the new calculation that we would arrive at after adjusting for GDAR, including new customer costs, rate case amortization increases, reduction in affiliate recoveries. 495 MS. LOTT: Just to clarify for me, since I wasn't able to get that percentage figure to you, if you include the GDAR and the rate rider, I think it comes up with a 9.8 percent increase rather than the 11.60. 496 Okay. I just wanted to ask a couple of questions about the issue of bad debt and I want to pull up the supplemental IR response, which is J.18.32, if you can pull that out. Have you got that? 497 MS. ELLIOTT: Yes, we do. 498 MS. LOTT: Okay. And my understanding from that question and the response is that you indicate that you are now holding customer security deposits for two years as opposed to one year and that this is something that you don't need Board approval for; am I correct about that? 499 MS. ELLIOTT: Yes. 500 MS. LOTT: And you're doing this, you indicate, as a result of the increasing level of bad-debt expense; is that correct? 501 MS. ELLIOTT: That's correct. 502 MS. LOTT: So I would understand that you're implementing this change, therefore, to bring down bad debt; is that correct? 503 MS. ELLIOTT: Yes. 504 MS. LOTT: So my question would be, what is the timing of when that change is going to take place? 505 MS. ELLIOTT: Change has taken place; it started in July of this year. Obviously it won't have an impact until probably next winter or possibly the winter after. But we have, in forecasting our bad-debt expense for 2004, attempted to take into account the fact that we are holding -- we have more deposits on hand which should reduce our bad-debt expense. 506 MS. LOTT: Then I guess if we go back to, you know, what is reflected in my table which, you know, includes the bad debt, and if we also look at -- obviously it's taken from line 18 of Exhibit J.7.22, and if we look at column J and column N, the expense is the same in those -- it's still 13.3 and -- 13.3 in 2004. So my question would be, why -- shouldn't it be lower in 2004 if you're ... 507 MS. ELLIOTT: I think we've actually probably incorporated it into the estimate of 2003, although I don't know how much impact it will have. 2003 and 4 are lower than the previous two years in terms of the percentage of revenues, and that decrease or that reduction, we don't expect the experience of 2001 and 2002 to continue because we've taken some corrective action in following up these accounts on a more timely basis and implementing collection practices, including increasing in security deposits where required. 508 MS. LOTT: I'm just wondering, given your answer there, would it be possible for you to undertake to look exactly as to whether or not you factor that in and how you factored it in in 2003 and 2004? 509 MS. ELLIOTT: Yes, we could do that. 510 MR. MORAN: Mr. Chair, Undertaking N.8.3, to advise whether the change in security deposit was factored into both the 2003 and 2004 bad-debt forecast. 511 UNDERTAKING NO. N.8.3: TO ADVISE WHETHER THE CHANGE IN SECURITY DEPOSIT WAS FACTORED INTO BOTH THE 2003 AND 2004 BAD-DEBT FORECAST 512 MS. LOTT: Thank you. And just a couple more questions further on the issue of bad debt. I'm just interested in what other factors impact bad debt. Am I correct in saying that gas prices, and therefore, their effect on billed charges is one important factor? 513 MS. ELLIOTT: Gas prices and -- basically the total gas bill, so to the extent that it is older, and it has been, the bill will be higher if gas prices are higher, that contributes to even higher bills. The experience we saw in 2001 created some of what we saw in write-offs in 2002. 514 MS. LOTT: And I think as you've identified, I think we've seen that that effect in 2002 was that unprecedentedly high figure of, I think it's 21.3 million in line 18 of the table, J.7.22. 515 MS. ELLIOTT: Yes. 516 MS. LOTT: And that has to do with the high retroactive charges to customers? 517 MS. ELLIOTT: The retroactive charges actually didn't get billed to customers until this year, January '03. To the extent that those amounts are not being paid and we can't collect on them, they will show up in increased write-offs this year, so part of the 2003 expense will include a reflection, if necessary, on the retro charge. 518 MS. LOTT: But we're not going to have those similar kinds of retroactive charges in 2004, are we? 519 MS. ELLIOTT: I hope not. 520 MS. LOTT: And in this proceeding, I understand that Union's proposing a QRAM method that will prospectively collect the PGVA balances, the gas variance balances, and therefore, I would understand then that the customer gas bills won't have as large retroactive charges as they did in 2002 because of that; am I correct about that? 521 MS. ELLIOTT: Certainly the intent of the prospective recovery is to collect the money as close to the point in time as costs are incurred. I can't speak to whether they'll be large or not. It is possible a prospective charge could be as large as a retroactive, it will just be much more timely. 522 MS. LOTT: Then my question would be then, have you factored that into the 2004 bad-debt expense then, that new QRAM methodology? 523 MS. ELLIOTT: We probably haven't specifically factored in those changes although we have in forecasting, coming up with the 2004 number, reduced the percentage of revenue that we've experienced in the past. So there has been a reduction. We're expecting to see a reduction in our bad-debt expense and we have forecast that accordingly. 524 MS. LOTT: Is that reduction on the record somewhere, the percentage of revenue? 525 MS. ELLIOTT: It's really a reduction as a percentage of revenue, and what I'll do in the undertaking is show the expense as a percentage of revenue that we have encountered and what is coming up in '03 and '04. 526 MS. LOTT: Okay. Thank you. 527 No other questions. I just wanted to clarify something from the panel. I understand Mr. Warren had directed some questions to capitalization and our understanding is that that's going to be dealt with in another panel. We do have questions on that but are not ready to do that today with this panel. 528 MR. SOMMERVILLE: Mr. Penny -- 529 MS. LOTT: Am I correct about that? 530 MR. THOMPSON: Excuse me, are you talking about capitalization of overheads? 531 MS. POON: It says capitalization. 532 MR. SOMMERVILLE: Are you referring to panel number 10? 533 MS. LOTT: That's right. 534 MR. SOMMERVILLE: Which has the same constituents and one additional. 535 MR. PENNY: Well, let's have the clarification from Ms. Elliott as to which area it is. I'm not sure this is going to work to anyone's -- I mean, we're not going to foreclose questioning on this basis, but I think it would be helpful to have that issue clarified. 536 MS. ELLIOTT: I was actually expecting to deal with it as part of the O&M panel, but as the Panel Member points out, the same players are back -- 537 MS. LOTT: With the addition of one. 538 MS. ELLIOTT: -- in another panel. 539 MS. LOTT: Okay. Thank you. 540 MS. ELLIOTT: It is more of an O&M issue. 541 MS. LOTT: Those are my questions. Thank you. 542 MR. SOMMERVILLE: Thank you, Ms. Lott. 543 It's about a quarter after 12:00, we normally break at 12:30 or quarter to 1:00. Why don't we proceed now. 544 Who would like to go next? Mr. Thompson? 545 MR. THOMPSON: Yes, I'm happy to go, Mr. Chairman. 546 MR. SOMMERVILLE: And we'd look to break around quarter to 1:00, Mr. Thompson. That is not going to present an unreasonable interruption? 547 MR. THOMPSON: No, sir. 548 MR. WARREN: Why don't I get out of the way. I occupy only a quarter of the space Mr. Thompson does. It's more than made up by the gravatus of counsel. 549 MR. THOMPSON: Thank you, sir. I don't get much respect. As you get older, you're supposed to get it. 550 CROSS-EXAMINATION BY MR. THOMPSON: 551 MR. THOMPSON: Panel, I'd like to start, if I could, with the big picture. And Ms. Elliott, you were discussing with Mr. Warren the delivery-related revenue deficiency that's being sought for the 2004 test year and that amount, I understand, is $104 million? 552 MS. ELLIOTT: That's the estimate we've arrived at by looking at the total deficiency and estimating what the supply-related sufficiency would be. Obviously, that would be precisely defined in the rate-design evidence, but our estimate is about 104 million. 553 MR. THOMPSON: All right. And I believe it's accepted that the $34 million of that relates to the increase being sought in ROE? Would you take that, subject to check? 554 MS. ELLIOTT: Yes. Our updated calculations is 35, but the difference between the requested ROE of 11 and 5/8ths, and the ROE benchmark for 2003 of 9.43 percent. 555 MR. THOMPSON: So that number is now 35 million? 556 MS. ELLIOTT: Yes. 557 MR. THOMPSON: So that the non-ROE delivery-related component of the revenue deficiency is about $69 million? 558 MS. ELLIOTT: Yes. 559 MR. THOMPSON: And we've been through other panels where numbers have been put on the record and I just wondered, in terms of the big picture, if we could put these on the record again. If the company stays with the 30-year average weather normalization, that will reduce the delivery-related deficiency by an estimated amount of $20.4 million; would you take that, subject to check? 560 MS. ELLIOTT: Yes, that's my understanding. If we use the 30-year average in 2004 for 2004, revenues would go up, or margins would go up by 20.4 million. 561 MR. THOMPSON: All right. And then there's evidence in the record that if the normalized annual consumption estimates for 2004 are kept at 2003 levels, that would reduce the revenue deficiency by a further $6.1 million. Would you take that, subject to check? 562 MS. ELLIOTT: I'll have to check that. That one I'm not aware of. 563 MR. THOMPSON: All right. And the evidence has indicated that if the ratepayers' portion of S&T deferral revenues is embedded in rates, that would amount to something slightly in excess of $15 million on the 75/25 split. Would you take that, subject to check? 564 MS. ELLIOTT: Yes. 565 MR. THOMPSON: And if that is embedded in rates, then it would reduce the deficiency by a further $15 million, give or take. 566 MS. ELLIOTT: 15, 1-5, yes. 567 MR. THOMPSON: One-five, yes. But the sum of those three items I make to be about $41,500,000, so we're looking at -- if those items are brought into account, we're looking at something between 27 and $28 million as being left out of the $69 million delivery-related deficiency. 568 MS. ELLIOTT: Yes. 569 MR. THOMPSON: And so that, then, gives us the context for, I think, the intervenors' position with respect to the amounts that you're seeking to increase O&M expenses, which are shown in this exhibit, J.7.22, you've mentioned a figure of about $42 million. I thought you used that. 570 MS. ELLIOTT: Yes, I think the best place to see that is at Exhibit D.3, tab 3, schedule 2. 571 MR. THOMPSON: "D" as in dog? 572 MS. ELLIOTT: "D" as in dog. If you look at the yellow update, the October update. 573 MR. THOMPSON: Yes. 574 MS. ELLIOTT: I should probably note that on line 6, column C, there's an error in the calculation. That number should be 42,503,000, the difference between -- sorry, page 2 of Exhibit D.3, tab 3, schedule 2, the difference between the test year O&M of 325,403,000. 575 MR. THOMPSON: Right. 576 MS. ELLIOTT: And the current 2003 outlook of 282,900,000. 577 MR. THOMPSON: Right. 578 MS. ELLIOTT: That difference is 42,503,000. 579 MR. THOMPSON: 42,503,000 is what's shown here. I thought you said there's a correction. 580 MS. ELLIOTT: That's not the number that's shown on the page that I've got. 581 MR. THOMPSON: We're got 42,503,000 in our yellow sheets, so you're working from a different set of books. A-ha. 582 That's the number that we have. But we can also see that from -- well, I guess what you're telling me is that J.7.22 doesn't reflect the yellow-sheet update, it reflects the blue-sheet update. 583 MS. ELLIOTT: Nor does it calculate the variance between 2003 and 2004. You would have to do that yourself. 584 MR. THOMPSON: All right. Yeah, you'd have to go through the math. But the line items, just, again, to put this in the big-picture context, the total gross operating and maintenance expenses, budget and actual, for the period -- well, Board-approved starting in 1999, then '99 actual, and then taking it all the way across to the blue-page update, we find those numbers, I believe, at line 33; is that correct? 585 MS. ELLIOTT: Yes. 586 MR. THOMPSON: And so the -- what was -- what was 400 -- taking it over to the last column for your 2004 test year blue-page update, the gross was 405,487 in Exhibit J.7.22; correct? 587 MS. ELLIOTT: Yes, that includes compressor fuel. 588 MR. THOMPSON: And then that number's been -- in the yellow-page update, is now 406,767, shown at line 31; correct? 589 MS. ELLIOTT: Right. 590 MR. THOMPSON: And similarly, if we back -- the first calculation that you do here is the capitalization of overheads, indirect and direct, and we see those at lines 34 and 35 of J.7.22; correct? 591 MS. ELLIOTT: Yes. 592 MR. THOMPSON: And we then get a total net operating and maintenance expense, that's net of capitalization of overheads; correct? 593 MS. ELLIOTT: Yes. 594 MR. THOMPSON: And that number for EBRO 499-approved was 258,562,000, the actual in 1999 was 264,613, and now you're looking for 362,629; correct? 595 MS. ELLIOTT: Yes. 596 MR. THOMPSON: And that's almost $100 million over '99 actual; 264 to 362 -- 597 MS. ELLIOTT: That's correct. 598 MR. THOMPSON: -- I make to be about $98 million. 599 And then the net operating and maintenance expenses, excluding compressor fuel, appears at lines 37; am I correct? 600 MS. ELLIOTT: Yes. 601 MR. THOMPSON: And we haven't shown those numbers for columns 2003 blue-page update and 2004 blue-page update, but they can be -- they're just the numbers that appeared above, I think, in line 36; am I correct? There are gaps for line 37, under blue-page update 2003/2004. 602 MS. ELLIOTT: It should actually be calculated to remove the cost of compressor fuel which is shown at line 32. 603 MR. THOMPSON: Right. But isn't that number the one that appears above it? Looks to me like the -- sorry, no, okay. 604 What is that number -- can we have those numbers? I thought it would be the 318,789 and then just add back the 359, and that's lines 40 and 38 in column J, I guess it's the second J, and column N. 605 MS. ELLIOTT: You deduct -- if you look under column N, taking line 36, which is net operating and maintenance expenses, including fuel -- 606 MR. THOMPSON: Right. 607 MS. ELLIOTT: -- and deduct the compressor fuel of 38,200,000, you get 324,429,000, should be what's in line 37, column N. 608 MR. THOMPSON: What is it in column -- in the two columns before that? 609 MS. ELLIOTT: 283,259,000. 610 MR. THOMPSON: Thank you. And then we get the -- we then deduct non-utility, as I understand it, and non-recurring items like Y2K amortization, to get the total at line 41 which is the net utility operating maintenance and expense excluding compressor fuel. 611 MS. ELLIOTT: That's correct. 612 MR. THOMPSON: So the number that we see under line 41 of the 2003 blue-page update of $282.9 million is the same number that we see in the yellow-page update D.3, tab 3, schedule 1, column B at line 37; correct? 613 MS. ELLIOTT: Yes. 614 MR. THOMPSON: And that contrasts to a 2002 actual which we find over in column H of 280.876 million. 615 MS. ELLIOTT: That's correct. 616 MR. THOMPSON: And what you're seeking net of operating and maintenance expense -- net of compressor fuel -- sorry. What you're seeking after capitalization and after deducting compressor fuel is 324,118,000 which has now been increased to 325,403,000. 617 MS. ELLIOTT: That's correct. 618 MR. THOMPSON: And it's the difference between the 282.9 and that last number that gives us the $42 million increase that you were discussing with others? 619 MS. ELLIOTT: Yes. 620 MR. THOMPSON: Okay. Now, the problem that my client has, the big picture, Ms. Elliott, is this: Union has been operating under the auspices of a PBR plan for three years, and am I correct that the company was able to exceed its allowed rate of return in 2000? 621 MS. ELLIOTT: I don't actually have the rate of return numbers with me here. 622 MR. THOMPSON: Well, there was an exhibit filed, and it's an M exhibit, and I unfortunately don't have the number, but it was the company's response to questions about actual returns and weather-normalized returns in the ROE case, it was a response to a question number 46 and it came up with the weather normalization panel. 623 Can someone help me with that exhibit number? 624 Have you got a list there, Pat? I can figure it out. Excuse me, Mr. Chairman. 625 Yes, it's Exhibit M.3.2, M as in Mary. 626 MS. ELLIOTT: I have that. Could you maybe repeat the question? 627 MR. THOMPSON: Yes. I was, again, trying to articulate the problems that my client has with this O&M expense claim that you make in the context of your operations under PBR. And the first year of operations under PBR, I believe, were fiscal 2000. 628 MS. ELLIOTT: 2001. 629 MR. THOMPSON: Okay. Sorry. So the 0017 decision fixed the base for 2000 and then the PBR operated for 2001, 2002, and 2003? 630 MS. ELLIOTT: That's correct. 631 MR. THOMPSON: All right. And so that there was, in the 0017 decision, an increment to the delivery-related revenue requirement reflected in EBRO 499 rates? 632 MS. ELLIOTT: There was certainly an adjustment, I'm not sure that I have the total in my head. There were increases and decreases. 633 MR. THOMPSON: Right. Well, I'll come back to that in a minute, but let's look then at fiscal 2000. According to this exhibit, the company actual returns were 10.620 percent on equity, would you take that, subject to check? 634 MS. ELLIOTT: Yes. 635 MR. THOMPSON: And then in the first year of the PBR, the actual returns appear to be 9.3 percent which would be below what is shown here as the historical approved. 636 MS. ELLIOTT: Yes. 637 MR. THOMPSON: On a normalized basis, the number was higher. In fiscal 2002, the second year of the plan, the actual returns are shown to be 10.67 percent; is that in the order of magnitude? 638 MS. ELLIOTT: That's correct. 639 MR. THOMPSON: And we don't know what's happening in 2003 yet on an actual basis. There are numbers in the record, but are they actual or normalized for 2003? 640 MS. ELLIOTT: For 2003, they are our current projections so they will include actuals up to May and projections for the balance of the year, and they are showing a $2 million sufficiency so we are slightly above the regulated rate of return. 641 MR. THOMPSON: Okay. So you're currently managing to exceed the allowed return and during the course of the PBR regime, you've cut, according to the evidence, over 400 FTEs. I think in an exhibit you filed this morning, Exhibit M.6.11, full-time equivalent positions have been reduced by 402 FTEs; is that correct? 642 MS. ELLIOTT: Yes, that's correct. 643 MR. THOMPSON: And that action has obviously produced some savings and the number that appears to be shown in Exhibit M.6.11 is $23 million; is that in the ballpark? 644 MS. ELLIOTT: Yes. 645 MR. THOMPSON: So you've saved $23 million as a result of staff cuts, and it appears you made some savings in other areas as well. Could you just highlight the major ones? 646 MS. ELLIOTT: It was part of the package that Mr. Warren cross-examined on. It identified some additional reductions through the supply chain initiatives which lowered costs, that's at Exhibit J.7.30, estimated $2 million reduction in purchasing initiatives that would reduce operating costs, and then at J.17.4, there's an estimated reduction during the period of 9.7 million. 647 As a result of the initiatives identified, what I don't know is whether those initiatives were -- those savings were labour dollars, so I would be hesitant to add them to the 23, they may be part of the 23. 648 MR. THOMPSON: All right. And I don't have the document with me, but there is in the material that you -- I have it with me, but it's back in my office two desks behind. In the material you filed in response to interrogatories from IGUA, there was included a slide presentation that had been made with respect to the implications of Duke's acquisition of the Westcoast Group of Companies, and in that document, there's a figure mentioned of -- I believe it's a savings target that's in the order of $60 million. 649 Do you know the document that I'm referring to? 650 MS. ELLIOTT: The number sounds familiar. That was a Canada-wide savings or possibly a corporate savings. 651 MR. THOMPSON: All right. But was a portion -- was there a target savings amount attributable to the Union Gas operations as a result of this acquisition -- 652 MS. ELLIOTT: No, not that I'm aware of. 653 MR. THOMPSON: -- that you're aware of? All right. Okay. But the big picture is you achieved savings as a result of role reductions and savings in other categories of expense. Can you put a ballpark number on the total amount of cost reductions that were achieved as a result of downsizing and other initiatives taken during PBR? 654 MS. ELLIOTT: That's similar to the discussion I had with Mr. Warren. Other than the estimated impact of the role reductions at $23 million, we don't have a listing of the savings achieved during the period. What we do have is, in the evidence, isolating some of those costs that are increasing as a result of external factors, we do know that our costs on a per-customer basis over the last five years have increased less than the rate of inflation. 655 So there is a savings or reduction in those costs. As we added 100,000 new customers, we didn't increase the costs at the same rate that they had been incurred previously. 656 MR. THOMPSON: Well, is there not some estimate that you could prepare that summarizes the increases and decreases in the company's costs over the period '99 to 2004, such as net role reductions, increases in compensation, increases in benefits, pension, that kind of thing, so we could see the line items we're reducing and the components of reduction as well as increase in some of those line items. Is that ... 657 MS. ELLIOTT: I think, in fact, what you're asking for is probably a merger of three pieces of information that are already in evidence. 658 MR. THOMPSON: It may well be. 659 MS. ELLIOTT: Exhibit D.5, tab 3, schedule 2 goes from 1999 to 2002 actuals and identifies all of the variances by cost component. Then D.4, tab -- 660 MR. SOMMERVILLE: Sorry, Ms. Elliott, what was that initial reference to D.5? 661 MS. ELLIOTT: D.5, tab 3, it's in the prefiled evidence, it will be behind the 2002 O&M expenses. D.5, tab 3. 662 MR. PENNY: That's the second volume of the D binders. 663 MR. SOMMERVILLE: I have it here. Schedule? 664 MS. ELLIOTT: Two. 665 MR. SOMMERVILLE: Thank you. That entire schedule, or do you want us to refer us to a specific -- 666 MS. ELLIOTT: Well, it's a seven-page schedule. The first page is just a summary. It takes 1999 expenses, as approved, and compares them to the 2002 actual by expense type; and then the six pages behind the cover sheet summarize or list the variance explanations for each line. That same presentation can be found for -- the difference between 2003 and 2002, and that's at Exhibit D.4, tab 3, schedule 2. It's four pages, includes a summary page -- summary sheet and three pages of variance explanations. 667 And then the same information is under D.3, tab 3, schedule 2, for 2004 to 2003. 668 I take it what you're looking for is one that goes right from 1999 to 2004. 669 MR. THOMPSON: Ideally, on one sheet of paper would be desirable. Could that be provided? 670 MS. ELLIOTT: I think -- I think we can compile all of the information. It won't be on one sheet of paper unless your eyes are a lot better than mine. 671 MR. THOMPSON: Right. Well, I'm looking for sort of a high-level comparison of what was approved in 1999 versus where we are today by line items that are comparable to what you have here. I mean, if you have something internally that's synthesized in some fashion, I don't think that's going to trouble me. But we're looking for the big numbers. 672 MS. ELLIOTT: We can do that. 673 MR. MORAN: Mr. Chair, Undertaking N.8.4, to produce a consolidation of the information in Exhibits D.5, tab 3, schedule 2; D.4, tab 3, schedule 2; and D.3, tab 3, schedule 2. 674 UNDERTAKING NO. N.8.4: TO PRODUCE A CONSOLIDATION OF THE INFORMATION IN EXHIBITS D.5, TAB 3, SCHEDULE 2; D.4, TAB 3, SCHEDULE 2; AND D.3, TAB 3, SCHEDULE 2 675 MR. SOMMERVILLE: Thank you, Mr. Moran. 676 MR. THOMPSON: Did you want to break now, Mr. Chairman, or at 1:00. 677 MR. SOMMERVILLE: I think that would be appropriate. We'll break until 2:00. 678 MR. PENNY: Mr. Chairman, just so you know, I will not be present this afternoon but Mr. Crawford Smith will be sitting in my position. 679 MR. SOMMERVILLE: Thank you, Mr. Penny. 680 --- Luncheon recess taken at 12:47 p.m. 681 --- On resuming at 2:08 p.m. 682 MR. SOMMERVILLE: Thank you, please be seated. 683 MR. SMITH: Mr. Chairman, good afternoon. Just for the sake of the record and those who aren't here, Union has handed out and put at the back of the room answers to Exhibit N.3.7 and N.4.6, and the panel's been provided with a copy as well. 684 MR. SOMMERVILLE: Thank you. Mr. Smith. 685 Are there any other preliminary matters before we take up Mr. Thompson's cross-examination? 686 MR. THOMPSON: Thank you, Mr. Chairman. 687 Ms. Elliott, before the break we were discussing the big picture in savings in general, and I also had made reference to a document in the company's responses to IGUA interrogatories that pertained to a presentation arising out of the Duke acquisition of the Westcoast companies. I'd like you to just turn that document up if you wouldn't mind, it's Exhibit J.17.5. 688 The question asked that Union produce copies of all reports to Union's board of directors, January 1, 2000 to date, which referred to any of the organizational changes that were planned and implemented, including any references to their anticipated or actual impact on Union's shareholder. And the answer indicated that in November, 2001, there was a presentation made to Union's board of directors respecting the status of the Duke transition planning, and attached to the interrogatory response is a copy of the slide presentation, as I understand it, or PowerPoint presentation. 689 I note you're not responsible for this answer, so are you familiar with this document? 690 MS. ELLIOTT: I am not familiar with this document, no. 691 MR. THOMPSON: Okay. Well, there's a fact stated in it that I wanted to draw your attention. I'll take this up with, I guess, Mr. Birmingham when he gets here, but at page 8 of the slide presentation, under heading "Union employee reaction." 692 Again, as I understand it, this is a presentation that is to be made to Union's board of directors. There is a statement, "Concern over employment implication starting to appear but not affecting work. $60 million target savings raising questions." 693 I understood you to say before lunch that you had heard that number or words to that effect, seen that number, and you attributed that to savings throughout the Westcoast organization. Did I understand that correctly? 694 MS. ELLIOTT: Yes, that's my understanding of the $60 million target, it was savings throughout the organization. 695 MR. THOMPSON: What's the basis for that understanding of yours? Is there something published internally that alerted employees to this target? 696 MS. ELLIOTT: I don't know whether it was -- 697 MR. THOMPSON: Gossip? Rumour? 698 MS. ELLIOTT: I'm not actually sure what the source of my information was. I'm not familiar with this slide presentation, although I have glanced through it. The 60 million is something that I recall, but I don't know on what basis. 699 MR. THOMPSON: All right. So can you -- it's probably a silly question but I'll ask it anyway. Can you explain why this number was being presented to Union's board of directors, or should I save that for Mr. Birmingham? 700 MS. ELLIOTT: I think you should probably save it for Mr. Birmingham. 701 MR. THOMPSON: All right. Moving forward then again, still part of the context here, is that the company has been working within a revenue requirement envelope, if I can call it that, that derived from the 1999 Board-approved revenue requirement cost of service; correct? The 2000 revenue requirement was derived from that EBRO 499 numbers; is that your understanding? 702 MS. ELLIOTT: I wouldn't say that there was a review of the 2000 revenue requirement, but there were certainly adjustments made to the rates coming out of the 1999 case that took into account some changes that were happening in 2000. 703 MR. THOMPSON: Okay. So what I want to just get on the record, if I could, and we'll probably have to do this by way of undertaking, but within the price cap, there was the delivery-related requirement that was subject to the cap and this excluded pass-through items and non-recurring items as I recall. Is that your recollection? 704 MS. ELLIOTT: The price cap was applied to the delivery-related revenue and there are items that are adjusted out of that before the cap is applied. 705 MR. THOMPSON: All right. So it's, if you will, the base delivery-related revenue to which the price cap was applied and so my recollection is that the base delivery-related revenue for 2000 represented an increase over 1999; is that your recollection? 706 MS. ELLIOTT: I don't have that clear of a recollection of whether it was an increase or a decrease, sorry. 707 MR. THOMPSON: All right. And just taking it through though, and then it's that base as adjusted by the application of the price cap that produced a number for 2000, and then the price cap was applied to -- for 2001 -- was applied to produce the number for 2001 and so on. And my recollection is there were two increases and one decrease in the price-cap amount, the price-cap percentage and what I would like you to do by way of undertaking is just give us, if you will, the base delivery revenue for 1999 to which a percentage was applied to produce the 2000, and then carry it on through to 2003. Can you do that? 708 MS. ELLIOTT: I can do that, yes. 709 MR. THOMPSON: All right. 710 MR. MORAN: That's Undertaking N.8.5, Mr. Chair. 711 MR. SOMMERVILLE: Thank you. 712 UNDERTAKING NO. N.8.5: TO PROVIDE THE BASE-DELIVERY REVENUE FOR 1999, TO WHICH A PERCENTAGE WAS APPLIED TO PRODUCE THE 2000 PRICE CAP, AND CARRY IT THROUGH TO 2003 713 MR. THOMPSON: Because it's with whatever additional or reduction in revenues that the price cap produced, along with the savings that you have achieved that you've managed the O&M expenses during the period of the PBR; have I got that straight? 714 MS. ELLIOTT: It will be the changes in the price -- it will be any volumetric or customer changes, volume changes, revenue growth, as well as cost reductions, that we managed the earnings during 2001 to 2003. 715 MR. THOMPSON: All right. Thank you. My last sort of big picture concern before I get down to some line items is with respect to the evolution of the budget bridge presentation for 2003. You can get the flavour of my concern by looking at Exhibit J.7.22. 716 Go to the bottom line, line 41. You'll see that in column H, your 2002 actual we're running at about rounded $281 million; correct? 717 MS. ELLIOTT: Yes. 718 MR. THOMPSON: And that included a significant change in the bad-debt amount at line 18, it went from 7 million to about 21 million, so about a $14 million increase in bad debt; right? 719 MS. ELLIOTT: Yes. 720 MR. THOMPSON: But the last foothold in actuals that we have here for the purposes of this case is 2002 on a complete fiscal-year basis; correct? 721 MS. ELLIOTT: Yes. 722 MR. THOMPSON: So then we start with the budget, the 2003 budget in the next column, and the date of that presentation or development of those numbers would have been about what? 723 MS. ELLIOTT: The 2003 budget would have been prepared during the summer of 2002, so the May/July time frame. 724 MR. THOMPSON: Okay. So you're halfway through the bridge year, being 2002, when that budget's completed; is that right? 725 MS. ELLIOTT: Yes. 726 MR. THOMPSON: Okay. And you started out with a total budget of 264 million, thereabouts; right? 727 MS. ELLIOTT: That's right. 728 MR. THOMPSON: Okay. And your bad debt was back to $7 million on a budget basis. 729 MS. ELLIOTT: At the time we were putting the budget together, we didn't have the full benefit of the 2002 actuals. 730 MR. THOMPSON: Okay. But is there something unusual in 2002 that drove that number up? 731 MS. ELLIOTT: I think it was -- 732 MR. THOMPSON: Like Enron or something like that? 733 MS. ELLIOTT: No, there was no unique item. It was the consequence of coming off of the 2001 winter and sort of leaving our -- sort of carrying some of the accounts longer than we should have, and the clean-up and the collection process didn't take place until 2002 and the full impact of that process didn't materialize until later on in 2002. 734 It probably was something that we were looking at during the budget process, but when we put the budget together, we didn't have a full understanding of the consequences of the higher bad-debt expense. 735 MR. THOMPSON: Well, one of the issues in one of the customer review cases, and I can't remember which one it was, involved the date on which you could collect, I think it was, balancing costs or something. I remember one customer owed you about a million dollars and the Board's decision, I think, said you couldn't collect that retroactively. Is that one of the things that would contribute to this problem? 736 MS. ELLIOTT: I would have to take a look as to whether or not that amount, as it was allocated, was written off in 2002. I recall the case in which the discussion was taking place, but I can't tell you whether that amount is in the $21 million specifically, or not. 737 MR. THOMPSON: Could you undertake to do that, please? 738 MS. ELLIOTT: Yes. 739 MR. MORAN: Undertaking N.8.6, to advise whether the million dollars, I think it was, load rebalancing charges -- 740 MR. THOMPSON: It was something like that. 741 MR. MORAN: Was included in the 21 million bad-debt amount for the 2003 -- sorry 2002 actual. 742 UNDERTAKING NO. N.8.6: TO ADVISE WHETHER THE MILLION DOLLARS IN LOAD-BALANCING CHARGES INCLUDED THE 21 MILLION BAD-DEBT AMOUNT FOR THE 2002 ACTUAL 743 MR. THOMPSON: Okay. So that we go from, as I mentioned, the 264 to the 281 -- sorry, we start at 264, and then in the next column, we have 2003 bridge. Now, is that what's in the white sheets in the filing here? 744 MS. ELLIOTT: Yes, it is. 745 MR. THOMPSON: All right. So what's the date of the white-sheets filing, approximately? 746 MS. ELLIOTT: It was May of 2003. 747 MR. THOMPSON: And does that include any actuals, or is it just 12 months of forecasts? 748 MS. ELLIOTT: It does not include any actuals; it's 12 months of forecast. 749 MR. THOMPSON: And so it involves a change of forecast made in the summer of 2002 to 2003. 750 MS. ELLIOTT: The bridge forecast would have been prepared in the fourth quarter of 2002 with some possible updates in the first quarter of 2003, but no actuals would be incorporated into that number. 751 MR. THOMPSON: Okay. Well, maybe I didn't phrase this properly. The 2003 budget involves forecasts for -- made in the summer of 2002 for 2003. 752 MS. ELLIOTT: Yes. 753 MR. THOMPSON: The 2003 bridge involves forecasts made in May of 2003 for 2003. 754 MS. ELLIOTT: Would have been finalized in May. The preparation would have been in -- most likely in the November/December time frame, November/December/January. 755 MR. THOMPSON: All right. But the inputs that you have for preparing that bridge forecast include at that point your 2002 actuals to year-end; do I understand that correctly? 756 MS. ELLIOTT: Possibly. I'd have to determine how far along we were in the process when the actuals were available. But certainly before we finalized it and filed it, the actuals were available. 757 MR. THOMPSON: Okay. Well, anyway, there we're running about 281 and some odd and then the 2003 bridge blue-page update takes that up slightly to 282.9. 758 MS. ELLIOTT: Yes. 759 MR. THOMPSON: And the date of the blue-page update was ...? 760 MS. ELLIOTT: It was August 2003, and that will include some actuals, actuals for the first five months. 761 MR. THOMPSON: Okay. So it's a five and seven, roughly; is that it? 762 MS. ELLIOTT: Yes. 763 MR. THOMPSON: And we see the bad-debt claim sort of creeping up; it went from 7 to 11.5, and then 11.5 to 13.3. Can you help with us that? 764 MS. ELLIOTT: That's the impact of the increase in the gas costs. So at the time the bridge forecast was prepared, we were looking at July -- the July QRAM and the gas costs associated with that. So recognizing that that would be what would be going into the revenues, that will increase the bad-debt expense. 765 MR. THOMPSON: All right. But we've now had -- so the blue-page update captured the July QRAM; is that -- for O&M expense purposes? 766 MS. ELLIOTT: Yes. 767 MR. THOMPSON: And we've now had an October QRAM which takes gas prices down. 768 MS. ELLIOTT: Effective October 1, it takes gas prices down, yes. But that will not get picked up until the 2004 bad-debt expense. 769 MR. THOMPSON: Why? 770 MS. ELLIOTT: Just in terms of -- we'll bill October, November, December; evaluate at the end of the year what's not collectible. The actual write-offs won't take place until next year. 771 MR. THOMPSON: Well, let me just ask you this: If the October 1 QRAM were taken into account now, the 13.3 would decline to what? 772 MS. ELLIOTT: It's a reduction of $1.1 million, so 12.2. 773 MR. THOMPSON: All right. Great, thanks. 774 MS. ELLIOTT: That would be the impact on the full year's revenue so that would be the 2004 impact. 775 MR. THOMPSON: Right, I understand. All right. Now, when we initially took a look at this, we got the impression, and perhaps mistakenly, that this jump from 264 to 283, roughly, which was made during the course of the evolution of the budget and as a lead-up to this case, our impression was that one of the factors influencing this might have been a desire on the part of the company to elevate its jumping-off point for 2004. Is there anything to that impression? 776 MS. ELLIOTT: No, this is our outlook for our expenses for 2003. 777 MR. THOMPSON: Okay. Well, let's move on then from the big picture to some of these line items that have been -- and I'll just highlight them first and then get into a little more detail. But one area of concern, as you're aware with what's happened with the previous panel, is line 1 where the salary -- total salaries of 149 million, roughly, and we understand this includes incentives as well, is essentially unchanged from 1999 even though 400 positions have been eliminated. That's the big picture. Right? 778 MS. ELLIOTT: I understand that, yes. 779 MR. THOMPSON: Okay. The benefits line we've canvassed with the other panel and that includes pensions. 780 Now, contract services, you discussed that with Mr. Warren briefly and you made reference to an exhibit. I didn't catch the number, but the big picture here is '99 to 2004, 15 million, roughly, to 42 million. Can you help us with an overview of the drivers of that? 781 MS. ELLIOTT: The increase between 2004 and 1999 approved is about $27 million. The majority of that increase took place between '99 and 2002, and the breakdown of that variance can be found at Exhibit D.5, tab 3, schedule 2, page 3 of 7. 782 MR. THOMPSON: Okay. So billing system outsourced, the total is about 17.6 million of which 10 million is for outsourcing the billing system? 783 MS. ELLIOTT: That's correct, yes. 784 MR. THOMPSON: And was that to an affiliate or someone else? 785 MS. ELLIOTT: No. Well, at the time it was an affiliate, it's no longer an affiliate. There will be an offset to that increase in the cost item referred to as computers which is found on page 5 of that same schedule, there's a $10 million reduction in leasing and software costs as a result of that outsourcing. 786 MR. THOMPSON: So this is more a cost shift than a cost increase; is that fair? 787 MS. ELLIOTT: In that particular case, yes. 788 MR. THOMPSON: On one line. Okay. And then the next major items are pipeline integrity, management, operations services and additional workload contracted out in districts, they total about $7 million -- sorry, $5 million. What's the driver of those cost changes? 789 MS. ELLIOTT: The pipeline integrity management program costs will be -- they are driven by the changes in regulation. And you'll also see those costs in the variance between 2003 and 2004. 790 MR. THOMPSON: All right. I thought we had a deferral account for those costs. 791 MS. ELLIOTT: The deferral account started... Yeah, 2001 would have been the deferral account. I don't actually see the offset. I need to look to determine where the offset to that cost increase is. 792 MR. THOMPSON: Sure. 793 MS. ELLIOTT: Or why it's not been put in the deferral account. 794 MR. THOMPSON: All right. Well, I don't want to dwell too long on these, but the other two items totalling 4 million, is there something cause that accounts for these or is this just business as usual? 795 MS. ELLIOTT: These will be outsourcing services, building maintenance contracted out and district workload that's contracted out as a result of some of their initiatives. So the undertaking I gave Mr. Warren was to look for the offsets or the cost savings as a result of those. 796 MR. THOMPSON: So there may well be cost shifts there as well? 797 MS. ELLIOTT: Yes. 798 MR. THOMPSON: Thanks. Now, the explanation for the change from 2002 -- just on this line item, we go from 2002 actual of 32.5 million to 2004 about 42, almost 42.5 million, and the bridge is 33.3 million roughly. So between the 2002 actual and 2004, we're looking at another $10 million and I understood you to say to Mr. Warren that the rate-rider expense was part of that. 799 MS. ELLIOTT: Yes, if you look at Exhibit D.3, tab 3, schedule 2, that would be the blue-page update at page 4 of 6, there's an increase in contract services between 2003 and 2004 of $9 million. 3.8 of that is due to the Banner enhancements to be able to implement rate-rider functionality. 800 MR. THOMPSON: What page, I'm sorry? 801 MS. ELLIOTT: Sorry Exhibit D.3, tab 3, schedule 2, page 4 of 6 in the August 2003 update. 802 MR. THOMPSON: And the GDAR -- sorry, the rate-rider functionality, is that something that ties in with GDAR or -- 803 MS. ELLIOTT: It's something separate, as I understand it. 804 MR. THOMPSON: Something separate. And was amortization of that amount considered in some fashion? 805 MS. ELLIOTT: Because this isn't a system that we own, software enhancement costs are being expensed in the period that they're incurred. 806 MR. THOMPSON: All right. So it wasn't considered or was considered and rejected? 807 MS. ELLIOTT: Capitalization was considered and rejected, deferring and amortizing this over some period other than one year wasn't considered. 808 MR. THOMPSON: Let's just go back up to salary and wages, then, if we could for a second here, and I have some questions that arise out of this document that was produced this morning, which was Exhibit N.6.11. 809 This exhibit, if I'm correct, arose out of my questioning of Mr. Bodnar about some of the discrepancies that appeared between Exhibits J.17.1 and J.17.37 with respect to FTE and headcount numbers; is that right? 810 MS. BRODIE LUMLEY: Yes, that is correct. 811 MR. THOMPSON: Okay. And so now what we have in -- just before I go on, I understood you to say to Mr. Penny, some interrogatory responses are being corrected as a result of this further work? 812 MS. BRODIE LUMLEY: That is correct. 813 MR. THOMPSON: So I take it J.17.1 and J.17.37 are two of those that are being corrected. 814 MS. BRODIE LUMLEY: That is correct. 815 MR. THOMPSON: Are there any others? 816 MS. BRODIE LUMLEY: As shown in note 3 on that undertaking response, the exhibits that are being corrected are J.7.54, J.17.1, J.17.37, and J.34.98. 817 MR. THOMPSON: It just shows you read the fine print. 818 MS. BRODIE LUMLEY: Now, those corrections would be applicable only to the 2002 portions of those interrogatory responses. That's the only piece of the data that had an error in it. 819 MR. THOMPSON: Okay. But just so that we all understand, at line 1 on page 1 of N.6.11, you're now showing the salaries and wages plus incentives, but you've excluded severances. 820 MS. BRODIE LUMLEY: That is correct. So it would be line 1 on Exhibit J.7.22 less the cost of severances. 821 MR. THOMPSON: Right. And the severance amounts you've extracted from J.1.17. I see that in footnote 1. 822 MS. BRODIE LUMLEY: Yes. 823 MR. THOMPSON: Okay. And then we -- we have the full-time equivalent positions. Just to back this up, what I was putting to the previous witness panel was a calculation that I had done on salaries for 2002 based on the numbers we had been given for 2002 FTEs, comparing that to 2003 and suggesting there appeared to be a fairly significant jump in salaries. And the number that we had been given for FTEs for 2002 in your response to IGUA question 1, Exhibit J.17.1, had been 2,401. Would you take that, subject to check? 824 MS. BRODIE LUMLEY: That is correct. 825 MR. THOMPSON: And the note, in fairness to that number, said: 826 "The 2002 FTE account is an approximate number based on the available headcount information for that year," and then referred us to another exhibit, J.7.54, which was the CAC exhibit. 827 Just stopping there and taking that number, 2,401, and plugging it in for what is now -- the number that we're now being given, which is 2,315, would you take, subject to check, that if we have the FTE equivalents at 2,401, the average salary per FTE is $57,518? 828 MS. BRODIE LUMLEY: That is correct. 829 MR. THOMPSON: All right. And would you take, subject to check, that the increase between that number and the 2003 number of 63,488 is about $5,970, or a 10.4 percent increase? 830 MS. BRODIE LUMLEY: I'm sorry, what FTE number did you quote? 831 MR. THOMPSON: I quoted two -- well, I quoted the 63,488 that you're showing for 2003. The difference between 57,518 and 63,488, I make it to be about $5,970, on the basis of the 2,401 number and the 57,518, that results therefrom represents a 10.4 percent increase. 832 My only point is: Based on the numbers we were originally given, a large increase was demonstrated; correct? 833 MS. BRODIE LUMLEY: Correct. The base data that was used in 17.1 to calculate FTE was erroneous, it had an overcount in it, so it resulted in an FTE count which was higher than we have calculated and will correct -- will provide in our corrected responses. 834 MR. THOMPSON: Yes. I guess my only concern is it only surfaces when I dig into the implications of the numbers. Can someone help me with the number of times this FTE number has been calculated for 2002 and the changes that have resulted by virtue of these calculations? 835 The 2,401 was an answer that was provided on August 7, 2003. After that date, were there recalculations checked -- were these calculations checked? Were other numbers developed? If so, what were they, and why weren't they corrected on the record previously? 836 MS. BRODIE LUMLEY: I discovered the error as I was preparing for this proceeding, within the past few days. 837 MR. THOMPSON: Well, were there any calculations done of the FTE -- estimates done of FTE subsequent to August 7, 2003, to your knowledge? 838 MS. ELLIOTT: This is a calculation or a statistic that we've had some difficulty with. It is not -- full-time equivalents on an actual basis is not an actual piece of information we retain or use. We do, however, present it and prepare it in preparation for rate cases. So it's available for 1999, the test year, and it's available in '03 and '04 when we're looking at the salary and wage dollars. 839 It isn't readily available on an actual basis, and we have tried to come up with -- sort of arrive at a methodology that we could use to estimate approximately what the full-time equivalents would be in each of those years and I've tried a number of times to come up with a reasonable approximation for that number. 840 When you look at the results and do the calculations that you're looking at, Mr. Thompson, in terms of average salaries, there are things that we can't explain. As a result, we came up with the calculation using the data that's been provided in 6.11, which is a consistent methodology to estimate using the data that's available on the system as an approximation for the full-time equivalents in those years. 841 So yes, there have been other calculations done; in each case, those calculations produce anomalies that require further follow-up. And what you're seeing here is the product of some fairly extensive review and follow-up to get to where we are today. 842 MR. THOMPSON: All right. Can I take it, though, that what we now have at line 2 of Exhibit N.6.11 are the company's best estimates of full-time equivalent positions for each of the years there shown? 843 MS. BRODIE LUMLEY: That is correct. 844 MR. THOMPSON: All right. And if we look, then, at line 4, the increase between 2002 and 2003 still stands out like a sore thumb. The average salary for FTE increase, 2000, 2001, 2002 range between 2.2 and 2.7 percent. What you're proposing for 2004, 2.7 percent, but the jumping off point is 6.4 percent, more than two times the highest number. That's what the numbers show. 845 MS. BRODIE LUMLEY: In an attempt to explain that, we'd like to draw your attention to Exhibit J.17.37. 846 MR. THOMPSON: This is going to be corrected? 847 MS. BRODIE LUMLEY: Not the lines that I'm going to draw your attention to. 848 MR. THOMPSON: All right. 849 MS. BRODIE LUMLEY: The lines that I'd like to draw your attention to are line 8, which is the actual incentive compensation payout for 2002, approximately $6.7 million. 850 MR. THOMPSON: Right. 851 MS. BRODIE LUMLEY: And the next line that I'd like to bring your attention to is line number 3 for 2003, which is the budgeted incentive payout for 2003 of $9.9 million. 852 MR. THOMPSON: Right. So there's about a 50 percent increase between actual incentive amounts paid and budget for 2003. 853 MS. BRODIE LUMLEY: Right. So it is my understanding that the payout in 2002 was at a level that reflects not meeting targets for incentive compensation payout at 100 percent of target. 2003 includes -- or provides a budget for paying at targeted levels. 854 MR. THOMPSON: Okay. Well, it's sort of similar to the situation '99 to 2000, you look at actual, you paid out about 7 million, in 2000 you paid out about 9 million. We don't have the 1999 numbers shown in Exhibit N.6.11, but I suppose to take your point and to have you restate this more fully, would you undertake to do the following: Divide line 1 in N.6.11 between salaries and wages and incentives? 855 MS. BRODIE LUMLEY: Yes, we would. 856 MR. THOMPSON: And then lines 3, divide that between the average for FTE for salaries, wages and incentives, and similarly, the percentage line, would you show it for both salaries and wages, and incentives? 857 MS. BRODIE LUMLEY: Yes, we will. 858 MR. THOMPSON: Thanks. And my guess is, I've done it roughly, but my guess is the number for salary for 2003 over 2002, the increase is going to be more than 4 percent. I don't know how that's going to compare to the numbers in 2000, 2001, 2002, and so on. And so I think we're still into a situation where what's happening is for 2003, the salary increase is much higher than it was in prior years, at least as shown by these numbers. Have you done this calculation before? 859 MS. BRODIE LUMLEY: No. 860 MR. SOMMERVILLE: Mr. Thompson, I think we skated past an undertaking and we need to give it a number. 861 MR. MORAN: I think Mr. Thompson stated it fairly clearly so we can just give it a number, N.8.7. 862 UNDERTAKING NO. N.8.7: TO DIVIDE LINE 1 IN N.6.11 BETWEEN SALARIES AND WAGES AND INCENTIVES, AND LINE 3 IN N.6.11 BETWEEN THE AVERAGE FOR FTE FOR SALARIES, WAGES AND INCENTIVES, AND TO SHOW THE PERCENTAGE LINE FOR SALARIES AND WAGES AND INCENTIVES 863 MR. THOMPSON: Well, I won't go any further with this until I get the undertaking response. But just again, at the end of the day, if the Board concludes for the sake of argument, that the average salary per FTE, including salaries and wages and incentives, is, for the sake of argument, 2000 per employee too high, am I correct that the way we would adjust the O&M claim would be to multiply that number by the 2,284 FTEs for 2004 to come up with an estimated reduction? Is that the proper way to do it? 864 MS. ELLIOTT: If the finding was that Union's average salary, including incentives or excluding incentives, was too high by $2,000 per FTE, it would take 2,284 FTEs in 2004 to get the dollar value of that. 865 MR. THOMPSON: Thank you. 866 Let's move on then from that number to line 2, just briefly. There was a discussion with the prior panel about pensions and the number that came out of that discussion was that the portion of the pension claim in 2004 that relates to the loss experience on management's management of the pension assets is about $11.8 million, are you familiar with that number? 867 MS. ELLIOTT: No, I'm not. 868 MR. THOMPSON: Okay. Well, I'll move on from that one, then. 869 Contract services we've discussed, bad debt we've discussed. 870 Now, management fee, line 29, you discussed this briefly with Mr. Warren, and this is a number that has increased significantly from the 2002 actual about $8 million to $28 million; right? 871 MS. ELLIOTT: Right, and this will be the subject of the panel of Mr. Birmingham and Mr. Laforet. 872 MR. THOMPSON: Okay, and I understand that, but again, just the big picture, we've got an envelope of O&M expenses that's increasing from 281 million roughly on an actual basis for 2002 to 324 million on an actual -- well, on an estimated basis for 2004 and it appears to me that one of the significant contributors to that overall increase is this management fee amount. 873 Now, in terms of the ratepayer benefit test for outsourcing, is that something that Mr. Birmingham is going to address -- 874 MS. ELLIOTT: Yes. 875 MR. THOMPSON: -- and how those numbers square with that test? 876 MS. ELLIOTT: Yes. 877 MR. THOMPSON: That's his area? 878 MS. ELLIOTT: Yes, that's correct. 879 MR. THOMPSON: Now, the next area I wanted to touch on quickly is the capitalization. We see these numbers at lines 34 and 35 and I understand that this may be a topic that's going to come up again with another panel and I'll reserve some of my questions for that panel, but I just want to get the context here on the record. 880 If we look at lines 34 and 35, really from '99 actual on, they're running in the 50 million plus range combined. Line item 34 is for incorrect capitalization and then line item 35 is for direct capitalization. Can you just explain the difference between those two, Ms. Elliott, or whoever is responsible? 881 MS. BRODIE LUMLEY: The indirect capitalization represents overhead costs that are allocated to capital using the cost-driver approach. So the cost-driver approach looks at all the costs that are accumulated in the buckets provided above, so lines 1 to 31, and uses a formula or a cost driver to allocate those costs to overheads. Those overheads are then allocated to capital projects. 882 The direct capitalized overheads are allocated to specific projects as opposed to being allocated to projects overall. 883 MR. THOMPSON: Okay. So if you know a person's going to be on one particular project, you can assign his costs directly, is that ... 884 MS. BRODIE LUMLEY: That's right. If we know that somebody is assigned to a specific project and that that's a hundred percent of their time, they'll go through the O&M and then directly over to that capital project. 885 MR. THOMPSON: But to the extent that the resource pool generally is supporting the capital exercises, that would be the indirect allocation or indirect capitalization approach? 886 MS. BRODIE LUMLEY: That's correct. 887 MR. THOMPSON: All right. Now, just looking at this, as I say, big picture, the numbers in combination were running at levels in the order of 50 million -- close to 50 million, over 50 million some years, up to 2002. Would you take that, subject to check? I'm just adding lines 34 and 35 in the actual columns for the period '99 through to 2002, eyeballing them. 888 MS. BRODIE LUMLEY: Subject to check. 889 MR. THOMPSON: All right. And then in 2003, they seem to jump up; in the initial budget, they were totalling about 54 and then they dropped down to 53, and they're still about 53 in the blue-page update. Not a big jump but a jump. And then, low and behold, 2004, they're down to a combined 42 million, 42 to 43 million. It's about a $10 million difference, correct? The 2003 bridge to the 2004 test. That's what the numbers show. 890 MS. BRODIE LUMLEY: Including combining overheads and DCC in the -- 891 MR. THOMPSON: That's right. 892 MS. BRODIE LUMLEY: That's right. 893 MR. THOMPSON: It's all part of the capitalization of overhead exercise; correct? 894 MS. BRODIE LUMLEY: That's right. 895 MR. THOMPSON: All right. And so the impact of that is if you reduce the level of capitalization, you drive up the total O&M; right? 896 MS. BRODIE LUMLEY: You drive up the net O&M. 897 MR. THOMPSON: Total net O&M. And so 2003 to 2004, there's about a $10 million increase in O&M attributable to the, what I call, reduced capitalization; is that correct? 898 MS. BRODIE LUMLEY: That's correct. 899 MR. THOMPSON: And now conversely, during PBR, if you capitalize at high levels, you keep your O&M down and you increase rate base; right? 900 MS. ELLIOTT: I guess that's the consequence of increasing the capitalized overheads. But we do follow a methodology for capitalizing overheads, so it's an approved methodology, the methodology that's underpinning rates, and we've been using that up until now; and changing the drivers or the factors in which the allocations between O&M and capital are made is what's taking place in 2004. But prior to that, the methodology and the drivers are consistent with what is underlying rates. 901 MR. THOMPSON: Okay. Well, there has to be some judgment, I would think, in applying these drivers; is there or is there not? 902 MS. ELLIOTT: Generally, the drivers have been defined. What happens through the budget process is an update to the driver, so the number of hours worked for the -- with headcount or people as a driver, those will be updated to reflect the current numbers. 903 MR. THOMPSON: Okay. Well, up to the end -- I think what you're telling me is up to the end of 2003, you're continuing to apply a methodology that was consistently applied from 1999 on; is that what you're telling me? 904 MS. ELLIOTT: Yes, that's true. 905 MR. THOMPSON: Okay. And for 2004, you're proposing to change, perhaps not the methodology but something within the methodology. Could you just explain what it is that is being changed, in 25 words or less? 906 MS. BRODIE LUMLEY: There was an internal review undertaken starting in 2002 and proceeding through 2003 which was forward-looking and anticipating the level of capital activity that was anticipated in the 2004 forecast. Using that anticipated capital activity, the cost drivers that were used -- that are used to capitalize overheads were reviewed and updated as necessary. 907 MR. THOMPSON: Okay. Now, was that initial -- was that review, so called, undertaken with a view to rebasing? I mean, the question that jumps out to a plain-speaking person, like IGUA members, is why wasn't it undertaken and implemented earlier? If this is such -- well, it's shifting costs quite significantly, and why not -- why wasn't it done during PBR, wait until the end, sort of thing? Get my drift? 908 MS. ELLIOTT: The review of the capitalization drivers is much like the review of the depreciation rates, the underpinning base rates. Those reviews were done at a point in time where rates are being rebased. Drivers, on an ongoing basis, are updated and kept current. But just simply looking at the drivers being used, say, much like the depreciation study on a periodic basis; and again, coincident with rebasing rates, the capitalization study is treated the same way. 909 MR. THOMPSON: And the -- all right. So the drivers are -- to the extent the drivers are changing, they're having this effect of reducing the capitalization of O&M; correct? 910 MS. ELLIOTT: That's correct, yes. 911 MR. THOMPSON: And the big-picture cause of that is what? You're doing less capital projects; is that what you're saying? 912 MS. BRODIE LUMLEY: A change in the level of capital activity. 913 MR. THOMPSON: And the factual data on which this conclusion is based ends when? 914 MS. BRODIE LUMLEY: Pardon me? 915 MR. THOMPSON: Is it done on an historic basis of data, or are you projecting out and saying, Here is what we're planning to spend on capital; and if we spend only that on capital, our drivers will change? 916 MS. BRODIE LUMLEY: We are projecting out to 2004. 917 MR. THOMPSON: I see. And so the more you defer projects in the 2003 test year or the 2004 test year, then it's going to impact the drivers; less will be allocated to capital. 918 MS. BRODIE LUMLEY: It depends on the project that is being deferred. If the project being deferred is one or two major projects which have significant dollars attached to them, they'll have little impact on the actual capital activity. The capital activity is more driven by the number of jobs that are completed during the period rather than it is the actual dollars spent on capital. 919 MR. THOMPSON: Have these driver studies always been done looking forward? To what extent is history taken into account in these driver studies? It's not given 100 percent weighting obviously, but is it given some weighting? 920 MS. BRODIE LUMLEY: This has been the first major review of the drivers. It's been seven years since -- we started using this in 1997. 921 MR. THOMPSON: What weighing is given in your current study to history? How many years of history is captured in the study? Do you understand what I'm getting at? 922 MS. BRODIE LUMLEY: I do, and the history is not what we based the study on, the study has been forward-looking, so it's the anticipated level of capital activity as opposed to the historical level of capital activity. 923 MR. THOMPSON: That will probably be the subject of further questions from others. 924 I think that's all I have. Thank you very much, Mr. Chair. 925 MR. SOMMERVILLE: Thank you very much, Mr. Thompson. 926 We'll take 10 minutes. We'll reconvene at 20 minutes after the hour. Thank you. 927 --- Recess taken at 3:10 p.m. 928 --- On resuming at 3:25 p.m. 929 MR. SOMMERVILLE: Thank you very much, please be seated. 930 Mr. Shepherd, I think you're nominated. 931 MR. SHEPHERD: Thank you, Mr. Chairman. I think Mr. Dingwall has a comment before I start. 932 MR. DINGWALL: Before Mr. Shepherd begins, sir, thank you, I understand from speaking both with Mr. Shepherd and Ms. Singh and Mr. Aiken that they anticipate taking the balance of the afternoon with some certainty and I have another commitment that's going to require my exit at 4:30 and given that I believe they've also borrowed Mr. Warren's watch for time-keeping purposes, I'm fairly safe in assuming I can begin in the morning and request that with your permission, I can take my leave? 933 MR. SOMMERVILLE: That's certainly all right, Mr. Dingwall. Thank you for raising it. 934 MR. DINGWALL: Thank you, sir. 935 MR. SOMMERVILLE: We'll talk about Mr. Warren's watch later, I'm sure. Thank you. 936 MR. MORAN: He was right on his time estimate, Mr. Chair, in defence of Mr. Warren. 937 MR. SOMMERVILLE: He must have borrowed someone else's watch. 938 MR. THOMPSON: It's tough to wear an hour glass. 939 MR. SHEPHERD: Mr. Chairman, I now feel under some pressure with respect to time, but thankfully, my two-hour estimate is now closer to a half an hour. 940 MR. SHEPHERD: Witnesses, I wonder if you could turn up the handout that we distributed this morning. 941 Mr. Chairman, this is a document headed up O&M Per Customer Comparison, and I wonder if we could give that an exhibit number. 942 MR. MORAN: Mr. Chair, this would become Exhibit M.8.1 entitled, O&M Per-Customer Comparison filed by Mr. Shepherd. 943 EXHIBIT NO. M.8.2: O&M PER-CUSTOMER COMPARISON, FILED BY MR. SHEPHERD 944 MR. THOMPSON: Wasn't VECC's 8.1? 945 MR. MORAN: Sorry, 8.2. 946 MR. SOMMERVILLE: Mr. Shepherd, I don't want to interrupt but perhaps this is the best time to do it. It would appear as though we have Mr. Aiken, Ms. Singh and Mr. Dingwall. Mr. Rowe will you have questions for this panel? 947 MR. ROWE: No, sir. 948 MR. SOMMERVILLE: Mr. Scully, will you have questions? 949 MR. SCULLY: No, sir. 950 MR. SOMMERVILLE: It is certain that we won't finish this panel today and that we will have a short period tomorrow, according to the estimates, Ms. Singh and Mr. Aiken and Mr. Dingwall, a short period tomorrow for this panel and the gas panel to follow them. 951 MR. SHEPHERD: That's correct. 952 MR. SOMMERVILLE: So I'm suggesting it may be worth while for you, Mr. Shepherd, to finish today, and for us to take up Ms. Singh, Mr. Dingwall and Mr. Aiken tomorrow, does that sound sensible to the parties? 953 Mr. Smith do you have any comment. 954 MR. SMITH: Well, I think that that makes sense, Mr. Chairman. My only concern is that to the extent people tend to be off on their estimates tomorrow, I wouldn't want to have the gas supply people come down only to start at 3:00, for example. If we really are going to be starting early with the gas supply people tomorrow, I think it makes absolute sense. 955 MR. SOMMERVILLE: That's kind of why I want to raise this now. 956 Do we have a realistic prospect of starting the gas panel at noon tomorrow? 957 MR. MORAN: Mr. Chair, in talking about time estimates earlier, I think Mr. Dingwall had indicated that his 15-minute estimate was actually going to be a bit longer than that. 958 MR. DINGWALL: A bit longer, I'm estimating close to 30. 959 MR. MORAN: So 30 to 45 minutes, I guess, and then we have Mr. Brett for half an hour, he's not here at the moment. Mr. Aiken for an hour, but he said he would be about 45 minutes. Ms. Singh at half an hour. 960 MS. SINGH: Probably. 961 MR. MORAN: And I have maybe about half an hour. 962 MR. SMITH: By that math that takes us to 1:00 with 15-minute break, to 12:45. 963 MR. SOMMERVILLE: Well that's manageable. 964 Will that suit? 965 MR. SMITH: That's fine. 966 MR. SOMMERVILLE: I'm really thinking about the convenience of your panel, and I think we'll proceed in that fashion. I don't want to unnaturally restrain anybody. I'm not trying to hold you to an unnatural schedule, but if you think it's reasonable, then let's approach it that way. 967 Thank you, Mr. Shepherd, we'll have your cross-examination today and then we'll adjourn until tomorrow morning. 968 MR. SHEPHERD: Thank you, Mr. Chairman. Well, that will motivate me to be even quicker. 969 MR. SMITH: Always a good thing. 970 CROSS-EXAMINATION BY MR. SHEPHERD: 971 MR. SHEPHERD: At Exhibit M.8.2, and let's start with the third line of numbers there, and I don't know who should I address these questions to, perhaps Ms. Elliott. I guess my first question is, do you understand how these numbers are arrived at and do you have any comments on whether these numbers are fairly reflective of the particular point of view of your O&M? This is just the Union Gas numbers at this point. 972 MS. ELLIOTT: I understand that the first line represents our total O&M for the years noted, 2002 through to 2000 will be actuals, 2003 and 2004 are the most current forecasts. The customer numbers I can match on a couple of them. There are a couple of others that I'm not sure where they came from, but the numbers I have are not significantly different, and then the third line would be just a simple division of total O&M by total number of distribution customers. 973 MR. SHEPHERD: Now, this is not consistent with your O&M-per-customer numbers as set forth in J.34.113, is it? 974 MR. SOMMERVILLE: That reference again, Mr. Shepherd? 975 MR. SHEPHERD: J.34.113. 976 MR. SOMMERVILLE: Thank you. 977 MS. ELLIOTT: The title on that is -- looks like it was gross O&M, so that's O&M before capitalization. The schedule that you've handed out is net O&M, that would be O&M after capitalization. 978 MR. SHEPHERD: So, in fact, if I were just to refer back to the ubiquitous Exhibit J.7.22, your 34.113 is line 33 of this document or equates to line 33 and calculates on a per-customer basis, whereas what we've just put forward to you is line 41; is that correct? 979 MS. ELLIOTT: I would have to check to see where compressor fuel is in the calculation on -- of O&M per customer. 980 MR. SHEPHERD: Okay. Now, I understand that the inflation -- the average inflation rate that you've been using for the last five years is 2.3 percent; right? That's the number that your evidence says is the average for the last five years. 981 MS. ELLIOTT: The average over the last five years, yes. 982 MR. SHEPHERD: Is 2.3 percent. 983 MS. ELLIOTT: Each year is a different factor, but on average it's 2.3 percent per year. 984 MR. SHEPHERD: Okay. So we did the calculation, and would you accept, subject to check, that you if you took your O&M per-customer for 2000, $217.61 and inflated it annually by that rate, you would end up with $238.34 per customer; would you accept that, subject to check? 985 MS. ELLIOTT: I will. 986 MR. SHEPHERD: And that would result in a total O&M of $291 million, 291,417,000. 987 MS. ELLIOTT: Subject to check, yeah. 988 MR. SHEPHERD: Thank you. I guess what I'm trying to get at here is, I guess we can all understand that individual items can go all over the map and I'm trying to get a handle on why you would be asking for $34 million more than inflation on your O&M expenses as a package over a relatively longer period of time. I understand what the breakdown is but I don't understand why you would have to run the utility at that much higher than inflation over that time. Can you just sort of give us a general overview of why that's the case. 989 MS. ELLIOTT: I think, as our evidence indicates, there are costs that we are incurring that are increasing at rates much greater than the rate of inflation. 990 MR. SHEPHERD: Yes, I understand that. I guess what I'm trying to understand is, inflation is a basket of costs; some go up quickly and some go up more slowly, and they are an average. And so you, too, have a basket of costs in running the utility, and I'm wondering why, if some of them have gone up rapidly, other ones haven't gone down. Shouldn't that balance out in the end? 991 MS. ELLIOTT: I'm not sure that it should. There's a number of our costs that have gone down. Clearly, the total package has gone up and that's largely a function of -- as the evidence indicates, one of the significant contributors to that is the increase in pension and benefits. 992 As a percentage or a component of our cost basket, I can't speak to how that cost is factored into the overall inflation rates. There are other costs that are costs incurred for services that we weren't -- we didn't require previously, things like the pipeline integrity program; regulation changes have increased our cost. Again, that may be a different percentage than the average impact through the inflation rate. 993 MR. SHEPHERD: I wonder if you could turn to Exhibit N.6.11. 994 MS. ELLIOTT: M? 995 MR. SHEPHERD: "N" as in Norman, the one filed by Mr. Bodnar. 996 MS. ELLIOTT: We have that. 997 MR. SHEPHERD: And will you accept, subject to check, that if you inflate your average salary per FTE from 2000, your last Board-approved amount -- 998 MS. ELLIOTT: Sorry, the last Board-approved amount was 1999. 999 MR. SHEPHERD: Well, 2000 was the base year for your PBR; correct? 1000 MS. ELLIOTT: But there was no review of the cost-of-service components for the year 2000. 1001 MR. SHEPHERD: There were adjustments from 1999 to 2000 to get a base; correct? 1002 MS. ELLIOTT: For specific items, yes. 1003 MR. SHEPHERD: Yeah, okay. So taking your 2000 amount and indexing it for inflation, the actual inflation rates that you filed, would you accept that an average salary for FTE of about 62,000 would track inflation? 1004 MS. ELLIOTT: Subject to check. 1005 MR. SHEPHERD: And by my math, that means given the 2,284 employees, or FTEs, I guess, that that's about $7.3 million -- you're paying them about $7.3 million more than inflation says would be appropriate. Why is that? 1006 MS. ELLIOTT: I believe that was the subject of the panel before ours in terms of the compensation package. But compensation is not just based on inflationary increases but also requirements of the market. 1007 MR. SHEPHERD: Okay. And then I wonder if you could turn to Exhibit M.8.1 filed by my friend Ms. Lott this morning. 1008 MR. SMITH: I'm sorry, I missed that number this morning. 1009 MR. SHEPHERD: M.8.1, that was filed this morning by Ms. Lott. 1010 MS. ELLIOTT: I have that. 1011 MR. SHEPHERD: And this, if I can simplify it, sort of calculates an all-other type of category for O&M, everything else other than some named items; at the bottom, 110 million, et cetera, going up each year. And I wonder if you would accept, subject to check, that if you inflated the 2000 number up to 2004, you would get not 142 million but 121 million. 1012 MS. ELLIOTT: I'll take that, subject to check. 1013 MR. SHEPHERD: And, again, I guess I have the same question: Aside from pensions, which I understand, but that's already excluded from this, I wonder why you're asking for almost $22 million more than inflation says are real costs over the period? 1014 MS. ELLIOTT: Again, there are components of those costs that are incremental over the period -- over that period of time, like the integrity management program. 1015 MR. SHEPHERD: But things like that, whether it's integrity management or GDAR - there's all sorts of things like that that are one-time right now, non-recurring right now - but if it's not that, it's something else; right? You have to manage, assuming that there's going to be unusual things like that every year; right? 1016 MS. ELLIOTT: The integrity management is not a one-time program, it's an ongoing program that has been increasing in costs over a period of time. We have rate hearing costs that are incurring -- that we're incurring now that will go into future years. There are costs in this mix that are increasing at a rate much greater than inflation. 1017 MR. SHEPHERD: Okay. Now, I wonder if you could go back to M.8.2 again. And what we've done is we've laid out for you the equivalent numbers to your O&M customers and O&M per customer for Enbridge Gas Distribution, and you'll see the sources there. Will you accept, subject to check, that those numbers are correct? 1018 MS. ELLIOTT: I'm not sure that I can speak to those numbers. Assuming that you can take the numbers from the sources that you cited here, I'll assume they're correct. 1019 MR. SHEPHERD: Thank you. And the thing that I'm noting here is that Union's O&M per customer has always been significantly higher than Enbridge's, and I understand there are reasons for that because of the nature of your franchise, but the relationship between the two has changed fairly dramatically between 2000 and 2004; that is to say, Union's excess over Enbridge, if you like, is higher now by almost 10 percent. 1020 Is there some underlying change in your business that's causing that to happen? 1021 MS. ELLIOTT: We have, I guess, submitted evidence on the cost increases that we're incurring between 2002, 3, and 4. There are factors contributing to those cost increases. But an underlying change in the business, no, I would say that we haven't done anything that would change the business. Although we've changed the way we do business and some of the components are -- the GDAR costs and the rate-rider costs are all new. 1022 MR. SHEPHERD: But things like GDAR are costs for Enbridge too? 1023 MS. ELLIOTT: I assume they are, yes, I just don't know where -- 1024 MR. SMITH: Sorry, if I can just stop Mr. Shepherd there, Mr. Chairman. 1025 It's difficult to say that the Enbridge costs with respect to GDAR are the same as Union's costs. Frankly, I don't know what they are, and Ms. Elliott has already indicated that she doesn't know what Enbridge's costs are simply that she's prepared to take that Mr. Shepherd transcribed the costs. So I think it's a little bit unfair to put that proposition to the witness. 1026 MR. SOMMERVILLE: Mr. Shepherd. 1027 MR. SHEPHERD: Mr. Chairman, I'm not asking about particular amounts, I'm trying to get a sense of why, on an overall basis, Union's O&M would be going up more rapidly than Enbridge's, that's all. 1028 MR. SOMMERVILLE: I appreciate that. 1029 So long as you're not trying to tax Ms. Elliott with knowledge of things that she doesn't have knowledge of. 1030 Ms. Elliott, don't feel obliged to try to come up with an answer that is more specific than you're comfortable with. 1031 But Mr. Shepherd, I don't think it's inappropriate for to you put general propositions to Ms. Elliott, it's as simple as that. 1032 MR. SHEPHERD: Thank you, Mr. Chairman. 1033 Maybe I can make this ease your mind, Ms. Elliott. 1034 Aside from the pension amounts, because we've already done that comparison with the two pension plans, are there any other specific areas of O&M costs that you know of where Union has had substantial increases that you know for a fact are not also being experienced by Enbridge? 1035 MS. ELLIOTT: The problem is I don't know anything about Enbridge's costs. I do know about Union's costs. I can't make a comparison between Union's experience and Enbridge's experience because I have no knowledge of Enbridge's costs. 1036 MR. SHEPHERD: I have a number of specific questions on individual items. 1037 Let me first ask you a follow-up, something that I think you discussed with Mr. Thompson. Did you say that as a result of the October 1st QRAM, your 2004 bad-debt expense is going to go down by $1.1 million; is that right? 1038 MS. ELLIOTT: If we reflected the October 1st QRAM in our 2004 revenues that would result in the decrease in the bad-debt expense of $1.1 million, yes. 1039 MR. SHEPHERD: So should we assume that you need that much less revenue requirement, or are you not making an amendment to what you're asking for? 1040 MS. ELLIOTT: The difficulty I have is the October 1st QRAM is the rates in place today. When we get into 2004, the gas costs that we actually experience and the revenues we actually receive may be very different, but if the Board was to reflect the impact of the October 1st QRAM in our revenue deficiency, it would be reduced by 1.1. 1041 MR. SHEPHERD: Okay. Thank you. 1042 The next item is -- I wonder if you could turn to J.7.22. 1043 MS. ELLIOTT: I have that. 1044 MR. SHEPHERD: Thank you. We all have it right next to us right now, I guess. 1045 Take a look at line 24. This item is recovery cost. What is that, by the way, what is recovery cost? 1046 MS. BRODIE LUMLEY: Recovery costs are costs that are recovered through either a deferral account or perhaps through an insurance claim that we are passing on to a third party for reimbursement. 1047 MR. SHEPHERD: Wonderful. So in 2003, from budget to bridge, it was 828,000 of recoveries, then it went up to 2.5 million in the blue page, and then 2004 is back down to 828. What is that $1.7 million difference? 1048 MS. BRODIE LUMLEY: Primarily, that's related to the integrity management program. In 2003, there is a recovery for those costs. In 2004, there is not. They are being recovered through a deferral account in 2003; in 2004, there is not a deferral account, not the entire amount of the pipeline integrity program, but in 2003 there is a recovery for the amount expense that was over a threshold expense as set by the Board. 1049 MR. SHEPHERD: But you've known that there was a recovery for that all along, right, or is this something -- like, I don't understand why it changed from the bridge number to the blue-page number, what happened between those two times? 1050 MS. BRODIE LUMLEY: When the bridge number was put together, the recovery was not reflected in the numbers that were built at that time so we needed to update and include them in the forecast. 1051 MR. SHEPHERD: Was a there a decision of the Board in the meantime giving you the deferral account, was that what happened? 1052 MS. BRODIE LUMLEY: No, there was not. 1053 MR. SHEPHERD: You just missed it the first time around and picked it up. 1054 MS. BRODIE LUMLEY: That's correct. 1055 MR. SHEPHERD: Okay. Now, I guess the next thing, I'm coming back to bad debts, I'm sorry, I should have dealt with them at the same time. 1056 Ms. Elliott, you said earlier, I think, that there's going to be an impact of the retroactive charges from the 2002 case in 2003, which will increase your bad debts by some amount. We didn't get the amount, but some increasing impact. You're not expecting the same thing in 2004; right? 1057 MS. ELLIOTT: No, we're not. 1058 MR. SHEPHERD: So I don't understand why you're using the same figure, 13.3 for both years. 1059 MS. ELLIOTT: I think I probably should correct myself. I stated earlier that although the deferral account balances were billed and recovered this year, January to July, we did, in fact, include at the end of last year a provision for some of those amounts to be not uncollectible, then the question is whether that provision was sufficient to deal with what we haven't been able to recover. 1060 The 13.3 million in 2003 is a forecast which includes everything. There may be a component of that that it relates to the retroactive charges. 1061 MR. SHEPHERD: Well, then, can you identify what that component is for 2003, so we can back it out for 2004? 1062 MS. ELLIOTT: Yes. I have an undertaking to build up the calculation of the 2004 expense. 1063 MR. SHEPHERD: Wonderful. Now, just following along from that, you mentioned that as of the end of 2002 you took a provision, so part of your 21 million included some things you knew were going to arise in 2003. That's normal practice, isn't it, at the end of the year you figure out what your bad debts are? 1064 MS. ELLIOTT: To the extent that there's a receivable on your books that you think there's some risk of collecting, there is a provision made at the time for those, yes. 1065 MR. SHEPHERD: So earlier you were talking to Ms. Lott about the impact of your increased security deposits and you said at the end of this year, 2003, you were going to review it, but you wouldn't take that deduction until 2004. I don't understand why you'd do it differently. 1066 MS. ELLIOTT: Sorry, we will review our receivables at the end of this year and make a provision. What we won't know to support that provision is the experience that we will have gained as a result of having the security deposits on hand. We just started collecting them and keeping them for two years in July, so we won't necessarily have a full year's experience to know how much having a security deposit on hand will reduce our bad-debt expense. 1067 MR. SHEPHERD: It should reduce it by something; right? 1068 MS. ELLIOTT: It should reduce it by something, yes. 1069 MR. SHEPHERD: You haven't reflected that in these numbers, have you? 1070 MS. ELLIOTT: In 2003 and 2004, yes, we have. 1071 MR. SHEPHERD: You have, okay. Now I wonder if you could turn up J.18.127, please. 1072 MR. SOMMERVILLE: 18 point? 1073 MR. SMITH: 127. 1074 MR. SOMMERVILLE: Thank you. 1075 MR. SHEPHERD: Do you have that? 1076 MS. ELLIOTT: I do. 1077 MR. SHEPHERD: So if you could turn to the attachment there, which is the fourth page of it, there is -- and I'm trying to sort of match these numbers up. You've got an actual annual cost for regulatory expenses and my calculation is that -- and that's line 11 there; right? 1078 MS. ELLIOTT: Yes, that's correct. 1079 MR. SHEPHERD: And my calculation is that the period from 2000 to 2003 when you're in PBR totals $16.4 million; is that right, subject to check? 1080 MS. ELLIOTT: 2000 to 2003? 1081 MR. SHEPHERD: Yes, the period of PBR. 1082 MS. ELLIOTT: The period of PBR is actually 2001 to 2003. 1083 MR. SHEPHERD: I'm including the base year. 1084 MS. ELLIOTT: $16 million, yes. 1085 MR. SHEPHERD: 16.4, yes. 1086 MS. ELLIOTT: Yes. 1087 MR. SHEPHERD: Now, am I right that the amount embedded in rates for those years was about $4.1 million each year; is that correct? 1088 MS. ELLIOTT: I'm not sure that I know the answer to that. It sounds right but I don't have anything with me that would confirm that number. 1089 MR. SHEPHERD: Okay. I wonder if, then -- I'm going to assume that that's correct, and if it turns out to be incorrect, presumably you can let us know, okay? 1090 MR. SMITH: Well, maybe Mr. Shepherd can just advise us now of the source of that number and that would expedite things. 1091 MR. SHEPHERD: Well, okay. I'm looking at 1999, the amortization is 4.1 million, that's the amount you include in your expenses for the year and so I'm assuming that that's the amount that would be included throughout the PBR unless there was an adjustment in RP-1999-0017. 1092 MS. ELLIOTT: You're looking at the actual amortization on line 22, under the column "Actual 1999"? 1093 MR. SHEPHERD: That's right. Because that would be your base unless it was adjusted; correct? 1094 MS. ELLIOTT: Well, that's certainly the actual amount that we amortized in that year. I'd have to confirm that that was the actual amount approved in rates. 1095 MR. SHEPHERD: Okay. Well, here's where I'm going with this, and it may turn out that if the amount baked in rates is something different, then I'm completely off base, but let's just plow forward and we'll see what happens. 1096 If you have an amount embedded in rates of 4.1 million over four years, that's 16.4, total; right? 4.1 times 4? 1097 MS. ELLIOTT: Yes. 1098 MR. SHEPHERD: Okay. And that's, in fact, presumably by coincidence, exactly what you spent. 1099 MS. ELLIOTT: Exactly what the actual costs were. 1100 MR. SHEPHERD: Right. 1101 MS. ELLIOTT: Yes. 1102 MR. SHEPHERD: But as I understand how your amortization method works, the actual amount that you took as expenses in those four years during PBR was $13.1 million, and that's found on line 22; those four items, 2000 to 2003, total $13.1 million. Does that sound right to you? 1103 MS. ELLIOTT: I'll take that, subject to check. You said 2000 to 2003. 1104 MR. SHEPHERD: Yes, the same comparison as the 16.4 million. 1105 MS. ELLIOTT: Yes, I get $13 million. 1106 MR. SHEPHERD: So what I'm trying to understand here is this looks like it's an anomaly of PBR. You amortize to spread a cost over time, and as long as every year is the same as every other year, it's just a smoothing mechanism; but if you amortize and it moves costs from a PBR period out into a cost-of-service period, then it's no longer neutral, is it? I mean, it seems like a strange situation to have actual costs and rate-embedded costs to be identical, which is a good situation, but to actually have an expense left over that you're charging to ratepayers later. It seems to me they already paid it all. 1107 MS. ELLIOTT: Yeah, the methodology we used deals with each hearing separately and the amortization of each of those costs separately. The consequences of that approach is that we didn't fully expense all of the actual costs incurred during the 2001 to 2003 period. We still have costs that are unamortized at the end of 2003. That's not an amortization method that's unique or was developed during PBR, that's the approach that's been followed for hearing costs for some time. 1108 MR. SHEPHERD: I'm not suggesting you did anything wrong, I'm suggesting it's an accidental result of the method. 1109 MS. ELLIOTT: It's the result of the amortization practice that we have costs that have not fully been amortized coming into the cost-of-service proceeding. 1110 MR. SHEPHERD: And so my question is, if you recovered in rates 16.4 million, and your expense was 16.4 million for the same item, then do you believe it's fair that there's $3.3 million still to be charged to the ratepayers when they've already paid all of the costs? 1111 MS. ELLIOTT: Well, you're isolating just the rate hearing amortization costs out of the rates and comparing them to the actual expense. During the course of the PBR, there will be a lot of expenses, bad debt, pension, that are much -- on an actual basis, those expenses were much greater than what is recovered in rates; and that it's not fair to pick and choose components that are in rates that are favorable and ignore the ones that are not favorable. The company has been managing O&M as a total. Rate hearing amortization costs, pension costs, bad-debt expense are all part of the O&M expense. 1112 MR. SHEPHERD: Two other items. 1113 The first is if you could turn to Exhibit J.7.55, please. This is your IT budget from 1999 to 2004. Do you have that? 1114 MS. BRODIE LUMLEY: Yes, I do. 1115 MR. SHEPHERD: And I just have a simple question. In that 26.5 million on line 3 at the end, does that include the rate rider and GDAR costs? If it's easier, you can just give us an undertaking to let us know that. 1116 MS. BRODIE LUMLEY: Well, I've verified so far that the rate rider is not included, it's included in the asset operations, administrator-level budget. 1117 There's a portion of the gas distribution access rules as well included under asset operations of about $100,000, but I'll need to take an undertaking to identify what administrator areas have the remaining balance. 1118 MR. SHEPHERD: That would be wonderful. What I'd really like to know is what that 2004 number is in that interrogatory if you include those two other IT items that are allocated elsewhere; that is, the rate rider and GDAR in total. 1119 MS. BRODIE LUMLEY: All right. 1120 MR. MORAN: Mr. Chair, just for the record could Mr. Shepherd restate the undertaking? 1121 MR. SHEPHERD: What I'd like to know is to what extent the rate rider and GDAR are included in the number $26,565,000 on Exhibit J.7.55 and what that number would be if they were totally included in that number. 1122 MR. MORAN: That would be Undertaking N.8.8. 1123 UNDERTAKING NO. N.8.8: TO PROVIDE TO WHAT EXTENT THE RATE RIDER AND GDAR ARE INCLUDED IN THE NUMBER $26,565,000 ON EXHIBIT J.7.55, AND WHAT THAT NUMBER WOULD BE IF THEY WERE TOTALLY INCLUDED IN THAT NUMBER 1124 MR. SHEPHERD: And just on that same question, the GDAR and rate-rider costs, these are costs that you negotiated with Enlogix, some of them or most of them? 1125 MS. ELLIOTT: Certainly the rate rider is part of the Enlogix agreement or will be an agreement with Enlogix. Some of the GDAR costs are also required -- system enhancements, I think the estimate is $537,000 in 2004 for system enhancements to GDAR, which would be Enlogix's. 1126 MR. SHEPHERD: Who negotiated those costs with Enlogix? 1127 MS. ELLIOTT: I think Mr. Andrews is coming up at a later date to speak about GDAR. 1128 MR. SMITH: And Mr. Shervill will be speaking to rate rider. 1129 MR. SHEPHERD: So they'll be able to tell us who negotiated the financial terms of those arrangements? 1130 MS. ELLIOTT: Yes, they will. 1131 MR. SHEPHERD: And you weren't involved in those negotiations. 1132 MS. ELLIOTT: I was not. 1133 MR. SHEPHERD: Thank you. And lastly, this is just a matter of clarification, if you can turn back to the well-loved J.7.22 and look at line 15. That has insurance costs in the blue page at 8.2 million for 2003 and 7.2 million for 2004 and, in fact, this is one of the reasons why you said your O&M increases because of insurance costs; right? 1134 MS. BRODIE LUMLEY: That is correct. 1135 MR. SHEPHERD: And so I wonder if you could then, keeping those $8.2 million and $7.2 million numbers in mind, go to Exhibit J.26.52 which is a question asking for a breakdown of your insurance costs, and the totals for 2003 and 2004 are 4 million and 4.4 million. And I guess I wonder if you could help me with how come those totals are different? 1136 MS. BRODIE LUMLEY: The difference represents some administrative costs for the insurance department as well as Union's self-insurance costs. 1137 So the costs shown in the IR are Union's costs to external carriers of insurance that provide insurance for Union. The difference between the 4.3 and the cost that you see in schedule J.7.22 is the self-insurance premium as well as some administrative costs. 1138 MR. SHEPHERD: So now here's how I have a problem with that. You've got from 2002 actual to 2003 blue page, an increase of $3.2 million in your budget, in 7.22, but there's only an increase in your premiums of $350,000. So are you saying that there's a $2.9 million administrative increase? 1139 MS. BRODIE LUMLEY: Not administrative increase. There's a self-insurance reserve. So part of Union's cost management program to maintain or contain the cost of insurance at the level that we've been able to do it is by utilizing higher deductibles and thereby requiring a self-insurance reserve to be maintained by Union. 1140 MR. SHEPHERD: Does the evidence say anywhere that you're charging the ratepayers a reserve? 1141 MS. BRODIE LUMLEY: That there's a self-insurance portion to Union's expense. 1142 MR. SHEPHERD: Can you show me where that is in the evidence, please? I can help you. If you take a look at J.26.53, the next interrogatory. It says that in 2002, you had a self-insured expense of 900,000 and that increased by 400,000 for the next two years, and so that still isn't $3.2 million. 1143 MS. BRODIE LUMLEY: J.26.53 was answered using prefiled evidence. 1144 MR. SHEPHERD: So in the prefiled evidence, you had 2003 of 7.2 million, and 2004 of $7.2 million, so the only difference is that million dollars of boiler costs, right, that we saw earlier, boiler claims. 1145 MS. BRODIE LUMLEY: There was a million dollars of boiler claims included in the 2003. 1146 MR. SHEPHERD: That's the only difference between the two filings; right? 1147 MS. BRODIE LUMLEY: The only difference in insurance costs? 1148 MR. SHEPHERD: Yeah. 1149 MS. BRODIE LUMLEY: There is that and there may have been some other adjustment for administrative costs as well, but it would not have been of the magnitude that we needed to separately identify it. 1150 MR. SHEPHERD: This self-insured expense of $1.3 million a year that's just to pay your deductibles, right? If you have claims, then there's a deductible and you'll have to cover them. 1151 MS. BRODIE LUMLEY: That is correct. 1152 MR. SHEPHERD: Mr. Chairman, those are our questions. Thank you. 1153 MR. SOMMERVILLE: Thank you, Mr. Shepherd. 1154 Are there any matters that anyone wants to deal with before we adjourn for the day? We'll reconvene tomorrow morning at 9:30 for Mr. Aiken, Ms. Singh and Mr. Dingwall's cross-examination and we'll take up the gas supply panel probably at the noon break. 1155 MR. SMITH: Thank you, Mr. Chairman. 1156 MR. SOMMERVILLE: We'll stand adjourned until 9:30 tomorrow morning, thank you. 1157 --- Whereupon the hearing was adjourned at 4:15 p.m.