Rep: OEB Doc: 12WW4 Rev: 0 ONTARIO ENERGY BOARD Volume: 9 17 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 17 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 MIMI SINGH CME RANDY AIKEN London Property Management Association, Wholesale Gas Service Purchasers Group ROBERT ROWE Enbridge Gas Distribution Inc. PETER THOMPSON Industrial Gas Users Association BRIAN DINGWALL Energy Probe, HVAC Coalition, Distributed Energy Association ALICK RYDER City of Kitchener TOM BRETT Ontario Association of School Business Officials PETER SCULLY City of Timmins, City of Sudbury, FNOM DWAYNE QUINN City of Kitchener 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [16] UNION GAS LIMITED - PANEL 7; ELLIOTT, BRODIE LUMLEY [33] CROSS-EXAMINATION BY MR. AIKEN: [36] CROSS-EXAMINATION BY MS. SINGH: [190] CROSS-EXAMINATION BY MR. DINGWALL: [351] CROSS-EXAMINATION BY MR. BRETT: [595] PRELIMINARY MATTERS: [749] UNION GAS LIMITED - PANEL 7; ELLIOTT, BRODIE LUMLEY [758] CROSS-EXAMINATION BY MR. MORAN: [761] RE-EXAMINATION BY MR. PENNY: [890] UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT [908] EXAMINATION BY MR. PENNY: [915] PRELIMINARY MATTERS: [1038] UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT [1051] CROSS-EXAMINATION BY MR. QUINN: [1056] 10 EXHIBITS 11 EXHIBIT NO. M.9.1: TABLE PREPARED BY CME [231] EXHIBIT NO. M.9.2: DIAGRAM ENTITLED, "UNION GAS DEFERRAL RESTRUCTURING" [998] 12 UNDERTAKINGS 13 UNDERTAKING NO. N.9.1: TO PROVIDE THE UPDATED IMPACT ON THE COMPANY USED GAS COST, REFLECTING THE OCTOBER WACOG OF 277.023; TO PROVIDE THE IMPACT ON THE COMPRESSOR FUEL COST, REFLECTING THE OCTOBER QRAM [79] UNDERTAKING NO. N.9.2: TO RECONCILE THE CUSTOMER-ADDITION FORECAST FOR MR. GARDINER WITH THE CUSTOMER FORECAST USED FOR O&M PURPOSES [134] UNDERTAKING NO. N.9.3: TO PROVIDE, ON A BEST-EFFORTS BASIS, THE REASON FOR CAPPING THE AMORTIZATION OF THE RP-2002-0130 COSTS AT 61,000 IN FISCAL 2003, AND THE REASON WHY THE 250,000 SHOWN FOR REGULATORY COSTS IS NOT BEING AMORTIZED ALONG WITH THE REST OF THE REGULATORY COSTS FOR 2004 [167] UNDERTAKING NO. N.9.4: TO DETERMINE WHICH GROUP ANY MEMBERSHIP FEES ASSOCIATED WITH THE CANADIAN GAS ASSOCIATION WOULD BE AND WHETHER UNION GAS IS SEEKING RECOVERY OF THOSE; AND WHETHER THOSE FEES INCLUDE ANY SUPPLEMENT OR SPECIAL ASSESSMENT WITH RESPECT TO PROJECTED OR ACTUAL HEARING COSTS FOR THE YEARS 2003 ON THE ACTUAL AND 2004 ON THE FORECAST [420] UNDERTAKING NO. N.9.5: TO ADVISE WHETHER UNION GAS HAS A WRITTEN CREDIT AND COLLECTIONS POLICY; AND IF SO, ADVISE WHEN POLICY WAS INSTITUTED AND WHETHER IT HAS BEEN MODIFIED SINCE 1999 [474] UNDERTAKING NO. N.9.6: TO PROVIDE WHAT THE CALCULATIONS, SINCE 1999, HAVE BEEN ON AN ANNUAL BASIS FOR THE AMOUNT OF BAD DEBT OUT OF THE TOTAL BAD DEBT EXPRESSED AS A PERCENTAGE AND AS A WHOLE NUMBER ASSOCIATED WITH ABC SERVICE CUSTOMERS, BROKEN OUT INTO COMMODITY FOR ABC CUSTOMERS AND TRANSMISSION AND DISTRIBUTION CHARGES WITH RESPECT TO ABC CUSTOMERS [505] UNDERTAKING NO. N.9.7: TO ADVISE HOW MANY CREDIT COLLECTION FUNCTION ROLES THERE WERE IN 1999, AND WHETHER THERE HAVE BEEN ANY FURTHER ROLE REDUCTIONS SINCE THE YEAR 2000 [575] UNDERTAKING NO. N.9.8: TO PROVIDE THE SPLIT OF THE $9.5 MILLION FORECAST AMOUNT FOR INCENTIVES, THE SPLIT AMONGST THE FOUR EMPLOYEE GROUPS AS LISTED IN THE ATTACHMENT TO EXHIBIT J.3.11 [775] UNDERTAKING NO. N.9.9: TO PROVIDE BREAKDOWN OF TOTAL COSTS ASSOCIATED WITH AVIATION FOR 2001 TO 2003; AND FORECAST FOR 2004 [826] UNDERTAKING NO. N.9.10: TO RECONCILE THE WINTER CONSUMPTION NUMBER FROM M.4.1, PAGE 2, TO THE WINTER CONSUMPTION NUMBER THAT APPEARS IN ATTACHMENT 5 TO J.5.87, INCLUDING WHATEVER REASONS OR ASSUMPTIONS UNION WOULD HAVE MADE TO COME UP WITH THAT NUMBER [1100] UNDERTAKING NO. N.9.11: TO PROVIDE THE DERIVATION OF THE 89,300 FIGURE THAT'S REFERENCED IN EXHIBIT J.5.87, AND HOW THAT NUMBER WAS DERIVED IN THE CONTRACT BETWEEN UNION AND KITCHENER [1189] UNDERTAKING NO. N.9.12: TO PROVIDE THE AVERAGE WITHDRAWAL ON A DAILY BASIS FOR THE PAST TEN YEARS, BY TAKING THE TOTAL AMOUNT OF THROUGH-PUT AND DIVIDING BY 365; THEN YOU TAKE THE NUMBER OF DAYS IN APRIL WHICH THAT AVERAGE WAS EXCEEDING FOR WITHDRAWALS IN APRIL [1357] 14 --- Upon commencing at 9:45 a.m. 15 MR. SOMMERVILLE: Thank you, please be seated. 16 PRELIMINARY MATTERS: 17 MR. SOMMERVILLE: Are there any preliminary matters before we start in with the cross-examinations of this panel this morning? 18 MR. PENNY: I thought perhaps I'd address the issue -- I don't want to use up a lot of the Board's time on this and the parties should consult, but I thought I would address the issue of scheduling and the calendar, just at the outset. And then perhaps if anyone has a comment on it, perhaps they could let us have that at the coffee break and then we can come back to it later this morning or after the lunch break. 19 We appear to be about a day and a half behind where we thought we might be, and our intention is to start the gas supply panel this afternoon and to finish them Monday. If there is extra time Monday, we thought we would do a little rejigging of the schedule to use up the Monday, any remaining time on Monday by bringing Mr. Andrews to speak to the GDAR and ABC costs. 20 We have the preemptive date for DSM on Tuesday. At this point, I can't tell the Board whether this will occupy the whole day or not. I rather suspect not, given the narrow scope of the issues in dispute, and so I think at that point, a decision needs to be made about whether to put the day off back on the table. If we did that, then that would enable us to get more or less back on schedule. But in any event, our intention would probably be, if DSM did not take all of Tuesday, that we would try and start with the affiliate panel that day. 21 If the 22nd became a sitting day, we'd try and finish the affiliate panel on that day and then assuming that we were roughly back on schedule, proceed with panel 9 on the 23rd. 22 So that's our current thinking. And as I say, I don't know that we need to take up the Board's time discussing it, but if people have any observations about that if they could let us know what they are at the coffee break and then we can report back to the Board. 23 MR. SOMMERVILLE: One of the difficulties with what you are pea proposing, Mr. Penny, is that the 22nd, day off, is a Board meeting and that's kind of -- I can speak to the Chair about that but our normal practice now is that Board meetings will proceed and Board members will attend. 24 The 30th becomes a day that we can use. Now, unfortunately, that comes a little bit later in the process and I would be happier, certainly, if we could try to get back on track earlier rather than later. So I will address that with the chair but just a caution that our general rule, and I frankly don't expect there's going to be a departure from it, is that -- so the 22nd may not be available to come back on. 25 MR. PENNY: That's fair enough. 26 MR. SOMMERVILLE: Certainly the 30th is a date that we have available to us and circumstances may have changed by then. So that's just a cautionary note. 27 MR. PENNY: Yes, thank you. That's helpful. I think we were then going to proceed with the remainder of the cross-examinations on O&M, and I think it was Mr. Aiken that was going to go first. 28 MR. DINGWALL: Perhaps there is another preliminary matter. I'm not sure if Mr. Penny is able to at this point, but it might be something useful for the intervenors to have an estimated schedule of the time of delivery of the balance of the outstanding undertakings? 29 MR. PENNY: All I can tell you is that we're spending every spare moment working on them and the people who gave them are working on them. I'll try and get a more specific report, if I can, later today. 30 MR. SOMMERVILLE: Thank you, Mr. Penny. 31 Mr. Aiken. 32 MR. AIKEN: Thank you, Mr. Chairman. 33 UNION GAS LIMITED - PANEL 7; ELLIOTT, BRODIE LUMLEY 34 P.ELLIOTT; Previously Sworn. 35 W.BRODIE LUMLEY; Previously Sworn. 36 CROSS-EXAMINATION BY MR. AIKEN: 37 MR. AIKEN: Good morning, panel. 38 A couple of brief questions to start off with. Could you turn to Exhibit D.3, tab 3, schedule 1, page 1 of the yellow-page update. 39 MR. SOMMERVILLE: Which tab was that in D.3? 40 MR. AIKEN: Tab 3. 41 MS. ELLIOTT: We have that. 42 MR. AIKEN: Could you confirm for me that the only change in the O&M costs between this yellow page and the blue-page update is in the line 5 market management and that's for the DSM change? 43 MS. ELLIOTT: That's correct, yes. 44 MR. AIKEN: On that same schedule, but on page 2 of 6, line 17, sales and marketing, the 2004 budget is a million dollars less than the 2003 budget. Can you explain this reduction? Is it a true reduction or a shift of that expense to another category? 45 MS. BRODIE LUMLEY: I'd like to refer you to D.3, tab 3, schedule 1, page 5, updated, it was the blue evidence. 46 MR. AIKEN: Which page was that. 47 MS. BRODIE LUMLEY: D.3, tab 3, schedule 1, page 5. 48 MR. AIKEN: Okay, I have that. 49 MS. BRODIE LUMLEY: And the major variance as described on line 11 -- I'm sorry, on line 13. 50 MR. AIKEN: So this million dollar shift is then part of the management fee? 51 MS. BRODIE LUMLEY: That is correct. 52 MR. AIKEN: My next question is on D.1, tab 5, page 5 of the blue-page update. And specifically it's the paragraph that starts at line 14 and I'll just read it. It says: 53 "An update in Union's WACOG and updated revenue projections have resulted in an increase of 1.8 million in the budgeted bad debt expense for 2004, and an increase in company- used gas costs of 0.9 million." 54 Is this company-used gas the "fuel" category in line 9 of Exhibit J.7.22? 55 MS. BRODIE LUMLEY: Yes, it is. 56 MR. AIKEN: Thank you. Now, yesterday, and I believe it was you, Ms. Elliott, you indicated that if the bad-debt expense were updated to reflect the October WACOG, the reduction in the bad-debt expense would be approximately 1.1 million; is that correct? 57 MS. ELLIOTT: That's correct. 58 MR. AIKEN: What's the difference between that figure and the 1.8 million on line 15? 59 MS. ELLIOTT: I'm not sure I understand what you're asking. The 1.8 was the increase from the cost of gas that was included in the original budget to the July QRAM, increased it to 1.8 million. If we reflect the October QRAM, that would reduce the 1.8 by 1.1 million. 60 MR. AIKEN: Let me try and get this straight for the record. In the white-page evidence, what was the WACOG value used and from which QRAM was it from? 61 MS. BRODIE LUMLEY: I believe that it was 237.990 for 10(3) m3, which was the WACOG effective July 1st, 2002, approved in EB-2002-0357. 62 MR. AIKEN: Okay. And then the WACOG in the blue-page update was from the July 2003 QRAM? 63 MS. ELLIOTT: That's correct. 64 MR. AIKEN: And the WACOG was 310.870. I'm taking that number from Exhibit D.1, tab 4, I believe it's page 3 of the blue-page update. 65 MS. ELLIOTT: Yes, that's correct. 66 MR. AIKEN: And then the October QRAM, what is the approved WACOG that came out of that? 67 MS. ELLIOTT: I don't think we actually have that information with us here. 68 MR. AIKEN: Would you undertake to provide that number? 69 MS. ELLIOTT: Yes. 70 MR. MORAN: Mr. Chair, that would become Undertaking N.9.1. 71 MS. ELLIOTT: Sorry, we do have it. It's $277.023 -- 277.023. 72 MR. AIKEN: Thank you. 73 MR. MORAN: We'll cancel that undertaking. 74 MR. AIKEN: What would be the impact on the company used gas cost, of updating it to reflect the October WACOG, the 277.023 you just gave me. 75 MS. ELLIOTT: I haven't done that calculation. It would be a decrease, but I don't have the calculation with me. 76 MR. AIKEN: Would you undertake to provide that change? 77 MS. BRODIE LUMLEY: Yes, we would. 78 MR. MORAN: Yes. That would be Undertaking N.9.1. 79 UNDERTAKING NO. N.9.1: TO PROVIDE THE UPDATED IMPACT ON THE COMPANY USED GAS COST, REFLECTING THE OCTOBER WACOG OF 277.023; TO PROVIDE THE IMPACT ON THE COMPRESSOR FUEL COST, REFLECTING THE OCTOBER QRAM 80 MR. AIKEN: Perhaps, as a part of that undertaking as well, I'm looking for the impact on the compressor fuel cost, again reflecting the October QRAM. 81 MS. ELLIOTT: Okay. 82 MR. SOMMERVILLE: Just so that the record is clear, the original undertaking has been overtaken by events and has been replaced with this latest undertaking. 83 MR. PENNY: Right. 84 MR. AIKEN: On the bridge-year forecast, and this is Exhibit D.4, tab 3, schedule 1, blue-page update, and I will be comparing that to the original white-page evidence, there are a number of categories in the blue page that are unchanged; for example, salaries and wages, benefits, employee training, transportation, utility costs, and then there's about half a dozen more. 85 Now, my understanding, the blue-page update reflects five months of actuals; is that correct? 86 MS. ELLIOTT: Yes, that's correct. 87 MR. AIKEN: But there was no change in the forecast of the annual costs for a number of these categories. Does that mean that the five months are tracking the forecast? 88 MS. ELLIOTT: Yes. 89 MR. AIKEN: Okay. I'm back to Exhibit J.7.22 now, the CAC interrogatory response. Contract services, and we talked about this a little bit yesterday, there's a $9 million increase between the 2003 blue-page update forecast and the 2004 blue-page update forecast. That was detailed or that was broken down in your evidence, and I don't think you need to turn this up, but it's basically $2.2 million pipeline integrity, 3.8 million rate rider, 2 million for customer growth, and a million dollars for other categories; is that correct? 90 MS. ELLIOTT: Yes, that's correct. 91 MR. AIKEN: Now, I want to focus, first of all, on the $2 million increase for customer growth. Is this the same $2 million that's shown in table 1 of D.1, tab 5? And this would be the white page, I guess. 92 MS. BRODIE LUMLEY: Is that page 2? 93 MR. AIKEN: On page 3, actually, the white page. Line 3 of table 1, it says "Cost of New Customers" 2.0. 94 MS. BRODIE LUMLEY: It is a component of that cost, correct. 95 MR. AIKEN: And this number, as I understand it from the bottom of page 3 and top of page 4, is based on $100 per customer being an annual variable O&M cost. 96 MS. BRODIE LUMLEY: That is correct. 97 MR. AIKEN: Then turning to the blue-page update, D.1, tab 5, page 4, and in this case it's table 2 for 2004, at line 6 we see an additional $700,000. Am I correct in assuming that's for, roughly, 7,000 additional customers that's added as part of the blue-page update? 98 MS. BRODIE LUMLEY: Yes, that is correct. 99 MR. AIKEN: And I guess this is actually summarized at line 9 on page 5, the 7,000 at 15, the 20,000 at $100 rival O&M cost, so in total we have 2.7 million for new customers as in the test year; is that correct? 100 MS. BRODIE LUMLEY: That is correct. 101 MR. AIKEN: I wonder now if you could turn up a VECC interrogatory response, it's J.34.30. Part B of that answer talks about how the annual customer forecast is used to derive the monthly increase in customers and basically applies a historic allocation factor to the December year-end forecast. Do you see that? 102 MS. BRODIE LUMLEY: Yes, we do. 103 MR. AIKEN: The last line of part B refers to Exhibit J.34.33 for the customer forecast by month. Do you have a copy of that customer forecast by month in J.34.33, part F? 104 MS. ELLIOTT: No, we don't. The response says it was an electronic file. 105 MR. AIKEN: Yes, that's actually what I have, is the electronic file. 106 MS. ELLIOTT: No, we don't have that. 107 MR. AIKEN: Would you take it subject to check that the customer addition forecast for the test year 2004, and I'll read this on to the record and it's only for the M2 residential class. And again, this is based on the 20,000 customer additions not the 27,000, this interrogatory was not updated to show the 27,000. But with 20,000 customer additions, the forecast for the M2 category, M2 residential is roughly 826,000 in December 2003; 828,000 January of 2004, rising to 830,000, 831-, 831-, 831-, I'm now at June, it's still at 831-, July is 831-, August is 828-, September is 834-, October is 839-, November is 843-, and December is 846,000. 108 Now, again, subject to check, but given that profile, has Union taken into account the fact that these new customers were on significantly less than a full year in the test year when you've calculated the $100 per O&M cost per customer? 109 MS. BRODIE LUMLEY: The 20,000 customers that was used was an average number of customers that are attached in a year. And the $100 variable cost that was used is a conservative estimate of the variable costs of attaching a customer to the system. So by using a conservative cost of attaching the customer to the system, we take into account the fact that the customers will arrive on the system throughout the period of a year. 110 MR. AIKEN: Can you state that answer again, because I'm confused as to how the $100 -- even if it may be conservative, is applied to the total number of customer additions? 111 MS. BRODIE LUMLEY: The total number, the average that's added to the system over a year has been 20,000 customers. The variable costs of adding a customer are greater than $100, but we've used $100 as a conservative estimate of adding a customer to the system to reflect the fact that they'll not all come on at the beginning of the year or all on at the end of the year, but they'll come into the system throughout the period. 112 MR. AIKEN: And what assumption have you used as to how long those customer additions are on the system the first year they attach? 113 MS. BRODIE LUMLEY: There's been no assumption made with respect to that. They would be added to the system throughout the year. 114 MR. AIKEN: So are you saying that the actual O&M cost per customer, for example, could be $200 for a customer who attached at the beginning of the year, and this $100 is really an estimate if, on average, the customer was on the system for half a year? 115 MS. BRODIE LUMLEY: No, it wouldn't be as high as 200. I can't give you an exact amount, but it would be something greater than 100 if they were attached to the system for a full year. If they were attached to the system for the very end of the year, it would be something less than $100. 116 MR. AIKEN: Maybe I could have you turn back then to Exhibit D.1, tab 5, page 4 of the original evidence. 117 MR. SOMMERVILLE: Sorry, Mr. Aiken, I was making a note, I didn't get that reference. 118 MR. AIKEN: D.1, tab 5, page 4 of the white page and the top paragraph there says the cost of 100 per customer represents the variable O&M costs incurred when customers are attached to Union's system. Examples of variable costs included are costs for bill inserts, mailing bills, reading additional meters, maintaining additional distribution services and meter sets. 119 MS. BRODIE LUMLEY: That's correct. 120 MR. AIKEN: The problem I'm having is that the customer additions, if you do the weighted average you come up with an average of somewhat less than 40 percent of the year that the customers are on. 121 MS. ELLIOTT: But you're ignoring, Mr. Aiken, the customers that were attached in 2003, for example, so in August of 2004, there will be approximately 20,000 more customers than in the previous August. So we also have the costs for the remainder of this year's customers to recover next year. So we add, on average -- in this case 27,000 customers next year. We also have the customers we attached this year to -- we have those costs as well next year. So the average increase over the course of the year isn't the only factor in determining the customer-attachment costs. 122 MR. AIKEN: Let me think about this for a moment. 123 We start with the 2002 actual O&M. You've added $2 million for 20,000 customer additions in 2003, some of which won't be on for that full year. 124 MS. ELLIOTT: But some of those customers will have been added earlier in the previous year. So in 2002, we have the costs for the customers that, depending on the month they're added, we'll have paid for the four months or the six months or the ten months, but the following year we'll have a full cost for the customer attachments for this year plus the cost for the customers in the new year when they're added. So on average, we're adding 20,000 customers each month over the previous month and have the incremental costs to service those customers. 125 MR. AIKEN: So these customer-addition costs that you're referring to are not just the customer additions in the current year they are also some customer additions in the previous year? 126 MS. ELLIOTT: Yes, the costs for the full-year service to the customers that were added in the previous year. 127 MR. AIKEN: Okay. Then, if we look at only the $700,000 for the incremental costs for the 7,000 customers who are specific to the test year -- 128 MS. ELLIOTT: I'm not sure whether those customers are specific to the test year or whether they are, in part, also customers that we expect to add this year. 129 MR. AIKEN: Could you undertake then to reconcile the customer-addition forecast for Mr. Gardiner with your customer forecast used for O&M purposes? 130 MS. BRODIE LUMLEY: Yes, we will. 131 MR. AIKEN: Thank you. 132 MR. MORAN: Mr. Chair, that will be Undertaking N.9.2. 133 MR. SOMMERVILLE: Thank you. 134 UNDERTAKING NO. N.9.2: TO RECONCILE THE CUSTOMER-ADDITION FORECAST FOR MR. GARDINER WITH THE CUSTOMER FORECAST USED FOR O&M PURPOSES 135 MR. AIKEN: Turning to a new topic, the rate rider, and the evidence for the rate rider is found in Exhibit D.1, 10, and I don't know whether it's necessary for to you turn it up or not, but in the updated evidence of -- in page 3 of that updated evidence. The total O&M cost is stated as 3.8 million, and it's broken down into four components. And if I've added these numbers correctly, the payments to the vendor represent approximately 3.35 million and the costs that are listed as Union costs are approximately 430,000. Are these Union costs internal costs to Union? 136 MS. ELLIOTT: I think you're going to have to direct those questions to Mr. Shervill when he's up on panel 7. This is his evidence. 137 MR. AIKEN: Perhaps this is the wrong panel, but is Union requesting a variance account for the rate-rider cost? 138 MS. ELLIOTT: No, we are not. 139 MR. AIKEN: Why not? Is that something Mr. Shervill should be addressing? 140 MS. ELLIOTT: It's a cost that's included in our forecast for the 2004 test year. We're, at this point, forecasting those costs and not requesting a deferral account to deal with any variance, because it's just another cost in our operating-cost forecast. 141 MR. AIKEN: Is that different than your proposal for a variance account for GDAR during the test year, GDAR costs? 142 MS. ELLIOTT: I think you'll have to ask Mr. Andrews the questions on the GDAR costs. 143 MR. AIKEN: Okay. The question on the bad-debt expense, I've come back to the bad debt, the forecast that's included, which I believe is $13.3 million, does that include any bad debt related to the ABC service? 144 MS. ELLIOTT: Yes, it does. 145 MR. AIKEN: Do you know how much of the bad debt would be related to the provision of that service? 146 MS. ELLIOTT: Specifically, no. I mean, the ABC service is also a part of the revenue forecast and the calculation that goes to produce the bad-debt expense. I don't have the specific breakdown of those numbers. 147 MR. AIKEN: Was there any change to the bad-debt forecast related to the proposal of adding the exit fee to the ABC service? 148 MS. ELLIOTT: Not that I'm aware of, no. 149 MR. AIKEN: On Exhibit J.7.22, line 27, it's labelled "Amortization." Other than the regulatory costs, what else is included in that line? 150 MS. BRODIE LUMLEY: Excuse me, are you referring to a specific year or just ... 151 MR. AIKEN: Yes, the test year. There is a small difference. The J.7.22 has 4.498 million and the attachment to J.18.127 shows 4.425 million. It's roughly a $73,000 difference. 152 MS. BRODIE LUMLEY: I don't have that information with me. 153 MR. AIKEN: If we stick with J.18.127 for a moment, again, on the attachment, I'm looking at line 17, which is RP-2002-0130. And I believe -- yes, on page 2 of that response, it describes that proceeding as: 154 "This proceeding set rates under PBR for 2003. The costs were amortized over two years, beginning in $2003." 155 My question which is specific to that cost which, in the attachment, is shown as a little over a million, why is only $61,000 amortized in 2003 with the remaining 964,000 assigned to the test year? 156 MS. ELLIOTT: I'm not sure I have the answer to that question. I'm just reading part B, which has a note in column B that the balance in that account was not amortized in 2003, that it didn't get amortized until 2004. 157 MR. AIKEN: On page 3 of the response, line number 4 of the table, in the middle, under the "Amortization" column it says, "Maximum amortization to bring hearing costs to budgeted level." 158 What does that mean? I'm assuming this applies to the 2003 amortization. 159 MS. ELLIOTT: It looks like the amortization in 2003 was capped at the level of 61. 160 MR. AIKEN: Would there be any specific reasons for that capping? 161 MS. ELLIOTT: I'm not sure what they -- certainly don't know what they are at this point. 162 MR. AIKEN: Would that be something that you could undertake to try and find out? 163 MS. ELLIOTT: Yes. 164 MR. MORAN: Mr. Chair, I wonder if Mr. Aiken could restate the undertaking. 165 MR. AIKEN: To provide, on a best-efforts basis, the reason for capping the amortization of the RP-2002-0130 costs at 61,000 in fiscal 2003. 166 MR. MORAN: That will be Undertaking N.9.3. 167 UNDERTAKING NO. N.9.3: TO PROVIDE, ON A BEST-EFFORTS BASIS, THE REASON FOR CAPPING THE AMORTIZATION OF THE RP-2002-0130 COSTS AT 61,000 IN FISCAL 2003, AND THE REASON WHY THE 250,000 SHOWN FOR REGULATORY COSTS IS NOT BEING AMORTIZED ALONG WITH THE REST OF THE REGULATORY COSTS FOR 2004 168 MR. AIKEN: On line 6 of J.7.22, we have the consulting costs, and I believe this was looked at a little bit yesterday. But essentially there's a $1 million increase in the 2004 forecast and that million dollar increase is shown at D.3, tab 3, schedule 2, page 4. And again, you probably don't need to look that up, but part of that variance or part of that increase is $250,000 for regulatory consultants, and I believe it also says cost of service year. 169 I have two questions on that. First of all, I just want to confirm that this $250,000 for regulatory consultants has not been double-counted as a cost for this regulatory proceeding, that's part of that amortization that we were just talking about a few minutes ago? 170 MS. ELLIOTT: No, this would be an incremental cost next year. 171 MR. AIKEN: Okay. Then the second question, why is this $250,000, which seems specific for the test year, for regulatory costs, why isn't that amortized the same way that the regulatory costs for this proceeding are amortized? 172 MS. ELLIOTT: I think I probably need to add that as part of the undertaking. I'm not sure that I can speak to why these costs are separate and what's included in the hearing costs, but I take it these costs would be costs for implementation of this decision, separate from a process of getting the decision. But I'll confirm that. 173 MR. MORAN: Mr. Chair, just for the purpose of the record, I wonder if we could get a description of the addition to the undertaking in 9.3? 174 MR. AIKEN: From me? 175 MR. PENNY: Well, I think it's why the 250,000 shown for regulatory costs is not being amortized along with the rest of the regulatory costs for 2004. 176 MR. AIKEN: Thank you, Mr. Penny. 177 MR. AIKEN: Finally, two questions or one question with two parts: Exhibit D.1, tab 5, page 3 of the original evidence, again this is table 1. Line 2 indicates an increase due to inflation at one and a half percent, and it is 5 million. I'm assuming that 5 million is one and a half percent of the number above the 334.6 which is the number coming out of 2003. 178 MS. BRODIE LUMLEY: Yes, it is. 179 MR. AIKEN: And then on table 2 on page 5, a similar question, the 2 percent inflation there is applied to the 330.8 which is the actual gross O&M from 2002? 180 MS. BRODIE LUMLEY: Yes, it is. 181 MR. AIKEN: And that gross O&M is net of compressor fuel? 182 MS. BRODIE LUMLEY: Yes, it is. 183 MR. AIKEN: Thank you. 184 Thank you, panel. Thank you, Mr. Chairman, those are my questions. 185 MR. SOMMERVILLE: Mr. Aiken. 186 Mr. Dingwall, are you next in order? 187 MR. DINGWALL: I thought that I was after Ms. Singh, but I'm at the Board's disposal. 188 MR. SOMMERVILLE: Ms. Singh. 189 MS. SINGH: Thank you, Mr. Chair. 190 CROSS-EXAMINATION BY MS. SINGH: 191 MS. SINGH: Good morning, panel. My name is Mimi Singh and I'm here representing the Canadian Manufacturers & Exporters. 192 Since 2004 is a cost-of-service year, could you advise, panel, what, in your view, rebasing means; in other words, to what year should the rebasing be referenced when Union is coming, now, out of a PBR period? 193 MS. ELLIOTT: This rebasing is the term that has been adopted coming out of PBR, but it quite simply is resetting rates using the 2004 forecast, so looking at the revenues and the costs as projected for 2004, we've determined what our revenue deficiency is, so current rates are not sufficient to recover the costs or the revenue reductions that will be incurred in 2004 and rates need to be reset using that forecast. So it's against current rates. 194 MS. SINGH: So in your view, then, the base year should not be 1999 when you were in a cost-of-service year to look at the appropriate rates, again, just to have an appropriate comparison for 2004. 195 MS. ELLIOTT: You can compare 2004 against 1999, but it doesn't tell you what the change in rates should be. You need to look at 2004 revenues and costs using current rates, so 2003 rates. 196 MS. SINGH: So 2003, then, in your view, a PBR year, should be the year that the Board should look at when it rebases its rates and adjusts for such things like employee wages and salaries and so on. 197 MS. ELLIOTT: I think 2004 is the year that the Board needs to look at. It's that forecast that is driving the rate increase. So the test year is the year that's determining what the revenue deficiency will be and what the appropriate rate levels should be for next year. Performance in 2003 isn't necessarily going to be repeated in 2004. Revenues will be lower and costs will be higher, and it's those numbers that are being examined to determine what the new rates should be. 198 The comparators are really useful in terms of what's changing between periods, but it's not the variances that are driving rates, it's the absolute forecasts in 2004. 199 MS. SINGH: I'm just a little confused as to how the Board will take into account the PBR variances between 2001, 2002, 2003, in terms of setting the appropriate numbers for 2004, as opposed to going back to 1999, which was actually a cost-of-service year. 200 MR. PENNY: Is there a question in that? 201 MS. SINGH: Could you comment on that? 202 MR. PENNY: You told us you were confused about something. 203 MS. ELLIOTT: It's the 2004 numbers that are being tested. The history can be looked at in terms of those forecasts not that I'm advocating that history is an indicator of what the future will look like, but it is certainly a piece of information that is typically used in reviewing the forecast information. 204 MS. SINGH: Okay. Now, I'm wondering if you can turn up Exhibit J.7.22, and I also passed out a document this morning that was prepared by the Canadian Manufacturers, and it basically extracts -- 205 MS. ELLIOTT: We haven't seen that. 206 MR. PENNY: Who did you pass it out to? 207 MS. SINGH: To everyone. 208 MR. PENNY: Well, everyone didn't include us. 209 MS. SINGH: Here are your copies, Mr. Penny. 210 MR. MORAN: Mr. Chair, this will become Exhibit M. -- 211 MR. PENNY: Well, just a minute, Mr. Chairman, the witnesses are seeing this for the first time and as you know, the Board procedural rules contemplate material being provided to witnesses 24 hours in advance. So at this point, it seems to me that the basis for marking this as an exhibit has not been provided. Perhaps Ms. Singh should make submissions as to why we should receive it, since it's not in compliance with the Board's procedural rules. 212 MR. SOMMERVILLE: Thank you, Mr. Penny. 213 Ms. Singh. 214 MS. SINGH: The document that you have in front of you is extracts from J -- from your evidence, from J.7.22, and the extracts are directly from lines 1, 2, 18, 34, 35, 36, 37, 40, and 41. So those line items have been extracted directly from J.7.22 and have been put into this table to show the changes, the percentage changes, from year to year with respect to those line items. 215 MR. PENNY: Well ... 216 MS. SINGH: And I wanted to walk the panel, either -- you know, through this document and ask the panel, subject to check, that these are the appropriate changes with respect to the different line items there. 217 MR. SOMMERVILLE: Do I take it, Ms. Singh, just so that I understand what it is that we're talking about, you have taken the material from the lines that you've listed -- 218 MS. SINGH: Yes. 219 MR. SOMMERVILLE: -- from J.7.22, and you have performed an arithmetic analysis, I suppose, that is, the percent change line on this document; and that that percent change calculation, perhaps you could tell us exactly how that was done, just so that I understand what this document is. 220 MS. SINGH: Well, that's correct, Mr. Chairman. You'll notice, like, for example, if we take line 1 with respect to salaries and wages, that line is -- the top line reproduces exactly the top line from J.7.22. The line underneath shows the calculated change year by year with respect to that item. So the only thing that's different, then, is that it's not a complete reproduction, it's certain line items, the ones that I mentioned; and secondly, the second line showing the percentage changes from year to year, which I think is a very valuable tool for the Board to have. 221 MR. SOMMERVILLE: Mr. Penny. 222 MR. PENNY: Well, the concern -- I mean, the reason for the procedural rule is not only to avoid surprise but also to make more efficient time of -- efficient use, excuse me, of hearing time. Assuming what Ms. Singh says is correct, I suppose there's two exercises that need to be conducted; one is to confirm that the numbers are accurately transposed from one to the other, and the other is to determine whether the mathematical percentage calculations, year over year, are correct. And it does not, seems to me, appear to be an efficient use of our time, for the panel to sit here with their calculators confirming these numbers. Nor do I think it's -- but on the other hand, in my submission, it's not fair to present a table with dozens of numbers and dozens of calculations and simply ask the witnesses to take it, subject to check. 223 Perhaps the better way to deal with this would be to provide -- for the company to provide an undertaking to review these numbers and advise whether we agree with the transposition or the percentage calculations. But I don't -- in my submission, it's not an efficient use of the panel's time to be trying to confirm the accuracy of these numbers while we're sitting here in the hearing. If we had been provided with this the day before, we could have done that and it would have been much more efficient. 224 MR. SOMMERVILLE: I think that's right, Mr. Penny. What I would anticipate -- I'm inclined, simply because of the essentially arithmetic nature of the analytical content of this document, I'm inclined to receive it on that basis, subject to the company's opportunity to take the document and provide whatever analysis it wants to in terms of the accuracy and appropriateness of the arithmetic extrapolation. 225 I do think it is extremely important that we observe the 24-hour rule, and that's just a matter of simple fairness across the board. Let me say that if this document contained one word of something that was more than an arithmetic calculation related to these numbers that I'm assuming, and I assume that for the purposes of your questions, you're going to be asking this panel to assume that they are accurate, but if this document contained one word of analytical material beyond that simple extrapolation, I would be inclined not to receive the document and it would be lost to me. 226 So on the basis that it is a simple arithmetic calculation, and on the basis that you will be asking the panel to make that assumption which they will independently confirm, I'll let the document come in. 227 MS. SINGH: Well, thank you very much, Mr. Chairman. I really truly appreciate your effort to accept this document in evidence, and it is my submission that there is nothing other than that pure arithmetic calculation that is different from J.7.22. 228 MR. SOMMERVILLE: Thank you, Ms. Singh. 229 Can we have a number for this? 230 MR. MORAN: Yes, Mr. Chair. That would be M.9.1, table prepared by CME. 231 EXHIBIT NO. M.9.1: TABLE PREPARED BY CME 232 MR. SOMMERVILLE: Please proceed. 233 MS. SINGH: Yes, panel, I wonder if we can look at line 1, which is salaries and wages, and I'm wondering if you can, looking across that line, advise if those numbers accord with the document J.7.22. 234 MR. SOMMERVILLE: Ms. Singh, I'm not going to ask the panel to do that. I think the panel is going to make that assessment independently. 235 For the purposes of your questions, we're going to assume, as a theoretical proposition, that they are a direct extraction. 236 MS. SINGH: Thank you. Thank you, Mr. Chairman. 237 And I'm wondering if, once again, you can go back to line number 1, the salaries and wages, and if you look under column number 9, you'll see that Union is proposing, in terms of its blue-page update, 148,909. Can you advise what the percentage change is from -- under column N from 1999 Board-approved? 238 MS. ELLIOTT: Excuse me, you want us to calculate the percentage change -- 239 MR. SOMMERVILLE: Ms. Singh, once again, I have to say that I don't think we should be asking the panel to verify these calculations or these figures. I presume that you are representing them to be a theoretical assumption and their accuracy can be assessed later. 240 So I guess the proper question is that you've represented a certain percentage here and I think your questions should flow from that; not be asking the witnesses to accept your proposition. 241 MS. SINGH: Okay. Thank you. 242 If you could accept my calculation, panel, you will see that the percentage change from 1999, the approved rate for salaries and wages from 2004, your blue-page update, is .04 percent -- sorry, negative 0.4 percent, and you'll see beside that, that the change from 1999 actuals to your test year of 2004 is negative 7.2 percent. Do you see that? 243 MS. ELLIOTT: Yes. 244 MS. SINGH: And we have heard evidence that that is despite the fact that there was a reduction of approximately 400 employees in your work force; is that correct? 245 MS. ELLIOTT: The forecast in 2004, the 148,909,000, is a forecast of the salary and wages for 2004 compared to 1999. That does reflect the reduction of 402 roles. It also reflects the increase in salary and wages during the same period. 246 MS. SINGH: Thank you. And moving down to line 2, benefits -- 247 MR. MORAN: Sorry, Mr. Chair, I wonder if through you I could ask Ms. Singh to just sit back a little bit from the microphone, she's engaging the automatic volume control and it's bouncing around a bit. 248 MR. SOMMERVILLE: We're offending Mr. Moran's auditory sensibilities. 249 MR. MORAN: It's actually the software that is being offended that controls the volume. 250 MR. SOMMERVILLE: The microphones are actually quite good, if you could sit back, you don't actually have to speak right into them. 251 MS. SINGH: Thank you. And if you can now turn your attention to line 2, benefits, and you see under column N again that the amount that you're proposing is 52,354; is that correct? 252 MS. ELLIOTT: Yes. 253 MS. SINGH: And you'll see that the change there from Board-approved, the 1999 to 2004 is a 76.6 percent change. Assuming that my arithmetic is correct, can you comment on the size, the magnitude of this change, from 1999? 254 MS. ELLIOTT: I think the subject of the benefits costs in 2004 was the subject of the HR panel that preceded us. The most significant component of that increase is the increasing cost of the company's pension expense, as well as the change in accounting for pensions and post-employment benefits. 255 MS. SINGH: Okay. And the change from the 1999 actuals, you'll see the next column over, is 115.4 percent, assuming my calculations are correct. 256 Moving now to the next line, that's bad debt, which appears at line 18 of J.7.22, again under column N, you'll see that Union is seeking 13,300 and my calculations reflect that that percentage change from 1999 approved, assuming that's correct, is 358.3 percent. So the bad-debt change is 358.3 percent, and the change from actuals is a 358.6 percent change from 1999, with an average change, according to our calculations of 71.77 percent over the course of those years from 1999 to 2004. Would you agree with me that that is a significant increase? 257 MS. ELLIOTT: I understand the calculation. The increase in bad-debt expense -- bad-debt expense isn't a function of what it was in 1999, it's a function of what the revenues and the company's experience is. So if you look across that line, you can see the periods where our actual experience is much higher than it was when we forecast the costs in 1999, and that experience level and the relationship of bad debt to revenues is what's reflected in the 2004 forecast. 258 MS. SINGH: And now moving down to line number 4, management fee, again, looking at column N, Union is seeking 28,649 and the percentage change from 1999 approved to 2004, according to our calculations, is a 932 percent percentage change from 1999. 259 MS. ELLIOTT: I see that calculation, yes. Again, the management fee we are forecasting in 2004 is a reflection of the organization changes and the conditions in 2004, which are not the same as they were in 1999. The restructuring and reorganization is contributing to the increase in the management fee, and that will be the subject of the panel next week here to speak to affiliate transactions. 260 MS. SINGH: Can I just ask you with respect to the management fees: Is there a competitive bidding process, as far as you know, that's employed to determine the market value of those services? 261 MR. PENNY: Well, Mr. Chairman, that is clearly the subject of evidence that's going to be given by Mr. Birmingham and Mr. Laforet who are the affiliate transaction panel. 262 MS. SINGH: I was just asking this panel for their evidence, Mr. Penny. I'm happy to also ask the question of the next panel. 263 MR. PENNY: As I understand it, Mr. Chairman, the way this process works, when witnesses who are responsible for finance come to speak to O&M, that those are the questions they respond to, and when the witnesses come to speak to other issues like affiliate transactions, which is not Ms. Elliott's area of responsibility, that those questions are put to them. 264 MR. SOMMERVILLE: I think Mr. Penny's point is fair. The hearing is organized in that fashion. Now, if it creates an important dysfunction somewhere along the line, we would certainly address that, but I think you will have full opportunity to explore that subject matter with that panel, and if you don't feel you've had that opportunity, you can raise it at that time. 265 MS. SINGH: Thank you, Mr. Chairman. 266 You'll see the next line is the indirect capitalization with the line 34 from J.7.22, and again, looking at the column N, I see that the number there is a negative 38415. 267 MS. ELLIOTT: Yes. 268 MS. SINGH: And the percentage change in the next column according to my calculations is a negative 7.6 percent. Do you have any comment with respect to -- I don't believe you gave much evidence yesterday with respect to that indirect capitalization change, do you have any comment with respect to that number, why that is a negative number? 269 MS. ELLIOTT: Well, again, the change in our forecast for 2004 -- sorry, our forecast for 2004 reflects the driver analysis that we did in preparing the forecast and there are changes in the drivers between what we're using in 2003 and what we're using in 2004, which would assume -- also be different than they were in 1999. The number in the forecast in 2004 is a function of the conditions and circumstances that we're forecasting for next year. 270 MS. SINGH: Okay. And the next line, direct capitalization, which is line 35 from Exhibit J.7.22, and you'll see under the column N that Union is seeking a negative 42,858, and that represents a negative 40.4 percent change from the Board-approved amount in 1999 and a negative 53.8 percent change, according to our calculations, from the actuals in 1999, which is the next column over. 271 MS. ELLIOTT: Yes, again the 2004 is a function of the level of capital and the level of activity which is forecast for 2004, where there is lower capital activity driving that reduction. 272 MS. SINGH: I'm going to go back to that after we get through this -- after we get through this chart. The next line item is the line item 36 on J.7.22 the total net O&M expense and I see that we have a figure of 362,629 for the test year; is that correct? 273 And according to our calculations, that represents a 40.2 percent change from the 1999 Board-approved year and the percentage change from the '99 actuals is a 37.0 percent change. 274 The next line, the total O&M net of compressor fuel -- 275 MR. PENNY: Sorry, Mr. Chairman, I'm not sure where we are in this process, but Ms. Singh is not here to give evidence. If she has a question about this, perhaps she could put her question but with great respect, it's not appropriate, in my submission, for her simply to be reading from this document, particularly given the ruling that you've made on it. 276 MS. SINGH: I'll try to be quick, Mr. Penny. I think I have about a half an hour allotted to me and I do intend to stay within my time frame. 277 MR. SOMMERVILLE: Ms. Singh, we're not running a race here. But I think Mr. Penny's point is well taken. I understand you want to put these figures to the witnesses, but you have to do it in the form of a question so that it elicits a response from the witnesses. 278 MS. SINGH: Well, I can ask the witness, then: Subject to check, would you agree with me that the percentage change in terms of the net O&M expense from 1999 is a 40.2 percent change, according to my calculation? 279 MR. PENNY: Well, Mr. Chairman, that's precisely the issue that has already been ruled, and we've decided that we are not going to use the witness's time and the Board's time to do that. If Ms. Singh wants to ask them to comment on those changes, I think that's fair game, given your ruling; but otherwise, you've already dealt with that issue. 280 MS. SINGH: Yes. Do you have any comment with respect to the change, that 40.2 percent change from 1999 and the net? 281 MS. ELLIOTT: I guess my comments would be in relationship to the actual level of expense forecast in 2004, and as our evidence indicates, we have a number of significant items that are increasing fairly significantly. 282 As you pointed out, the benefits line, those are all contributing to the forecast level of O&M expense in 2004 and that's the subject of the evidence filed. Particularly, if you look at Exhibit D.3, tab 3, it will contain explanations of the variances between 2003 and 2004. It also lays out the percentage changes between those two years and describes, in detail, the reasons for those variances. 283 MS. SINGH: Yes. And certainly in terms of Exhibit M.9.1, we've also tried to reproduce the changes from year to year from 2003 to 2004, et cetera, so we do see the difference between the PBR period and then going back to 1999. 284 I'm just, you know, struck by the percentage changes, panel. If we look at the next line, there's 100 percent percentage change in terms of total O&M net of compressor fuel, which is line 37 from J.7.22. Again, can you comment on that 100 percent change? 285 MS. ELLIOTT: I'm not sure that I can. It doesn't make any sense. 286 MS. SINGH: Sorry, it's a negative 100 percent change. 287 MS. ELLIOTT: You're missing some numbers in some cells to do that calculation. 288 MS. SINGH: Just now moving away from the chart, panel, what is Union's current estimate of its revenue deficiency for O&M? 289 MS. ELLIOTT: Sorry, a revenue deficiency is the difference between total revenues for the forecast period and total costs, and our estimate for 2004 for those delivery-related components is $104 million. 290 MS. SINGH: 104? 291 MS. ELLIOTT: Yes. 292 MS. SINGH: I'm wondering if you can look at Exhibit N.6.11. 293 MS. ELLIOTT: N or M? 294 MS. SINGH: N. That's the undertaking of Mr. Bodnar to Mr. Thompson asking that you reconcile the FTE and headcount numbers contained in Exhibit J.17.37 and Exhibit J.17.1. 295 MS. ELLIOTT: We have that. 296 MS. SINGH: Could you explain why Union's salary and wages remained constant from 2000 to 2003 and are shown to have actually declined in the 2003 bridge year but they increase in 2004, which is the line -- the first line in the exhibit. 297 MS. BRODIE LUMLEY: I would like to refer you to Exhibit D.3, tab 3, schedule 2, page 3, the updated blue-page evidence. 298 MR. PENNY: State that again. 299 MS. BRODIE LUMLEY: D.3, tab 3, schedule 2, page 3 of the updated evidence. 300 MS. SINGH: Yes, I have that. 301 MS. BRODIE LUMLEY: Lines 4, 5, and 6 show the variance explanation for salary and wages. There were role additions and there are costs associated with that. There are salary increases planned in the year and there are costs associated with that. There's also some role reductions. The net result is a variance of $5 million. 302 MS. SINGH: And am I correct that Union is using a 4 percent salary increase and salary assumption to estimate its 2004 salary and wages? 303 MS. BRODIE LUMLEY: It is approximately that. 304 MS. SINGH: Thank you. What is Union's estimate for the 2004 consumer price index, the inflation index? 305 MS. BRODIE LUMLEY: On D.1, tab 5, page 7 of 10, Union's -- the 2004 CPI per Stats Canada is 1.8 percent. 306 MS. SINGH: So it's 1.8? So what evidence is there that the salaries will increase by 4 percent in 2004? 307 MR. PENNY: Well, Mr. Chairman, I'm happy to have the witnesses answer the question, but I would point out that we've had the people directly responsible for this area, the human resources people here for two days and there was ample opportunity to have asked them this question. 308 MS. SINGH: But this is part of this panel's evidence, Mr. Penny. They just referred me to an exhibit where they're setting out the amount. 309 MR. SOMMERVILLE: You may proceed, Ms. Singh. 310 MS. ELLIOTT: The details behind the compensation for the company's employees was the subject, or should have been the subject of the panel, the HR panel. But, in fact, as I indicated yesterday, the average salary or the average compensation, it doesn't -- isn't limited to an increase in inflation. We use a market comparator to determine what the percentage increase should be. 311 MS. SINGH: And that's to attract employees? 312 MS. ELLIOTT: And retain existing employees. 313 MS. SINGH: Retain and attract employees, okay. And was the evidence that a 4 percent increase would be the amount that would be necessary to attract and retain those employees; is that the evidence that Union received? 314 MS. ELLIOTT: The information that we get comes from our HR group and that based on advice that they're receiving from outside consultants, yes. 315 MS. SINGH: With respect to the pension contributions, can you explain, or what would have been the benefits paid in the years 2000, 2001, 2002, and 2003 if Union had not used the CICA 3461 and the 10 percent corridor for purposes of pension smoothing? 316 MS. ELLIOTT: I don't have the answer to that question. Again, the previous panel... 317 MS. SINGH: Could we get an undertaking to find out what that would have been? 318 MR. PENNY: Well, Mr. Chairman, I take exception to that request because Mr. Witts was here, was cross-examined on this very issue by everyone, including Ms. Singh. That question ought to have been put to that panel. 319 MR. SOMMERVILLE: I have a recollection that I think that question was, in some form, put to that panel. 320 MR. PENNY: That's my recollection also. 321 MR. SOMMERVILLE: And I think a review of the transcript would show that. I can't put my finger on the evidentiary basis for that, but I think Mr. Penny's point is well-taken, and I think especially so in light of the fact that I think that material may be available from the transcript. 322 MR. MORAN: I think that's right, Mr. Chair. I recall an exchange where one of the witnesses did indicate what the difference would have been to the revenue deficiency if the smoothing methods had been applied, but I can't recall where exactly that was in the transcript but there was a rough number, a ballpark estimate. 323 MS. SINGH: Ms. Elliott, in your answers to questions posed by Mr. Warren yesterday, I understood you to say that the bad debt at line item 18 on Exhibit J.7.22 is largely comprised of the cost of the commodity; am I correct in that? 324 MS. ELLIOTT: The bad-debt expense is a function of the revenue, and to the extent that the revenue is fluctuating with the cost of the commodity, then that is one of the reasons for the fluctuations in bad-debt expense, yes. 325 MS. SINGH: And I also understood you to say to Mr. Warren that it was your evidence that bad debt is, in Union's view, properly a matter of rates and not to be dealt with through a deferral mechanism. I believe your evidence to support that point was Union was trying to predict as closely as possible what the gas commodity price would be in the upcoming year; is that correct? 326 MS. ELLIOTT: I think what I said was we were trying to predict as closely as possible what our bad-debt expense would be for the period, yes. 327 MS. SINGH: And the Board heard a lot of evidence a few days ago from Union's weather panel to the effect that weather is variable and unpredictable, and that panel justified their proposal to move to a 20-year trend methodology for budgeting and forecasting and planning purposes in part on the basis, as I understood it, that it was a better methodology over the long term to forecast the actual weather and not to overpredict the heating degree days as the 30-year average methodology tends to do. 328 Now, I'm wondering if you could just turn up Exhibit J.7.22, you probably have it in front of you anyway. 329 MS. ELLIOTT: Yes, I do. 330 MS. SINGH: The bad-debt line in 1999 appears on that page to be 2.9 million; do you see that? 331 MS. ELLIOTT: Yes. 332 MR. SOMMERVILLE: I'm sorrow, Ms. Singh, I missed that reference. 333 MS. SINGH: J.7.22 exhibit, the bad-debt line item. 334 MR. SOMMERVILLE: Thank you. 335 MS. SINGH: By contrast, the bad-debt item that Union is proposing for 2004 appears to be 13.3 million which, to me, is just roughly speaking, about a four-fold or over a four-fold increase. Can you advise whether the line for the bad-debt expense for 2004 is based at all on the use of the 20-year trend methodology or the 30-year average? 336 MS. ELLIOTT: It's a function of the revenue forecast for 2004 which is a function of the 20-year trend. 337 MS. SINGH: And would you know what that bad-debt line item would be based on the 30-year average? 338 MS. ELLIOTT: Well, if we forecast revenues using the 30-year average, our revenues would be higher and our expense would be higher by approximately -- sorry, the increase in revenues would translate into an increase in bad-debt expense. The relationship is just under 1 percent. 339 MS. SINGH: So you're saying that it would be higher? 340 MS. ELLIOTT: Yes. 341 MS. SINGH: If you used the 30-year average, the bad-debt line would be higher, using the 30-year average? 342 MS. ELLIOTT: Because our revenue forecast would be higher, our forecast of bad-debt expense would be higher. 343 MS. SINGH: Thank you. Those are my questions. 344 MR. SOMMERVILLE: Ms. Singh. 345 We will take our morning break. We'll reconvene at 11:30. 346 --- Recess taken at 11:12 a.m. 347 --- On resuming at 11:36 a.m. 348 MR. SOMMERVILLE: Thank you. Please be seated. 349 Mr. Dingwall. 350 MR. DINGWALL: Thank you, sir. 351 CROSS-EXAMINATION BY MR. DINGWALL: 352 MR. DINGWALL: Good morning, panel, my name is Brian Dingwall and I'm here in the capacity of counsel for Energy Probe. 353 Now, we have a relatively interesting but certainly not unheard of situation in that this panel is involved in the presentation of a number of numbers and line items which, for more clarity, would be likely directing intervenors' questions to other panels that may be answering specifics. 354 Just so I can understand your role, Ms. Elliott, does the audit function for the utility in terms of the correctness or the verification of the numbers that are put forward in these hearings rest within accounting and your purview? 355 MS. ELLIOTT: The actual audit function doesn't rest within accounting or under my control, but certainly the finance group is responsible for the accuracy of actual financial information reported, yes. 356 MR. DINGWALL: And you say that's with respect to reported information, so is that reported information after the fact, such as in annual reports or quarterly reports? 357 MS. ELLIOTT: That is one of our responsibilities, yes. 358 MR. DINGWALL: Now, I'm sorry, you mentioned finance as having that -- is that accounting or finance? 359 MS. ELLIOTT: It's one group at Union Gas. The accounting function does the reporting function. It also gathers and presents forecast information. 360 MR. DINGWALL: Now, in your previous role, Ms. Elliott, you were the controller of the company? 361 MS. ELLIOTT: Yes. 362 MR. DINGWALL: And does that role continue to exist? 363 MS. ELLIOTT: Yes, actually there's a new position at Union Gas which now has the title controller which I report to. 364 MR. DINGWALL: Which you report to? 365 MS. ELLIOTT: Yes. 366 MR. DINGWALL: So it's within the same purview? 367 MS. ELLIOTT: Yes. 368 MR. DINGWALL: Okay. Now, in deriving and presenting the numbers that are presented today with respect to O&M expenses, would your function have involved making reference to whatever third-party supplier agreements or other source documents would have set out the sources for these numbers? 369 MS. ELLIOTT: No, it would not. 370 MR. DINGWALL: Where would that function lie? 371 MS. ELLIOTT: Each individual administrator that is preparing their budget is responsible for that information. 372 MR. DINGWALL: And when it comes to paying invoices related to third-party suppliers, does accounting or finance or audit or any of these functions make reference back to the agreements in order to verify that the payments stem from actual approved charges? 373 MS. ELLIOTT: All payments before they're made are approved by the same party or within the same group that has set up the contract or approved the services to be purchased. That's not the responsibility of the finance department; individual managers approve the expenses before they're paid. 374 MR. DINGWALL: Does accounting or finance approve or verify the calculations that these managers proffer when either seeking budget approval or seeking payment? 375 MS. ELLIOTT: You're asking if we -- if we go in and reverify or recalculate departmental budgets, the answer is no. 376 MR. DINGWALL: How about relations to third-party vendors and invoices submitted in respect of their contracts? 377 MS. ELLIOTT: Confirming the accuracy of the payments against the original contract, no, that's not within the responsibility of the finance group. 378 MR. DINGWALL: So, then, does your function solely rest on accumulating and presenting the aggregated departmental budgets for the purpose of presenting these figures? 379 MS. ELLIOTT: Yes, although we do review for reasonableness and get a general understanding of what's in the budgets, and we certainly review the accuracy of the costs that are coming through for actual reporting, yes. But the individual managers are responsible for their budgets and the approval process for contracts, making sure that that's followed. 380 MR. DINGWALL: Well, does the approval process for contracts involve approval of finance or accounting in addition to departments? 381 MS. ELLIOTT: Not generally, no. Certain contracts, if they are non-standard or have clauses, conditions on them that would require finance's approval, would come through finance. If we're looking for -- in the case of a sales contract or a large-purchase contract, we would be doing the credit on those, but that's -- so to the extent that it requires credit review, it would go through the finance department. 382 MR. DINGWALL: Now, you also said non-standard contracts would go through finance. Does that mean that there would be a threshold of materiality or financial cost that would make them non-standard? 383 MS. ELLIOTT: It would be clauses that might have unique financial conditions that would make them non-standard. 384 MR. DINGWALL: For example, the company has a fairly significant charge associated with its business dealings with Enlogix, both through the CIS agreement and then through whatever various additional agreements relate to the implementation of the rate rider or whatever proportion of GDAR costs. Would these contracts have gone through accounting or finance? 385 MS. ELLIOTT: No, they have not. 386 MR. DINGWALL: Would that be because they have not been completed yet? 387 MS. ELLIOTT: No. The contract process falls -- the process of dealing with the service provider falls within the asset operations group and the legal department to review the contract language. The legal department would -- could raise the issue to finance if there were clauses in the contracts that finance should be aware of. But those specific contracts haven't been brought to finance for review or approval. 388 MR. DINGWALL: In your role within the company, do you also sit on any other committees or councils or other cross-business groups. 389 MS. ELLIOTT: I sit on the risk management committee which deals with the commodity risk transactions. 390 MR. DINGWALL: Do you sit on the pension committee? 391 MS. ELLIOTT: I do not. 392 MR. DINGWALL: Does anyone within your department sit on the pension committee? 393 MS. ELLIOTT: Not at this time, no. 394 MR. DINGWALL: Do you know what the rationale for having someone from your group on the risk management committee is? 395 MS. ELLIOTT: We're dealing with commodity transactions and hedging transactions in the gas supply just in terms of knowing and understanding what the gas pricing is, what, if any, financial exposures there may be or credit issues, and in terms of just having members within the committee that are outside of the gas purchasing group looking at those transactions. 396 MR. DINGWALL: Now, moving away from philosophy and on to substance, is there a panel that will be dealing with the specific costs of the regulatory and business services? 397 MS. ELLIOTT: No. 398 MR. DINGWALL: So does that, then, fall to this panel in terms of questions of detail? 399 MS. ELLIOTT: Yes. 400 MR. DINGWALL: For the projected 2004 budget or forecast, do these costs include any association memberships? 401 MS. ELLIOTT: These costs being the total O&M, or specifically the regulatory and business services group? 402 MR. DINGWALL: That's a good question, Ms. Elliott. And if you could let me know if they're not within the regulatory and business services unit, whether they're under another line item, that would be great. 403 MS. ELLIOTT: The budget would include fees for associations. I don't believe they are in the regulatory and business services grouping. I couldn't tell you which grouping they are in, but they are included in the budget. 404 MR. DINGWALL: So you are familiar with these costs, then? 405 MS. ELLIOTT: Association fees? 406 MR. DINGWALL: Yes. 407 MS. ELLIOTT: I know we incur costs to belong to the various associations and those costs are budgeted, yes. 408 MR. DINGWALL: And when these costs are submitted, do they go to your group or do they go somewhere else? 409 MS. ELLIOTT: They are submitted for approval to the administrator that's responsible for them. I can't -- at this point, I can't tell you, for specific associations, who that would be. 410 MR. DINGWALL: Okay. 411 MS. ELLIOTT: For example, to the extent that I belong to the Canadian Institute of Chartered Accountants, those fees would be approved within the group that I work with. Other association fees may be approved directly by the manager responsible for the person. In other cases, there's a group fee for the organization that would be approved in total. 412 MR. DINGWALL: Do you know which group fee the Canadian Gas Association would be under? 413 MS. ELLIOTT: Not off the top of my head, I don't. 414 MR. DINGWALL: And I'm presuming I'll get the same answer, but I'll ask it as it will lead to the undertaking request: Do you know whether or not there have been any special assessments of the Canadian Gas Association against members or specific members relating to hearing participations? 415 MS. ELLIOTT: I don't know that, no. 416 MR. DINGWALL: Could I then ask you to undertake to, one, determine which group any membership fees associated with the Canadian Gas Association would be and whether Union Gas is seeking recovery of those; and secondly, whether those fees include any supplement or special assessment with respect to projected or actual hearing costs for the years 2003 on the actual and 2004 on the forecast. 417 MR. SOMMERVILLE: These would be hearing costs related to the participation of the Canadian Gas Association? 418 MR. DINGWALL: That's correct. 419 MR. MORAN: That would become Undertaking N.9.4, Mr. Chair. 420 UNDERTAKING NO. N.9.4: TO DETERMINE WHICH GROUP ANY MEMBERSHIP FEES ASSOCIATED WITH THE CANADIAN GAS ASSOCIATION WOULD BE AND WHETHER UNION GAS IS SEEKING RECOVERY OF THOSE; AND WHETHER THOSE FEES INCLUDE ANY SUPPLEMENT OR SPECIAL ASSESSMENT WITH RESPECT TO PROJECTED OR ACTUAL HEARING COSTS FOR THE YEARS 2003 ON THE ACTUAL AND 2004 ON THE FORECAST 421 MR. DINGWALL: Moving or to the subject of bad debt, I have a number of questions related to collection policies, deposit policies, and allocation of bad debt between rate classes and ABCs. Would these questions be questions that would be appropriate for your panel, Ms. Elliott -- 422 MS. ELLIOTT: Yes. 423 MR. DINGWALL: -- or would there be another panel that you could point me to? 424 MS. ELLIOTT: No, that would be us. 425 The allocation of those costs would be the cost allocation panel, but the costs themselves we will deal with. 426 MR. DINGWALL: Now, I know you've answered this question before, but it merely gives context to the next few questions. The number for the 2004 that's forecasted is primarily based around the number that the company's experienced in 2003; is that correct? 427 MS. ELLIOTT: Sorry, the experience will go back to 2001 and 2002. 428 MR. DINGWALL: Right. Would those be because those are the years in which the company experienced a somewhat higher than normal increase in bad debt? 429 MS. ELLIOTT: Those the years we have full-year actuals to use as a base. 2003 isn't a complete year yet so our actual experience for the year is not known to us at this time. 430 MR. DINGWALL: Would it be fair to say that 2001, the bad-debt costs were relatively low compared to what they were after that point? 431 MS. ELLIOTT: Certainly the bad-debt expense for 2000 is lower than the 2001 actuals, but as a percentage of revenue, it's about the same. The revenue going up significantly in 2001 as a result of gas costs caused the bad-debt expense to increase proportionately. But yes, 2002 is a significantly higher proportion of the revenue in that period which is, in part, due to some 2001 clean-up. So the experience was we were seeing a higher write-off in 2002 as a result of 2001 bills. 432 MR. DINGWALL: Now, I take it from years of interest in bad debt from the retailer perspective that the company likely keeps reports of bad debt on a per-customer basis; is that correct? Rate class, I mean. 433 MS. ELLIOTT: No, we don't, actually. I mean, the majority of the experience will be in the general service market, so that would be the rate classes that are labeled M2, 01, 10 and possibly 16, those rate classes that are non-contract, and we use the Banner billing system for. So we use those bad-debt expenses captured from the Banner system, yes. 434 MR. DINGWALL: And the balance of the bad debt would be associated with the contract classes, and therefore, outside the Banner system? 435 MS. ELLIOTT: There's a separate billing system for contracts, so we would have separate record of the contract writeoffs, but again, not captured by rate class. 436 MR. DINGWALL: Right, but you'd agree with me that the significance of the departure between contract and non-contract really is a volumetric threshold and the non-contract classes are generally the general-service rates up to the small commercial threshold; is that correct? 437 MS. ELLIOTT: That's correct. 438 MR. DINGWALL: Do you have any way of separating out the costs between the commercial versus M2 and 01 categories? 439 MS. ELLIOTT: I'm looking at an interrogatory response J.7.28, but I see that the M2 and the 01 category are combined. 440 MR. DINGWALL: They are effectively the same rate class but in different operational zones, aren't they? 441 MS. ELLIOTT: Different geographical areas, but the same rate class, yes. 442 MR. DINGWALL: Yes. And could you describe the experience over these two rate classes combined versus the rest of the bad-debt experience for that year? 443 MS. ELLIOTT: In looking at the response to that question, the majority of the bad-debt expense is attributed to the general-service rate classes. 444 MR. DINGWALL: And so that the record is clear, could you read out the numbers and also reference the year, please? 445 MS. ELLIOTT: I'm looking at Exhibit J.7.28 corrected, which says in 1999, total expense was 2.9 million, general service share of that was 2.8. In 2000, the total expense was 6.9 and the general service share was 6.9. The 2001 actual was 8.3 and the general service share was 8.0. 2002 actual, the total was 21.3 and the general service was 20.6. 446 MR. DINGWALL: Thank you. Since the year 1999, has the company experienced or identified any regulatory changes which diminish its ability to collect or seek credit from customers? 447 MS. ELLIOTT: Not that I'm aware of. 448 MR. DINGWALL: For example, I believe around that time with the Electricity Act, municipalities lost the ability to put outstanding electricity arrears on a municipal tax bill. The company never had this ability for gas, did it? 449 MS. ELLIOTT: That's correct. We've never had the ability where we have to collect our bad-debt costs in our rates or the variances impacts earnings. 450 MR. DINGWALL: Since 1999, has the company made any changes to its deposit standards or deposit amounts for customers in the general-service rate classes? 451 MS. ELLIOTT: Yes, we have. I'm thinking that it was a response to an interrogatory, but I can't tell you what the reference is. 452 MR. DINGWALL: Are you referring to the change in the length of duration the deposits are held from one year to two years? 453 MS. ELLIOTT: Yes. 454 MR. DINGWALL: Apart from that change, have there been any other changes in the deposits, standards, or policies of the company? 455 MS. ELLIOTT: Not that I'm aware of. 456 MR. DINGWALL: I'll ask you a number of specific questions and if you need to refer to a policy document that you might wish to undertake then feel free to. 457 What does the company require from customers who are new connects in terms of a deposit? 458 MS. ELLIOTT: Are you asking how much we require? 459 MR. DINGWALL: How much or how that amount might be calculated. I assume it might not be a fixed-dollar amount given the fluctuation we've had in commodity. 460 MS. ELLIOTT: Yeah, I know we require to security deposit from the customer or the customer can enroll in our budget billing and automatic payment programs, but I don't have the amount or how the security deposit amount is determined. 461 MR. DINGWALL: Okay. Do you know what level of arrears lead to disconnection? 462 MS. ELLIOTT: I know we start following up the account after 30 days. I don't know at which -- at what point the account is scheduled for disconnection. 463 MR. DINGWALL: Do you know at what point in the arrears or even connection process a credit rating might be used to determine or enhance the need for a deposit? 464 MS. ELLIOTT: I'm sorry, can you repeat the question? 465 MR. DINGWALL: Certainly. Let me try to put this in a bit of context for you to see if this helps. 466 Some business entities, when determining whether or not they're going to do business with a new customer, may look at their credit rating as a vehicle to establish a deposit, or, in the event that they don't, may look at a credit rating as a vehicle in which to either accelerate collection methods or, subsequent to the commencement of service, require a deposit. Does Union Gas do anything like that? 467 MS. ELLIOTT: You're getting into an area where, sort of, my specific knowledge is limited in terms of what our -- what the steps are specifically and when they're taken for collection and security deposits. I don't know that I can answer those questions. 468 MR. DINGWALL: Okay. Do you know whether or not there's a set policy that the company uses that covers these? 469 MS. ELLIOTT: I'm sorry, can you ... 470 MR. DINGWALL: Do you know if the company has a credit and collections policy? 471 MS. ELLIOTT: With respect to the residential or general-service customers, I'm not sure that I have seen one; but I can certainly inquire as to whether or not there is a written policy. 472 MR. DINGWALL: That might be the appropriate time for an undertaking, and I think Ms. Elliott's words seem to capture that very nicely. 473 MR. MORAN: Undertaking N.9.5, Mr. Chair. 474 UNDERTAKING NO. N.9.5: TO ADVISE WHETHER UNION GAS HAS A WRITTEN CREDIT AND COLLECTIONS POLICY; AND IF SO, ADVISE WHEN POLICY WAS INSTITUTED AND WHETHER IT HAS BEEN MODIFIED SINCE 1999 475 MR. DINGWALL: To clarify the undertaking as well, it would be helpful to know when the policy was instituted and whether it's been modified since 1999. 476 Now, with respect to the 2004 projected bad-debt number, does that include a specific forecast for general-service customers and contract customers? 477 MS. ELLIOTT: The forecast is really a function of total revenue so it would include all customers. I think, again, if you look at J.7.28, there's a breakdown of the original 11.5 million bad-debt expense forecast between residential and commercial. 478 MR. DINGWALL: So would it be correct for me to assume that that forecast does not separately break out or separately forecast what the amount might be attributable to either of contract or general-service customers? 479 MS. ELLIOTT: It doesn't separately identify them, no. 480 MR. DINGWALL: Now, you made the statement a moment ago that the bad-debt forecast is really based around the forecasted revenue. Does the company forecast that it will have revenue associated with risk management? 481 MS. ELLIOTT: I'm not sure what you're referring to in terms of "revenue associated with risk management." 482 MR. DINGWALL: In terms of the revenue forecast, is there an element of that that shows a contribution from the risk-management program? 483 MS. ELLIOTT: The revenue forecast is based on our approved cost of gas. We don't, in forecasting our bad-debt expense, take into account any receivable that may arise as a result of higher gas purchase costs, if that's what you're asking. 484 Purchased gas variance is recorded in the deferral accounts so that the results of the risk-management program, as our actual costs differ from our approved weighted average cost of gas in rates, those variances sitting as receivable or payable on the balance sheet are not specifically brought into the estimation for bad-debt expense. 485 MR. DINGWALL: Does bad debt, over the period that we've discussed, from 1999, solely relate to the nonpayment of end-use customers? 486 MS. ELLIOTT: Yes. I'm not sure what other customers you would be looking at. But, yes, our bad-debt expense is related to our end-use customers. 487 MR. DINGWALL: Well, let's understand what we mean by the word "related." You've got a number on a page for 2004; I guess it's somewhere around 13.3 million. When I say "related," I'm making the presumption that a number of customers haven't paid their bills, these customers being customers receiving distribution and commodity services from Union Gas; and that it's the total of the amounts of the outstanding bills of those customers that make up the bad-debt expense; is that correct? 488 MS. ELLIOTT: That's correct, as far as it goes. But it also includes the commodity sale under ABC service which is covered under our ABC fee. So the company is subject to the bad-debt expense for customers who are under a bundled-T service and their broker is using our agency billing and collections service to bill those customers. Union's costs include a bad-debt component for the commodity under those contracts. The revenues will include a revenue from the -- for the fees for the ABC service so there will be -- as long as the fee is set at a level to recover the costs, there will be an offset there. 489 MR. DINGWALL: So the ABC fees are adjusted annually to reflect the amount of bad debt that is experienced with respect to the commodity of the ABC customers? 490 MS. ELLIOTT: Yes. 491 MR. DINGWALL: So it's really not a prospective calculation, it's a retrospective calculation? 492 MS. ELLIOTT: To the extent that we can, we attempt to do it prospectively. We may need to adjust it. We don't adjust it retroactively, but we would go forward and make adjustments in the ABC fee if we were getting out of line between revenues and costs. 493 MR. DINGWALL: So the ABC fees that you're putting forward for 2004 would really reflect the bad-debt experience for 2003, is that correct, since you're not doing it retroactively? 494 MS. ELLIOTT: No, but we're also looking forward at the experience that we would expect in '04, as we look at those fees and determine whether they continue to be set at an appropriate level. But, generally, forward-looking, we use our experience of the past as an indicator of what we expect it to be. 495 MR. DINGWALL: Is that a number that comes from the accounting group, or does that come from Mr. Shervill's group or Mr. Andrew's group? 496 MS. ELLIOTT: What number are you asking? 497 MR. DINGWALL: The number that goes into the subsequent forecasted bad debt associated with ABC which is then put into the ABC fee. 498 MS. ELLIOTT: It comes from the finance group. 499 MR. DINGWALL: Do you know what the numbers, since 1999, have been on an annual basis for the portion of bad debt that's been associated with ABC service? 500 MS. ELLIOTT: I don't have that information with me. 501 MR. DINGWALL: I wonder if I could have that undertaking? 502 MS. ELLIOTT: Yes. 503 MR. DINGWALL: Thank you. 504 MR. MORAN: That will be Undertaking N.9.6, Mr. Chair. 505 UNDERTAKING NO. N.9.6: TO PROVIDE WHAT THE CALCULATIONS, SINCE 1999, HAVE BEEN ON AN ANNUAL BASIS FOR THE AMOUNT OF BAD DEBT OUT OF THE TOTAL BAD DEBT EXPRESSED AS A PERCENTAGE AND AS A WHOLE NUMBER ASSOCIATED WITH ABC SERVICE CUSTOMERS, BROKEN OUT INTO COMMODITY FOR ABC CUSTOMERS AND TRANSMISSION AND DISTRIBUTION CHARGES WITH RESPECT TO ABC CUSTOMERS 506 MR. DINGWALL: Do you know how payments are allocated when they come into the utility from ABC service? 507 MR. PENNY: Sorry, could we just get clarification for the record of precisely what aspect of ABC bad debt we are looking for here? 508 MR. DINGWALL: We're looking on an annual basis since 1999 for the amount of bad debt out of the total bad debt expressed as a percentage and as a whole number associated with ABC-service customers. 509 And you'll notice I've not just used the word commodity, so perhaps we could break that calculation out into commodity for ABC customers and in addition to that, transmission and distribution charges with respect to ABC customers. 510 MS. ELLIOTT: This may be going to your next question, I'm not sure whether we can identify the difference between the commodity and the delivery, but we will do our best. 511 MR. DINGWALL: That's all you can do. Thank you. 512 Now, do you know how Union Gas prioritizes payments received from customers that are on ABC service? 513 MS. ELLIOTT: When you ask prioritize, is that in terms of payment for commodity or delivery? 514 MR. DINGWALL: Yes. Say for example, and this may help things, if a customer only pays 75 percent of its bill, is that money applied equally to both portions of the bill -- 515 MS. ELLIOTT: Yes. 516 MR. DINGWALL: -- on a pro rata basis? 517 MS. ELLIOTT: Yes, the company is responsible for collecting the whole bill. We'll take 75 percent of the money that we get, if it's 75 percent of the amount owing, the remaining 25 percent if it's not collected will go into bad debt. What I said earlier, we don't take that 25 percent and make a determination whether it's commodity or delivery that we didn't collect, it's money that we didn't collect. 518 MR. DINGWALL: So if a customer then pays an additional amount the next month, I presume it would be allocated to the oldest receivables first, I think that's how you've been doing it in the past? 519 MS. ELLIOTT: Yes, that's correct. 520 MR. DINGWALL: Which raises the question - I realize Mr. Aiken asked you something similar earlier, so feel free to defer me, should you wish - if the company is going to be collecting termination fees for marketers as proposed under the new ABC amendments, and the example I'll put forward to you is that some marketers have termination fees in their contracts which could lead to several thousands of dollars, do you know if the company would be proposing to allocate ongoing payments past that point to the oldest receivable first which, if you've got a bill for several thousand dollars in the middle of the year, might really lead one to conclude that for some significant period of time that would be the termination fee? 521 MS. ELLIOTT: I don't know what the company's position is going to be on the collection of those fees. 522 MR. DINGWALL: Would you agree that whatever the company's position might be, that it certainly provides a significant potential to have an effect on the company's bad debt? 523 MS. ELLIOTT: I know it is a subject of some discussion that I have not been involved in. And yes, it has the potential to increase our costs, depending on how it's done. 524 MR. DINGWALL: Okay. Do you know at what point the company considers customer arrears to be bad debt or unrecoverable, is it post disconnection? 525 MS. ELLIOTT: Yes, it's when we've done everything we can to attempt to collect the customer's account and there comes a point in time where future action doesn't seem to be generating any results, the account will be shut off and we'll writeoff the balance -- sorry, it's not necessarily that we'll shut it off and immediately writeoff the balance. 526 MR. DINGWALL: Would that likely be reflected in the collections and credit policies and procedures that we've requested in an undertaking earlier? 527 MR. PENNY: Mr. Chairman, while Mr. Dingwall was asking a few other questions, we looked it up, and that was, in fact, filed in May of 2003. It's at Exhibit A, tab 14, and the rules and regulations applying to gas service contain the security deposit and customer accounting policy that relates to that. It's current as of May 2003. 528 MR. DINGWALL: I'll move on to another area while I try to load the disk. 529 MR. SOMMERVILLE: Just so that I'm clear, Mr. Penny, we're looking at Exhibit A, tab 14? 530 MR. PENNY: That's correct. 531 MR. SOMMERVILLE: The rules and regulations applying to gas service? 532 MR. PENNY: That's right, and there is a section called "Customer Accounting" and it includes sections on security deposits, meter reading, billing and payment, delayed payment, monthly charges, et cetera, and there's also a section on disconnection and reconnection. 533 MR. SOMMERVILLE: Do you have that in front of you, Mr. Dingwall? 534 MR. DINGWALL: That will take a minute to load. I'm on the disk system not the binder system. 535 MR. SOMMERVILLE: I think I'd like to be on the disk system. 536 MR. DINGWALL: While we're waiting for technology, Ms. Elliott, I understand that the company has a pipeline integrity management program. 537 MS. ELLIOTT: Yes. 538 MR. DINGWALL: I presume it likes a different acronym than PIMP; is that correct? 539 MS. ELLIOTT: Maybe that's why it doesn't have one. 540 MR. DINGWALL: Is there an affiliate or another corporate entity undertaking that program? 541 MS. ELLIOTT: No, and I think Mr. Sanders is coming in a later panel to speak to that program. 542 MR. DINGWALL: So you've escaped the PIMP then. 543 Moving on from there, I understand that the company has an interest charge associated with late payments. Is it your understanding that the interest charge is focused on the total amount of the bill outstanding? 544 MS. ELLIOTT: I think that's correct. 545 MR. DINGWALL: So would you agree with me that while the company's gas costs might be rising significantly, the amount of revenue associated with the interest and late payment charges would also be rising significantly? 546 MS. ELLIOTT: Yes. 547 MR. DINGWALL: And do you know if the revenues associated with these interest charges and late payment fees are reflected in the binders? 548 MS. ELLIOTT: They are, yes. I'm just not sure I can put my hands on them right now. 549 MR. PENNY: Well, late payment charge was a settled item. It's H 7. It was a complete settlement to which Energy Probe was a party. That does list all of the evidentiary references that support the late payment charge. It's at page 10 of the agreement. 550 MR. DINGWALL: Does that -- perhaps your memory is better than mine, Mr. Penny. I do recall, of course, Energy Probe being party to that settlement on the percentage rate and the policy surrounding that. Do you recall whether the evidence referenced actually includes the historical amounts of monies recovered with that percentage? 551 MR. PENNY: I don't. 552 MR. DINGWALL: So quite simply, I'll ask the witnesses if they can provide either an undertaking to give, from the period 1999 to the present, an indication of either the evidentiary reference or what the amounts are that the company has received by way of interest and late payment revenue. 553 MS. ELLIOTT: I can give you the references for the current filing, and that would be 2002, 2003, and 2004. Those revenue items will be identified -- the 2004 number is at Exhibit C.3, tab 3, schedule 1. The 2003 -- and that's at $10.5 million revenue forecast for delayed payment. 554 For 2003, that's at Exhibit C.4, tab 3, schedule 1, and that's $7,953,000. The 2002 amount is at Exhibit C.5, tab 3, schedule 1, and it's $10,240,000. 555 The drop in '03 will reflect the change in rate from previous rate of 5 percent, I believe, to the new rates which are, I think, 1.9 percent compounded. The 2004 number will reflect that rate and the current gas pricing revenue forecast for 2004. So all although the bad-debt expense is up, delayed-payment revenue is also up. 556 MR. DINGWALL: Thank you. 557 I understand that the company contracts with Enlogix, or whatever it's called now, to actually perform the credit and collections function; is that correct? 558 MS. ELLIOTT: No. Enlogix, or I think they're ADS now, is our billings service provider. We do our credit and collections with resources at Union Gas. 559 MR. DINGWALL: Now, that was previously done out of a number of regional centres and has now moved to a centralized location; is that correct? 560 MS. ELLIOTT: That work has been consolidated into, I believe, two locations. 561 MR. DINGWALL: How many locations were there previously? 562 MS. ELLIOTT: I don't know. It would have been done, as you indicated, in each of the divisional offices. 563 MR. DINGWALL: Do you know how many roles there were previously performing that function? 564 MS. ELLIOTT: I don't know how many roles there were, but I do know that there was a reduction of 18 roles through the consolidation of that process, and that took place in -- in the year 2000. 565 MR. DINGWALL: So from 1999 to 2000, there was a reduction of 18 roles? 566 MS. ELLIOTT: Yes. 567 MR. DINGWALL: Do you know if there have been any role reductions since 2000? 568 MS. ELLIOTT: I don't specifically, no. 569 MR. DINGWALL: Could I ask you to provide an undertaking to, first of all, tell me how many roles there were in 1999, and, second of all, tell me whether there have been any further role reductions since the year 2000. 570 MR. PENNY: This is all in connection with the credit collection function? 571 MR. DINGWALL: That's correct, Mr. Penny, thank you. 572 MR. PENNY: Thank you. 573 MR. MORAN: That's Undertaking N.9.7, Mr. Chair. 574 MR. SOMMERVILLE: Thank you. 575 UNDERTAKING NO. N.9.7: TO ADVISE HOW MANY CREDIT COLLECTION FUNCTION ROLES THERE WERE IN 1999, AND WHETHER THERE HAVE BEEN ANY FURTHER ROLE REDUCTIONS SINCE THE YEAR 2000 576 MR. DINGWALL: And I believe we touched on this area but may not have gotten to the point of fully covering it. I think it's one of my last areas. 577 Over the past five years, were any of the amounts charged as bad debt or identified as bad debt associated -- pardon me, directly related to anything that was not on an individual customer's bill? 578 MS. ELLIOTT: I'm not sure what you're looking for. I mean, the bad-debt expense is a function of the customer's bill. It's either a specific bill that's written off or a provision that's -- an accounting provision that's made at the end of the year to allow -- to provide for writeoffs for the following year. 579 MR. DINGWALL: Well, would any of these amounts relate to charges that would not have been recoverable due to regulatory disallowance? 580 MS. ELLIOTT: No. 581 MR. DINGWALL: No disallowed balancing charges? 582 MS. ELLIOTT: No. This amount is -- reflects the amounts that have been billed to customers and not collected. 583 MR. DINGWALL: Now, my final area of inquiry relates to - and I'm not going to ask anyone to turn it up; I'll just merely identify it and we can move from there - Exhibit J.26.59, which is an answer to an interrogatory from the Ontario Public School Boards' Association, which encloses a copy of what was at that time all agreements between the company, Union Gas, and Alliance Data Systems with respect to the CIS system. 584 I had the opportunity to ask, today, Ms. Elliott a number of questions and it would appear that Ms. Elliott has not had the opportunity to gain a personal knowledge in respect of this contract, yet there are some upcoming panels who it would be very appropriate to deal with this contract. 585 Now, the contract references a number of ancillary documents and also has a number of redacted portions within it, and from the interest of being fluid within this process and giving fair notice to Mr. Penny, I'm wondering if the company, prior to the panels on affiliate transactions and prior to the panels that will be dealing with Enlogix and the rate rider, could review the contract that's J.26.59 and determine whether any of the ancillary documents which were subject to negotiation as to whether they'd be completed referenced in that contract have been completed, and if they have, whether they could be provided prior to the appearance of those panels, and whether also the company might consider what form of confidentiality arrangement might best address dealing with the redacted portions of the contract. 586 I bring this up now because that would greatly assist me in being able to deal with the subsequent panels and also in dealing with the time lags that we have between now and the subsequent panels. 587 So I beg the Board's indulgence in this, but it's one of the hoops that we have to get through when we've got multiple panels and incomplete documents where there are confidentiality claims. 588 MR. SOMMERVILLE: Mr. Penny. 589 MR. PENNY: Yes. Well, I think there Mr. Dingwall's notice of this is appropriate and we thank him for it. We'll look into it. 590 MR. DINGWALL: Thank you very much, Mr. Penny. 591 And thank you very much, panel. Those are my questions. 592 MR. SOMMERVILLE: Mr. Dingwall. 593 Mr. Brett. 594 MR. BRETT: Thank you very much, Mr. Chairman, Mr. Birchenough. 595 CROSS-EXAMINATION BY MR. BRETT: 596 MR. BRETT: Panel, good morning. I wanted to mention at the outset, Mr. Chairman, I have some questions, or rather I will have some questions of capitalization of overheads issue but I plan to put them to the panel on capitalization that Ms. Elliott is one. So I want to let you know that and let her know that so I will also have impact of shortening my tenure here this morning. 597 MR. SOMMERVILLE: I think it's perfectly appropriate and I think the applicant appreciates whatever form of notice is possible with respect to areas of inquiry for subsequent panels so that they can prepare themselves appropriately. I think it's a device that could be very useful and probably the more explicit you can be about that, the better off we'll all be. 598 So with that, Mr. Brett, please continue. 599 MR. BRETT: Thank you. I'm going to start with a couple of quick questions, Ms. Elliott, on this N.6.11 exhibit, and I recognize this isn't part of your evidence, so just tell me if there's a -- 600 MR. PENNY: This actually was prepared by Ms. Brodie Lumley, so it is her evidence. 601 MR. BRETT: I see, okay. Thank you for that. 602 As I say, this is nothing too profound about any of this, but I wanted to just check. If I look at the second, third page of this, second page of the attachment, I wanted to check, "Roles and Headcount," which is that second column, those are the essentially the same thing, are they? 603 MS. BRODIE LUMLEY: That is correct. 604 MR. BRETT: And in another IR that you filed, which you probably don't have to turn up, but it's the J.7.54 that you also discussed yesterday with, I think, Mr. Thompson, and in there you use the phrase, "Establishment" and I take it that's another word for roles and headcount? If you look at, for example, the 2000 column of J.7.54, the 2000 year, it's the same number. It's 2793, which is the same number that appears under roles and headcounts in N.6.11 and then you have an asterisk opposite establishment in the title of the column and you explain the full-time establishment is not available. 605 So I just take it you used establishment as a -- it means the same thing as headcount in this context at least, as headcount or roles; is that fair? Do you see where I'm... 606 MS. BRODIE LUMLEY: In the response to that IR, I believe so, but I just want to turn it up to be sure. 607 MR. BRETT: That's fine. I just want to make sure I've got a system here. 608 It's the left-hand column I was looking at for 2000. In fact, in the title you actually say "role count by administrator," the overall title at the top, and then under the column -- under each of the years they say "the establishment" with an asterisk. 609 MS. BRODIE LUMLEY: That is the establishment would include vacancies the same as the roles and headcount in column B. 610 MR. BRETT: Right, they're all the same. 611 Going back to N.6.11, line 5, "dollar value of role reductions/additions," you show a $23 million variance in the right-most column, 2004 versus EBRO 499, 23.0 million; do you see that? 612 MS. BRODIE LUMLEY: Yes, I do. 613 MR. BRETT: And I just want you to reconcile that, if you could, with another reference to role reduction costs. If you look at D.5, tab 3, this is your historical year evidence, D as in Derek, D.5, tab 3, schedule 2, page 2 of 7, this is white page, of course. Do you have that? 614 MS. BRODIE LUMLEY: Yes, I do. 615 MR. BRETT: Do you see down line 9 -- you'll see a role reduction of 19.5 million? 616 MS. BRODIE LUMLEY: Yes, do I. 617 MR. BRETT: Now, is that meant to be -- it's obviously not equivalent to 23, but could you explain the relationship between the 23.0 and the 19.5? 618 MS. BRODIE LUMLEY: The 23.0 has been calculated using these calculated FTE numbers that we have arrived at in response to N.6.11. The 19,500,000 was a role-reductions savings identified while prepared a variance explanation for the period 2002 through to EBRO-approved 1999. 619 MR. BRETT: I guess one explanation then is that, in fact, under N.6.11 you show a role reductions over a series of years starting in 2000 and going all the way up to 2003, and so for example, the $3 million role reduction that you achieved in 2003 wouldn't be captured by that number; right? 620 MS. BRODIE LUMLEY: That's correct, it would not. 621 MR. BRETT: The bottom line of this, I think, is that you're saying that the end -- is it fair to say in the N.6.11 is sort of your latest and best information? 622 MS. BRODIE LUMLEY: That is correct. 623 MR. BRETT: Okay. I'd like to then move over and talk for a moment about contract services and I think -- I don't think you need to turn this up, but it's been the subject of a good deal of discussion that from June of 2003 to 2004, there was an increase in contract services shown in your evidence of about $10 million from 32.5 to 42.5 approximately. Is that fair? 624 MS. BRODIE LUMLEY: Yes, that is. 625 MR. BRETT: And then the first item of that or -- and you had an explanation in your D.3, tab 3 series of the reasons for that, and the first item was a rate-rider item which I recall to be 3.8 million; do you recall that? 626 MS. BRODIE LUMLEY: Yes, I do. 627 MR. BRETT: And in yesterday's transcript, if you would look, Ms. Elliott, Ms. Brodie Lumley at paragraph 807, that's 807 from yesterday's transcript, a discussion you were having with Mr. Thompson. 628 Do you have that? 629 MS. ELLIOTT: Yes, we do. 630 MR. BRETT: Okay. There was a couple of paragraphs here, but starting on -- Mr. Thompson was discussing with you both GDAR and the rate rider and he asked you a question at 806 and I believe you -- it's a question I think that he asked and I think you understood him to ask and I'll pose that as a question about the rate rider. He says: 631 "All right. So it wasn't considered or it was considered and rejected?" 632 And you said in 807: 633 "Capitalization was considered and rejected. Deferring and amortizing this over some period other than one year wasn't considered." 634 And this, I take it, you'll agree with me, was the rate rider. 635 MS. ELLIOTT: That's correct, yes. 636 MR. BRETT: And my question to you is: Would it be, given the nature of this -- of that proposed expenditure, would you agree with me that it would be -- it would be reasonable to amortize that over a period of a few years, given the fact that it's a one-time charge -- given the fact that, I think, if you were doing it yourself as opposed to having someone else do it for you under contract, you might -- you might capitalize that? I recognize you wouldn't capitalize it now. But do you think there's a case to made that it could be amortized over a three-year period, three- to five-year period? 637 MS. ELLIOTT: I think there's a case to be made for amortizing it over the remaining life of the contract. 638 MR. BRETT: Of the contract? And that contract, do you know when it expires? 639 MS. ELLIOTT: I think we actually have three years remaining on that contract, so an amortization over the three years remaining, 2004, 5, and 6, under that contract would be reasonable. 640 MR. BRETT: Okay. So that would mean, if that were done instead of -- as I understand it, instead of putting the 3.8 into rates this year, you would put a third of that plus the appropriate interest consideration into rates; is that correct? 641 MS. ELLIOTT: Yes. 642 MR. BRETT: Now, is that something that you could agree to do here, or is it something you want to think about? 643 MS. ELLIOTT: I think it's an alternative treatment to expensing it in one year. 644 MR. BRETT: All right. The other question I had for you in this area is in the -- when you explain the reference -- the increase in 2004 over 2003 for contract services, I guess we'd better turn that up, it's D.3, tab 3, schedule 2. Would you have a look at that. It's a blue page, I believe. It would be page 4. 645 MR. PENNY: Page 4, I think. 646 MR. BRETT: Page 4 of 6. I've just managed to misplace it. Thank you. Thank you very much, Mr. Penny. 647 If I look at page 4 of 6 where you explain the difference of the 9 million, it is -- in 2004 versus 2003, you have a factor of inflation in here. I notice you have a factor of inflation in each of these, or not in all of them but in the consulting one as well, so my question really would apply to both of those. Anywhere here in this list where you have a -- it continues on where you have an explicit inflation factor, and I'm wondering -- my question is: Why would you put an explicit inflation factor in there when, I would imagine, to some extent, these expenditures -- and these expenditures are by business centre rather than by type of expenditure. But let me put it this way: To the extent that you have -- that this work is done by people on staff, is there not an element of double-counting if you also put an explicit inflation factor in? 648 MS. ELLIOTT: These expenses are by cost type. By definition, contract services and consulting services are services purchased from a third party, they're not services provided by internal resources. So there is an inflationary component in the existing services as well as new services that we're acquiring during the period. 649 MR. BRETT: Would you agree with me that that would -- the legitimacy of that, that would depend -- whether you should be claiming that would depend on whether or not, under the contract in question with the third-party service provider, it's indexed in some fashion for inflation? I mean, could it not be, for example, that you have a fixed-price arrangement or ... 650 MS. ELLIOTT: If there are fixed-price arrangements within that grouping of services, then you're right, the inflation factor wouldn't apply to that particular purchase. 651 MR. BRETT: Do you know whether or not, in this particular situation - we're speaking with respect now to the rate rider, which is in your CIS contract, I take it, pursuant to your CIS contract - whether or not that contract has an annual increase for some or all of its parts, components, for work from year to year? 652 MS. ELLIOTT: I haven't specifically read that contract. Mr. Shervill is attending at a later date to discuss the rate rider specifically. 653 MR. BRETT: That would be a question for Mr. Shervill, then. 654 MS. ELLIOTT: Yes. 655 MR. PENNY: And that is a new service, rate rider, Mr. Chairman. 656 MR. BRETT: Well, Mr. Chairman, I guess through you, I guess we'd have to see under the contract how that's defined in the sense that if it's a billing service -- I mean, there's a number of issues that arise. I think I should probably leave them to the discussion with Mr. Shervill, because it's -- it could get a little bit complicated. 657 All right. I'd like to move on now to my third area. I only have five areas here and I have not very much in each of them. 658 But the third area has to do with bad debt, and, of course, you just had a lengthy discussion with Mr. Dingwall. I'd like to take a somewhat different tact or cover a somewhat different aspect of it, and I'd ask you to turn up from yesterday, again, paragraph 507 from yesterday's transcript. It's a discussion you were having with Ms. Lott. 659 Do you have that? 660 MS. ELLIOTT: I do. 661 MR. BRETT: Okay. In your -- at 507, you were answering a question about whether or not, I think, you've incorporated -- what you've incorporated into the bad debt and what you haven't, and then you say in 507: 662 "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 percentage of revenues, and that decrease or that reduction, we don't expect the experience of 2001 and 2002 to continue ..." 663 And here's the part I'm interested in: 664 "... 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." 665 So the first point is that you say some -- you say collection action has been taken and you're now following up accounts on a more timely basis. Could you elaborate on that a bit? What are you doing now that you weren't doing before you had this experience? 666 MS. ELLIOTT: Today it's a much more automated process. What you see happening in 2002 is a lag effect of the 2001 high gas prices. Currently, as I say, we have a much more automated process for identifying and contacting customers as soon as their account goes into arrears, or very quickly, to avoid the arrears accumulating for 60, 90, 120 days. We start taking action 30 to 60 days, once it's been identified the account, the customer is behind in their payments, to make payment arrangements with the customer. 667 MR. BRETT: When did you start -- when did you put this new policy into -- this new practice into effect? 668 MS. ELLIOTT: I think it's been a gradual implementation as we cleaned up older accounts through 2002 and got the accounts more current, reducing the length of time that the accounts were in arrears. So moving from accounts that were 120 days in arrears to accounts that were 90 days, 60 days, working towards bringing them up to -- identifying where payment arrangements need to be made quickly. 669 MR. BRETT: Before you made these changes, it sounds like you had a lot of accounts that got into the 120-day area. 670 MS. ELLIOTT: Through 2001, I think, as a result of the gas pricing and the high gas bills, and the inquiry people were dealing with calls on high gas prices, the accounts did go longer before they were being collected. 671 MR. BRETT: Your second point that you make there is that you're implementing collection practices. Could you elaborate a bit on that? I take it from the way you put it there, that you've changed the collection practices from what they were before in some fashion? 672 MS. ELLIOTT: I think I was referring mostly to the calling and the focus in the call centre on calling customers when their accounts go into arrears, reminding customers that they need to make arrangements to pay their gas bills. Also the security deposit is... 673 MR. BRETT: The security deposit, that's part of the overall picture? 674 MS. ELLIOTT: Yeah. I don't think the practices are different, but the timing in which they're followed up is. 675 MR. BRETT: So those are two ways of saying the same thing, in a sense. 676 Have you made an analysis at all of effectively who doesn't pay you; in other words, I'll give you an example: There's at least sort of two categories of person that come to mind, one, a category that really can't pay, and another category that could but for some reason or other don't wish to. Have you done any kind of analysis by rate class of -- well, I'm sorry, you have statistics on rate class of service, as for example in the M2, you've just referred to that in 7.28, but have you done any analysis about who doesn't pay and why? 677 MS. ELLIOTT: Not that I'm aware of. You're talking about analysis by characteristic of customer and I don't think we have that type of information on our billing system. 678 MR. BRETT: Okay. Okay. Now, when you -- you talked a bit about disconnection with Mr. Dingwall. Do you have any regulatory -- I believe Centra Manitoba, for example, has a situation where they can't disconnect people at certain times of the year regardless of what the situation is with respect to their bill. Do you have a similar kind of -- is there a similar provision in effect here at all; do you know? There's not. 679 MS. ELLIOTT: No. 680 MR. BRETT: So you are free to disconnect? 681 MS. ELLIOTT: I think there is a condition when the temperature falls below a certain degree day that we won't disconnect. I'm not sure whether -- it's not mandated. 682 MR. BRETT: Right. And what happens then is -- once you've written off the amount, do you still, in fact, continue to try and collect that amount and do you get people paying and to what extent will people pay later, effectively, pay when they can, if you like? 683 MS. ELLIOTT: If we've made payment arrangements, we won't writeoff the amount. 684 MR. BRETT: So you might settle an account for payment over a period of time, for example, like a series of post-dated cheques? 685 MS. ELLIOTT: Yes, when a customer is contacted to make payment arrangements, we'll make those arrangements and that account won't be written off. Once an account is written off, we've exhausted the steps that we take internally to collect that account, we may sell it -- 686 MR. BRETT: To do a factor or something? 687 MS. ELLIOTT: -- and get collection in that fashion. 688 MR. BRETT: So you would discount it or sell it to a third party and this would be like a sort of a professional buyer of distressed accounts or something of that sort? What do you do then with -- how is that cash that you get at that point, how is that accounted for in your system? 689 MS. ELLIOTT: It reduces the bad-debt expense. 690 MR. BRETT: If comes in a subsequent year, how do you deal with it? 691 MS. ELLIOTT: It will go against the expense of the year in which the transaction is undertaken. 692 MR. BRETT: So it will go back, it will be revisited? 693 MS. ELLIOTT: No, it's recorded in the year that it happens. 694 MR. BRETT: It will reduce the bad-debt allowance, is it what, in a deferral account or something like that? 695 MS. ELLIOTT: No, it's just part of the transaction, if we collect on an account that's been written off, subsequently, it will reduce the bad-debt expense. 696 MR. BRETT: Of the subsequent year. 697 MS. ELLIOTT: Of the year in which it's collected. 698 MR. BRETT: Now, are those amounts of money significant relative to the amounts of bad-debt forecast, for example, are they 10 percent, can they be as high as 25 percent? 699 MS. ELLIOTT: They're not significant amounts. In the hundred thousand dollar range in total. 700 MR. BRETT: So only a few percentage points of the original estimate of bad debt? 701 MS. ELLIOTT: Yes. 702 MR. BRETT: Okay. I'd like to ask you a couple of questions about two other subjects here and the first is a brief one. I noticed -- this would be for you, Ms. Brodie Lumley, if you could turn up 7.55 for a moment, J.7.55. It's a CAC, Consumers' Association interrogatory. 703 MS. BRODIE LUMLEY: Yes, I have it. 704 MR. BRETT: And it deals with IT expenditures over the last -- for '99 through 2004. And if I look at that total gross O&M for IT from '99 through 2004 on line 3, it's pretty well constant -- well, it rises slightly but it's 24 to 26 million each year over that period; right? 705 MS. BRODIE LUMLEY: That's correct. 706 MR. BRETT: And do you know roughly how many roles are associated with that, what the headcount would be in the -- I'm sorry, I have that here actually that's in your Exhibit J.7.54. It would appear the headcount has been reduced over time. I'm looking at J.7.54 of your information technology. 707 I take it that's because, over time, this function has been partially outsourced starting in 2003, actually it's a little -- starting in 2003, it's part of the management fee, right? 708 MS. BRODIE LUMLEY: It is a part of the shared-services arrangement, correct. 709 MR. BRETT: Before that, for a period of time, it was -- you show on J.7.22, I'm just looking for a little bit of a chronology here, in J.7.22, you show 2002 actual 13.6 million in information technology expenditures; right? 710 MS. BRODIE LUMLEY: That is correct. 711 MR. BRETT: And you show about 3 million of telecommunications. I take it what's happened is you've taken that -- you've taken that in house? The 13.6 is not shown anymore, it's only shown in the 2002 actual. Where does that go? 712 MS. BRODIE LUMLEY: It's a part of the shared services arrangement incorporated in the management fee line. 713 MR. BRETT: Okay. It goes up into the affiliate revenue -- sorry, into the management fee, the previous line. 714 Have you looked at, as a possible area of saving over the last year or two - and you may not be the right people to ask this, but I don't know where else we'd ask it - but have you looked at a possible area of saving in the last two or three years at the IT budget, the IT O&M budget, to see whether or not it could be reduced? Do you know whether that's been a subject of serious examination? 715 MS. ELLIOTT: I think everyone's budget is under scrutiny to be reduced every year. IT is not an exception to that practice. 716 MR. BRETT: Okay. It just seems to have a constancy which is -- let me ask you a few questions on productivity. 717 I think I can finish off in five minutes, Mr. Chair, so we'll get out at one less ten pin after lunch. 718 I'd like to start on this with a reference to -- again, I understand that you folks are not -- you know, you're not the president of the company or the vice-president, but, Ms. Elliott, you've had a long experience with Union in a number of senior positions. If you look at J.3.5, this is a CME -- do you have that? 719 MS. ELLIOTT: Yes, we do. 720 MR. BRETT: This is a more general question. It's not so much a question of specific numbers, but it's sort of a question dealing with approach and posture, I think, on these matters. 721 On J.3.5 -- well, this deals with a number in the first question. You were asked, "Please advise what operating efficiencies (productivity gains) Union Gas expects to achieve in 2004." 722 Answer: 723 "Union expects to achieve operating efficiencies of 0.3 percent gross O&M in 2004 representing a productivity gain of approximately 1 million gross for those costs that are controllable." 724 Now, is that a -- when you say you expect to achieve operating efficiencies or productivity gains, do you have specific -- are there specific projects in mind that would yield that 0.3 percent? 725 MS. ELLIOTT: There are no specific initiatives related to that. That would just be a general productivity reduction to keep costs from going up at the rate of inflation. 726 MR. BRETT: And did you -- I was going to ask you how you arrived at that number. Is that -- do you have an -- could you tell me that, how you arrived at the .3 percent or the 1 million? 727 MS. ELLIOTT: It's really the difference between what the actual inflation was and a limit on the cost increases of one and a half percent versus the 1.8 inflation. 728 MR. BRETT: Okay. And the next question is if you -- if you look at CAC J.7.30, I think it's one -- I don't think it was discussed. It's one that was referred to by Mr. Thompson, I think, yesterday. Do you have that? 729 MS. ELLIOTT: Yes, we do. 730 MR. BRETT: If you look at the second paragraph, the last sentence -- well, no, let's look at the second paragraph in its entirety. "Guidelines were communicated to management, I'll just read it, "as to how to go about constructing their budgets. As it became apparent that financial targets would likely not be achieved without corrective action, management was asked to commit to generating higher revenue or reducing costs. How managers delivered on their commitments was up to each individual administrator." 731 And then this is the sentence I'm interested in: 732 "There was no value to be gained from documenting the areas where productivity improvements were being achieved, nor were there resources available to do so." 733 And my question is: Would you agree with me that actually being able to document, that it is desirable to be able to document individual productivity improvements in terms of the company being able to have a reference for practices that they've taken that they can repeat in the future or build upon? Does that seem reasonable? 734 MS. ELLIOTT: Given that we manage financial targets and each manager/administrator manages their own budgets within those targets, this is really a reference to accumulating and logging all those various initiatives. As we pointed out under examination by Mr. Thompson yesterday, the operations group was able to produce a list of some of the things they've done. But it isn't our practice to record and document initiatives in a fashion that allowed us to provide a listing in response to this question. 735 Clearly, when we're preparing a budget, there will be discussions at each administrator level as to what can be done. Once the budget target is set, then we report progress against that on an actual basis and don't tend to go back and report performance as to how the individual plans materialized, just at the total level. 736 MR. BRETT: Do you think it would be helpful over the longer term, particularly as you -- if, as and when, we get into an extended PBR program to have a -- for the company to have a -- wouldn't the company want to have sort of a digest of these improvements, where they've been made, how reproducible they are, what kinds of savings can be made from them, how difficult or easy they are to implement? 737 MS. ELLIOTT: It hasn't been required within -- within the company for management. Individual managers may have their own area and understand what they've done. But in terms of logging, tracking, recording, reporting this activity, it hasn't been a requirement of management to do. And it's probably not as easy as it sounds, given the interrelationship and the constant change that's taking place, to go back and try and sort out the costs of individual initiatives. 738 MR. BRETT: All right. Thank you. Those are my questions. 739 Thank you very much, Mr. Chairman, Mr. Birchenough. 740 MR. SOMMERVILLE: Mr. Brett. 741 We will adjourn until 2:00. 742 MR. THOMPSON: Mr. Chairman, just before we break, I'm unable to stay for this afternoon and I won't be here next week for the first few days. My colleague, Mr. DeRose, will be covering for IGUA. 743 But I'd appreciate it if Mr. Penny could just give us an outline of how he expects it to proceed on Monday. My understanding is that gas supply will probably carry over until Monday. And then is it the GDAR panel that goes in if there's time available? Is that the game plan? 744 MR. PENNY: Yes. 745 MR. THOMPSON: Thank you very much. 746 MR. SOMMERVILLE: Thank you, Mr. Thompson. 747 --- Luncheon recess taken at 1:10 p.m. 748 --- On resuming at 2:04 p.m. 749 PRELIMINARY MATTERS: 750 MR. SOMMERVILLE: Thank you, please be seated. 751 Mr. Penny. 752 MR. PENNY: Yes, thank you, Mr. Chairman. I'll just indicate for the record that we've filed with the Board and made available for parties a series of answers to some transcript undertakings. There's N.4.3, 4.8, 5.1, 5.5, 6.13, 7.4. 753 MR. SOMMERVILLE: Thank you. 754 MS. SINGH: Mr. Chairman, I just have one preliminary matter. 755 I just wanted to advise the Board and provide Mr. Penny with notice that I will be filing a corrected M.9.1 on Monday. Thank you. 756 MR. SOMMERVILLE: Mr. Moran. 757 MR. MORAN: Thank you, Mr. Chair. 758 UNION GAS LIMITED - PANEL 7; ELLIOTT, BRODIE LUMLEY 759 P.ELLIOTT; Previously Sworn. 760 W.BRODIE LUMLEY; Previously Sworn. 761 CROSS-EXAMINATION BY MR. MORAN: 762 MR. MORAN: There was a question that I began to raise with the HR panel and they bounced it to you, and I'll start off with that one. It involves Exhibits J.17.37 and J.3.11, if you could just turn those two up. 763 MR. SOMMERVILLE: Sorry, Mr. Moran, could I have those references again? 764 MR. MORAN: Yes, J.3.11 and J.17.37. 765 MR. SOMMERVILLE: Thank you. 766 Beginning with J.17.37, under the blue-page 2004 column for the budget for incentives, there's an amount entered in there of about 9.5 million; right? 767 MS. ELLIOTT: Yes, that's correct. 768 MR. MORAN: Which is included as part of what you're seeking in rates. 769 Then if you turn to J.3.11, there's a letter attached to that interrogatory and on pages 2 and 3, you will see that Union's employees are divided into four groups: Executives, managers, salaried professionals and unionized employees. The HR panel told us what the split amongst those groups was for the people, and I wanted to know what the split was for the $9.5 million amongst those groups, and they thought that you might be able to answer that. 770 MS. ELLIOTT: I don't have that information. 771 MR. MORAN: So we may have just deferred the inevitable undertaking. 772 MS. ELLIOTT: I think so, yes. 773 MR. PENNY: You're looking for the split of 9.5 million in incentives between the four groups of employees listed on pages 2 and 3 of the attachment to J.3.11? 774 MR. MORAN: That's correct. Mr. Chair, that would be Undertaking N.9.8, to provide the split of the $9.5 million forecast amount for incentives, the split amongst the four employee groups as listed in the attachment to Exhibit J.3.11. 775 UNDERTAKING NO. N.9.8: TO PROVIDE THE SPLIT OF THE $9.5 MILLION FORECAST AMOUNT FOR INCENTIVES, THE SPLIT AMONGST THE FOUR EMPLOYEE GROUPS AS LISTED IN THE ATTACHMENT TO EXHIBIT J.3.11 776 MR. SOMMERVILLE: Thanks. 777 MR. PENNY: Mr. Chairman, this is not for the record, but I wonder if I could just ask Mr. Mackie if he can close the blind on the window that's behind him. Thank you. 778 MR. MORAN: We were trying to cast light on things in here. 779 Now, Ms. Elliott, earlier, you indicated to another examiner that you review department budgets for reasonableness and I was wondering if you could explain what that means? 780 MS. ELLIOTT: As we're collecting the information and bringing it together in the form of financial statements, we're comparing the information that we're receiving against what we thought we would get in terms of our actuals and our expectations for the level of costs and obtaining variances explanations on what's giving rise to the differences. 781 MR. MORAN: I wonder if you could just explain in a bit more detail the nuts and bolts of that exercise. 782 MS. ELLIOTT: Each individual group is responsible for compiling their own individual budgets and all of the component parts. As we total it up and compare it to prior years and the current year's actuals, we'll look at basically the component parts and get variance explanations, just an understanding. It's not unlike the information that's filed in the exhibits at D.3, tab 3, that breaks down the component parts, in some cases by administrator in other cases by cost type, so that we know what we've got and what's included in it. 783 MR. MORAN: And if you find a variance that you're not sure about, you go back to the particular department and quiz them on why there seems to be a bit of a jump? 784 MS. ELLIOTT: That's right. We go back to the originator and get the explanation and we also confirm that the administrator in the various areas has approved and signed off on those budgeted amounts. 785 MR. MORAN: Thank you. I'd like to turn now to the rate-rider issue, just a few follow-up questions on that as well, the $3.8 million that you've identified. As I understand it, I think you indicated it earlier, customer care, the billing operation is done by a third party; right? This is the Enlogix or ADS that you referred to? 786 MS. ELLIOTT: The billing function is done by third party. The customer care, the inquiry, the credit and collection, that's done internally. 787 MR. MORAN: So the billing portion is done internally, but the rate-rider issue relates to the software that's owned by Enlogix; is that correct? 788 MS. ELLIOTT: That's correct, yes. 789 MR. MORAN: And if we have more questions on that, there's a witness coming up through the ranks to speak to that. 790 MS. ELLIOTT: Yes Mr. Shervill is scheduled to appear to speak to that. 791 MR. MORAN: Now, you were asked, I think it was by Mr. Brett, about an alternative approach to that expense, amortizing it over the remaining life of the contract with Enlogix or ADS. I think you agreed, as I remember, that that would be an alternative approach, but I don't think you indicated whether you had a preference or whether Union had a preference towards either approach; is that something that you specifically want to go away and think about? 792 MS. ELLIOTT: It's the company's position that the costs would be incurred in 2004 and recovered in 2004. As I indicated to Mr. Brett, an alternative would be to incur the costs in 2004 and defer and amortize them over the remaining period of the contract, but from a matching principle, incurring the costs in 2004 and recovering them would be preferable. 793 MR. MORAN: Okay. Am I correct in understanding that this 3.8 million would be simply a bill that would be presented to you by the Enlogix folks and that's a bill that you would then pay in 2004 and that's why you are expensing it in 2004? 794 MS. ELLIOTT: The majority of the $3.8 million is costs to the service provider for the programming required to make modifications to the system. It would be invoiced to us and paid by us. 795 MR. MORAN: And with respect to how those arrangements work, that's for another witness to speak to? 796 MS. ELLIOTT: Yes. 797 MR. MORAN: And with the specific question on amortizing it, can you identify any downside to amortizing it over the remaining three years of the contract, other than the matching principle you just identified? 798 MS. ELLIOTT: In terms of putting the cash out next year and recovering it over a three-year period of time, is the consequence of amortizing it over a period. 799 MR. MORAN: Right. But are you able to identify any downside to doing it that way? 800 MS. ELLIOTT: The additional cost incurred to carry -- to finance the expenditure for the three years versus one. 801 MR. MORAN: Okay, so the carrying costs and the matching principle would be the two things you would point to? 802 MS. ELLIOTT: That's right. 803 MR. MORAN: All right. Next area: I always get stuck with the airplane question. I don't know why that is. It's always left to the end, but here it is: You've identified an expense for the overhaul of airplane engines of $500,000 and aircraft insurance in the order of a quarter of a million, 226,793,000; right? The engine overhaul is identified in D.3, tab 3, schedule 2, page 4 if you want to check that. 804 MS. ELLIOTT: I'm aware of that one. The insurance one -- 805 MR. MORAN: The insurance one is J.26.52. 806 MS. ELLIOTT: I have those numbers, yes. 807 MR. MORAN: Just looking at Exhibit J.26.52, the schedule attached to that, there's a line, 6, that deals with aviation and we see numbers associated with the years 1999 through to 2004. 808 MS. ELLIOTT: Yes. 809 MR. MORAN: And it looks like there was a major jump in the cost of insurance for 2002/2003. Was that in the aftermath of 9/11? 810 MS. ELLIOTT: Certainly the jump occurred after -- I'm not sure that I can -- I mean, the insurance has generally increased since that period, certainly, including our aviation insurance. 811 MR. MORAN: Okay. These two items, the aviation insurance and the airplane engine overhaul, what aircraft are they in relation to? 812 MS. ELLIOTT: The aircraft owned by Union Gas. 813 MR. MORAN: All right. And this aircraft, what is it used for? 814 MS. ELLIOTT: It flies employees -- predominantly, it flies employees between Chatham and Toronto. But it's used -- it's used for travel arrangements for Union Gas employees. 815 MR. MORAN: Okay. And what are the other costs associated with the aircraft in question? 816 MS. ELLIOTT: We would have general maintenance, fuel, and the pilots that are all tied to that aircraft. 817 MR. MORAN: Right. Landing fees -- 818 MS. ELLIOTT: Yes. 819 MR. MORAN: -- and so on. Is that identified anywhere that we can find on the record? 820 MS. ELLIOTT: There's no specific list of all the aviation costs in the record, no. 821 MR. MORAN: All right. I wonder if you could undertake, then, to provide me with the total costs associated with aviation, broken down by item? 822 MS. ELLIOTT: Yes, I can do that. 823 MR. MORAN: If you could do that over a three-year period, on an annual basis, 2001, 2002, 2003; and then the forecast for 2004. 824 MS. ELLIOTT: 2001 to 2004? 825 MR. MORAN: Mr. Chair, that would become Undertaking N.9.9. 826 UNDERTAKING NO. N.9.9: TO PROVIDE BREAKDOWN OF TOTAL COSTS ASSOCIATED WITH AVIATION FOR 2001 TO 2003; AND FORECAST FOR 2004 827 MR. MORAN: Now, with respect specifically to the airplane engine overhaul item, would you agree that that's sort of an unusual expense, it's not a routine kind of expense, is it? 828 MS. BRODIE LUMLEY: I believe that that is for an overall of the brakes and the landing gear. It is a significant maintenance item. 829 MR. MORAN: It's not a regular one, it's a special item, isn't it? 830 MS. BRODIE LUMLEY: That's right. 831 MR. MORAN: And is there any reason why that expense shouldn't be capitalized? 832 MS. BRODIE LUMLEY: Because it is a maintenance item. It's not a betterment of the aircraft, it's an ongoing part of the maintenance. 833 MR. MORAN: Okay. Is there any reason why that expense shouldn't be amortized over the period of time between such required maintenance? 834 MS. ELLIOTT: I think in conjunction -- we may have to look at that in conjunction with the total cost of the aircraft just to determine how "one time" that cost is. Clearly if it's a maintenance expense, then it would be expensed in the period. If it's a cost isolated, not recurring frequently, then there may be a case for amortizing it. 835 MR. MORAN: And on that basis, I assume you'd have the same caveats about amortizing it -- 836 MS. ELLIOTT: Yes. 837 MR. MORAN: -- as you said, for the rate-rider treatment. All right. Thank you. 838 Now I'd like to turn to Exhibit J.7.1. A couple of questions just to clarify what we have in J.7.1, corrected. This is where you describe the four key items contributing to the delivery-related deficiency of $104 million; right? 839 MS. ELLIOTT: The four key variances between 1999 and 2004. 840 MR. MORAN: Right. And that $104 million delivery-related deficiency is what is being added into the revenue efficiency that leads to the request for the rate increase; is that correct? 841 MS. ELLIOTT: It's not added into, it is the revenue deficiency. So the revenue deficiency is a product of revenues less costs giving you a difference. This is a variance analysis on that 104 between the 2004 forecast in 1999 and the four key items that would support the 104, or build up to 104. 842 MR. MORAN: Right, which then leads to the request for an increase in rates; right? 843 MS. ELLIOTT: Yes, the request for the increase in rates is the result of the 2004 forecast, so the difference between our revenues as forecast and our costs as forecast. 844 MR. MORAN: Okay. 845 MS. ELLIOTT: This was an attempt to try to explain what has given rise to that variance in 2004 when you compare it to what was in the forecast in 1999. 846 MR. MORAN: All right. So you have your forecast and you compare that to what revenues you would expect to get from current rates if they continued into 2004; right? 847 MS. ELLIOTT: Yes, we forecast our costs and then look at what level of activity we expect to see next year at current rates and compare the two. 848 MR. MORAN: Right. And the current rates are the rates that were originally set going into the PBR plan and then escalated according to the adjustment mechanism during the course of the PBR plan; right? 849 MS. ELLIOTT: Right. 850 MR. MORAN: And so when we look at the top of the answer on page 1 of Exhibit J.7.1, you indicate that the 2004 updated October delivery-related deficiency of 104 million is driven by the following key items when compared to the 1999 forecast underlying current rates. Did you mean the 1999 rates, or did you mean the rates as escalated over the course of the PBR that's currently in effect? 851 MS. ELLIOTT: No. This is a comparison against the forecast in 1999, so not the rates in 1999, but we took the 2004 revenues against the revenues in -- in 1999, looking at the variances between them and that's where you identify predominantly the decrease in weather and the decrease in use. We also looked at the costs in 1999 relative to 2004 and identified the pension as a component that is varying, but it's the analysis on page 2 that looks at the rates, basically the rates in place today that are being used in 2003, and comparing the 2003 revenues and costs against 2004. 852 MR. MORAN: Right. So when we look at page 2, and we see the total of 106 million, the reason it's $106 million is because you're predicting a $2 million sufficiency for 2003, which then takes you to the $104 million figure; right? 853 MS. ELLIOTT: Right. 854 MR. MORAN: Then the last area I want to cover with you follows. You went into PBR and you spent three years under PBR, and I think as you you've indicated, it was up to you to manage your costs; is that correct? 855 MS. ELLIOTT: Managing the costs and changes in revenues, yes. 856 MR. MORAN: Right. And of course, the objective would be to try to keep a relationship between the costs and the revenues because you want to make some money while you're doing it; right? 857 MS. ELLIOTT: Yes. 858 MR. MORAN: Okay. And is that what happened? 859 MS. ELLIOTT: Yes. Over the period of 2001 to 2003, we have earned approximately our benchmark rate of return each and every year. 860 MR. MORAN: And then the plan ends and you have to rebase and that's what all this case is about for 2004 rates; right? 861 MS. ELLIOTT: That's correct. 862 MR. MORAN: And as I understand it then, during the course of the proceeding, people have identified a number of special situations, I guess, that have contributed to the higher costs that we see discussed in the case. One of these is change in insurance costs; right? Those have changed dramatically since the beginning of the PBR period; is that correct? 863 MS. ELLIOTT: Yes. 864 MR. MORAN: And there's been a lot of discussion about the pension issue because pension funds all performed quite badly for a couple of years which happened to the coincide with the PBR period as well; right? 865 MS. ELLIOTT: Yes. 866 MR. MORAN: And you talked about changes in your pipeline integrity requirements that has led to greater costs as well; right? 867 MS. ELLIOTT: That's correct. 868 MR. MORAN: Now, these are all things of course that during the course of the PBR, you just had to manage it, right, these things were happening during PBR but you had to manage it during the context of the PBR plan; right? 869 MS. ELLIOTT: Yes, they were happening during the term of the PBR plan. The accumulated impact is what we're dealing with in 2004. 870 MR. MORAN: And with respect to the return on equity that's been dealt with in a separate proceeding and whatever impact that has comes as a result of whatever conclusion that proceeding reaches; right? 871 MS. ELLIOTT: That's correct. 872 MR. MORAN: And finally, we have the weather-normalization issue, and the impact associated with that has to do with the decision by Union to change its methodology or propose a change in its methodology; correct? 873 MS. ELLIOTT: Sorry, can you repeat that question? 874 MR. MORAN: The impact associated with the weather- normalization issue results from a decision by Union to propose a change to its methodology. When we look at J.7.1, that's the item number 2; is that correct? 875 MS. ELLIOTT: That's correct. Union's proposing a change to its weather-normalization methodology in order to better forecast revenues based on a better forecast of the heating degree days that underpin the forecast. Over the course of the PBR term we were forecasting, in 2002, and 2003, we were forecasting using the 20-year trend. That ensures that the company is managing its costs to match its revenues. Then we deal with the actual weather on top of that. 876 MR. MORAN: Okay. So on the list of things that we've just discussed, the impact of changes in the insurance costs, the pension and benefits costs, the pipeline integrity maintenance costs, the ROE issue, the weather normalization change in methodology, leaving those aside, are there any other special circumstances or factors that you would identify as contributing to the revenue deficiency? 877 MS. ELLIOTT: I think there are more O&M increases than just insurance, pension and pipeline integrity. The difference between our operating and maintenance expense in 2004 and the costs we're incurring this year is $42 million and the list of what's contributing to that is in evidence, so included in that will also be our costs for GDAR and the rate rider. We're also seeing a decrease in our revenues from -- for this year, for example, when you go back to looking at 2003, numbers have a component of actual weather in it, beginning of this year, we've had some favorable weather that has contributed to this year's earnings that doesn't materialize next year when we normalize the forecast. So those components as identified in page 2 of J.7.1 are all changes between 2003 and 2004 that will explain why the revenue deficiency is $104 million. 878 MR. MORAN: One last question on Exhibit J.7.1. In looking at item 2 and item 3. 879 MR. PENNY: Which page? 880 MR. MORAN: The first page. Item 2 deals with, I guess, the impact associated with the change in methodology from 30-year average to 20-year trend and there was a lot of discussion and a whole panel spent a while talking about that. 881 Item 3 is described as being the decline in normalized average use per customer since rates were set in EBRO 499, and I wonder if you could explain the difference between item number 2 and item number 3 given that -- 882 MR. PENNY: Well, Mr. Chairman, Mr. Gardiner was asked that very question by someone and did explain that difference. That's really an issue that we've already dealt with, in my respectful submission, and the answer to that question is already in the evidence. 883 MR. SOMMERVILLE: That's consistent with my recollection too, Mr. Moran. I don't recall whether it was Mr. Gardiner, but it was certainly asked of the weather panel, by Mr. Warren I believe, as what the difference between item 2 and item 3 was. I think that was probably the right locale. 884 MR. MORAN: It just runs in the back of my mind that there was some reference to these numbers that was kicked over to this panel. 885 MR. PENNY: It was kicked over from the weather people to the demand forecast people and it was Mr. Gardiner that was asked this question. 886 MR. MORAN: I'm happy to leave it at that, Mr. Chair, and those are all my questions. 887 MR. SOMMERVILLE: Thank you, Mr. Moran. 888 The Board had no questions. 889 MR. PENNY: Thank you, sir. I actually had no questions in re-examination until Mr. Moran asked about the aircraft. He spoiled my record. It's been a while that the aircraft came up, I don't even remember, it's been since the days that I was, myself, asking questions on the other side of the table as an intervenor. 890 RE-EXAMINATION BY MR. PENNY: 891 MR. PENNY: I just have two questions for you, Ms. Elliott. The first has to do with specific issues of the maintenance that Mr. Moran asked you about, and the overhaul. I just wanted to ask you whether the timing for aircraft maintenance is prescribed either by regulation or by the manufacturer? 892 MS. ELLIOTT: I'm not sure that I'm in a position to answer that. I know that there is regular maintenance performed on the plane after so many hours of flight. I can't tell you what those are. 893 MR. PENNY: All right. And with respect to the costs generally, Mr. Moran asked you for an undertaking to break out those costs. Can you just speak, at a high level, to the avoided costs associated with Union owning its own aircraft and what relationship those bear to the cost to Union of owning its own aircraft? 894 MS. ELLIOTT: Certainly the intent of the aircraft is to avoid the cost of travel and hotel accommodations and the time spent on the road getting from, for example, Chatham to Toronto. In terms of economics, having the plane reduces the time spent out of town and on the road. 895 MR. PENNY: All right. Thank you. 896 Those are all my questions, sir. 897 MR. SOMMERVILLE: Mr. Penny. 898 This panel is excused for now. You will be making a return engagement in the not too distant future. Thank you very much for your assistance. 899 MR. PENNY: Mr. Chairman, the gas supply panel is ready to proceed, so we'll just ask them to come into the room. 900 Mr. Reghelini has asked me to note, for the record, that we have prepared updated evidence on DSM which is being filed -- as a result of the settlement which is being filed as D.1, tab 13, updated, with associated schedules and so on. It also reflects the result of the audit reports. So that package will be made available to the Board and is being mailed out to all the parties today. And there are extra copies at the back of the room today. 901 MR. SOMMERVILLE: Have a safe trip back to Chatham. 902 MS. BRODIE LUMLEY: Thank you. 903 MS. ELLIOTT: Thank you. 904 [Union Gas Limited - Panel 7 stood down] 905 MR. PENNY: So the gas supply panel will consist of Mr. Isherwood, Mr. Newbury, Mr. Simpson, and Mr. Dent. Mr. Dent has been here already once and has already been sworn, but Messrs. Isherwood, Newbury, and Simpson, it will be their first appearance in this case so they will have to be sworn. 906 MR. SOMMERVILLE: Mr. Ryder, are you prepared to cross-examine this afternoon? 907 MR. RYDER: Yes, we are, but it will be Mr. Quinn. But there won't be any interchange. 908 UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT 909 M.ISHERWOOD; Sworn. 910 D.NEWBURY; Sworn. 911 D.SIMPSON; Sworn. 912 D.DENT; Previously sworn. 913 MR. PENNY: Mr. Chairman, there will be -- once we go through the background and so on, there will be a visual aid to the explanation of one of the proposals for the restructuring of the deferral account which I'll take the witnesses through, and so we've got a large copy in case there needs to be any pointing to something and then we have individual copies for the Board and for the other parties. 914 MR. SOMMERVILLE: Thank you. 915 EXAMINATION BY MR. PENNY: 916 MR. PENNY: Just by way of background, though: 917 Mr. Isherwood, you are currently the director of acquisition for Union Gas? 918 MR. ISHERWOOD: Yes, I am. 919 MR. PENNY: And you've been with Union Gas since 1982, I understand. 920 MR. ISHERWOOD: That's correct. 921 MR. PENNY: You hold a Bachelor of Engineering and a Bachelor of Commerce degree? 922 MR. ISHERWOOD: That's correct. 923 MR. PENNY: As well as a Masters of Business Administration? 924 MR. ISHERWOOD: That's correct. 925 MR. PENNY: And you are a member of the Professional Engineers of Ontario? 926 MR. ISHERWOOD: Yes, I am. 927 MR. PENNY: And you have appeared before this Board on a number of occasions, as well as before the National Energy Board, but before this Board, most recently in RP-2002-0130. 928 MR. ISHERWOOD: That's correct. 929 MR. PENNY: And you, I understand, have overall responsibility for gas supply acquisition at Union Gas? 930 MR. ISHERWOOD: Yes, I do. 931 MR. PENNY: And that includes implementing the gas supply plan. 932 MR. ISHERWOOD: That's correct. 933 MR. PENNY: And you were involved in the preparation of the gas supply evidence at tab D.1 -- sorry, at Exhibit D.1, tab 1? 934 MR. ISHERWOOD: Yes, I was. 935 MR. PENNY: And you were also involved in the preparation of interrogatories that are relevant to that evidence? 936 MR. ISHERWOOD: Yes, I was. 937 MR. PENNY: And do you adopt that evidence for the purposes of these proceedings? 938 MR. ISHERWOOD: I do. 939 MR. PENNY: And, Mr. Newbury, you're currently the manager of integrated supply planning for Union Gas? 940 MR. NEWBURY: Yes, I am. 941 MR. PENNY: And you've been with Union Gas, other than a brief stint at Union Energy, since 1988? 942 MR. NEWBURY: That's correct. 943 MR. PENNY: And you've got a Bachelor of Applied Science in Chemical Engineering, sir? 944 MR. NEWBURY: Yes, I do. 945 MR. PENNY: And you are also a member of the Professional Engineers of Ontario? 946 MR. NEWBURY: Yes, I am. 947 MR. PENNY: And you've appeared before this Board on one prior occasion, being RP-2002-0130, in relation to gas supply planning matters? 948 MR. NEWBURY: That's correct. 949 MR. PENNY: And your specific area of responsibility has to do with the preparation of the gas supply plan? 950 MR. NEWBURY: That's correct. 951 MR. PENNY: And you were, in that respect, involved in the preparation of the evidence at D.1, tab 1? 952 MR. NEWBURY: Yes. 953 MR. PENNY: And the interrogatories that relate to the gas supply plan? 954 MR. NEWBURY: Yes. 955 MR. PENNY: And you adopt that evidence for these proceedings? 956 MR. NEWBURY: I do. 957 MR. PENNY: Thank you. 958 And then, Mr. Simpson, turning to you, you are the manager of asset acquisition for Union Gas? 959 MR. SIMPSON: That's correct. 960 MR. PENNY: And you are also an engineer, I understand. 961 MR. SIMPSON: Yes, I am. 962 MR. PENNY: And a member of the Professional Engineers of Ontario? 963 MR. SIMPSON: That's correct. 964 MR. PENNY: And you, I think, have been employed at Union Gas, in various aspects of gas sales or acquisition, since 1987? 965 MR. SIMPSON: That's correct. 966 MR. PENNY: And you've appeared before this Board on a number of occasions in respect of your gas supply responsibilities, but most recently also in RP-2002-0130. 967 MR. SIMPSON: Yes, that's correct. 968 MR. PENNY: And you participated in the preparation of gas supply evidence, and specifically with respect to -- well, sorry, let me back up. Your specific area of responsibility on this team has to do with upstream transportation, including the vertical slice? 969 MR. SIMPSON: That's correct. 970 MR. PENNY: And in that capacity, you participated in the preparation of the gas supply evidence that's been filed in this case? 971 MR. SIMPSON: Yes. 972 MR. PENNY: As well as the interrogatories that relate to that? 973 MR. SIMPSON: Correct. 974 MR. PENNY: And you adopt that evidence, sir? 975 MR. SIMPSON: I do. 976 MR. PENNY: And then, Mr. Dent, we've already run through your background so I won't do that again; but for the purposes of this panel, I understand that you are responsible for commodity purchasing and that includes, as well, the deferral account -- gas supply deferral accounts and, in particular, the evidence related to the deferral account restructuring? 977 MR. DENT: That is correct. 978 MR. PENNY: All right. And you were, in that capacity, involved in the preparation of the D.1, tab 1 evidence and the interrogatories relating to that evidence? 979 MR. DENT: Yes, I was. 980 MR. PENNY: All right. Thank you. And do you adopt that evidence? 981 MR. DENT: Yes, I do. 982 MR. PENNY: Now, the only area in examination-in-chief I wanted to touch on with you, panel, is the deferral account restructuring, just because reading the words is sometimes not as accessible as seeing it visually. 983 But by way of background, Mr. Dent, first of all, you are the one who is here to speak to the gas supply deferral account restructuring? 984 MR. DENT: That's correct, I am. 985 MR. PENNY: And can you, first of all, outline just briefly the back -- well, why don't you outline what the existing -- what the concept of the existing gas supply deferral accounts are and tell us why Union is pro -- the reasons that Union has for proposing to do some restructuring of those gas supply deferral accounts. 986 MR. DENT: The current structure of the gas supply accounts goes back a number of years and includes categories such as firm transportation which is essentially TransCanada, as well as the other purchased gas account, which is primarily the non-TCPL or the Dawn-delivered, if you like, gas supply elements. Over the years, a number of things have occurred that have created the need to restructure our gas supply deferral accounts; TransCanada's supply has been reduced in our portfolio because of direct-purchase displacement and as a result, we've seen a morphing, if you like, of our portfolios, our north being TransCanada related and our south being backed primarily by the non-TransCanada sources of supply. 987 And then there's been a couple of other things that occur with respect to vertical slice. The vertical slice for the south direct purchase really hasn't been well reflected in the deferral accounts themselves. And also, with the change that we're proposing for load balancing and flexibility, we no longer as of the end of this year, want to have any gas costs categorized as capital F flexibility, but that concept really goes away with the load balancing and flexibility directive and so we're trying to redesign the deferral accounts to meet that need as well. 988 And then, finally, there are also some gas costs which are really integrated, you can't distinguish between north or south. And we'll look at it, I guess, more directly in a few moments, but there are still some integrated costs that we need to reflect and we think that by restructuring the accounts as we're suggesting that that becomes a little bit more intuitive and makes a little bit more sense based on where our portfolio is today. 989 MR. PENNY: Thank you. First of all, an overview question with respect to the restructuring. Does the restructuring affect any of the dollars deferred in total? 990 MR. DENT: No, the restructuring has no effect on the deferred dollars themselves. The same costs that we would have today under the firm and other-purchased gas categories would exist January 1, 2004. They will just be categorized or captured in different accounts. 991 MR. PENNY: So if there's $100 in the -- under the old system that gets deferred into various accounts, there's $100 under the new system that also gets deferred into the various accounts? 992 MR. DENT: That's correct, there will be no change in the overall deferral dollars itself. 993 MR. PENNY: With that background then, could you -- well, let me back up. 994 It is the coloured diagram that we have a visual representation of the restructuring of the gas supply deferral accounts and the flow of dollars into those accounts? 995 MR. DENT: Yes, that's correct. 996 MR. PENNY: So could that be given an exhibit number? 997 MR. MORAN: Mr. Chair, Exhibit M.9.2, a diagram entitled, "Union Gas Deferral Restructuring." 998 EXHIBIT NO. M.9.2: DIAGRAM ENTITLED, "UNION GAS DEFERRAL RESTRUCTURING" 999 MR. SOMMERVILLE: Thanks, Mr. Moran. 1000 MR. PENNY: Mr. Dent could you just walk the Board through the basic components of the restructuring and why those were being done or being proposed in this case for approval? 1001 MR. DENT: Certainly. Starting at the top, the green box, heat value account, no change to that account. That account will remain as it is now. And then we move into the firm supply purchase which is really the TransCanada commodity purchases. Those purchases made primarily at Empress or the Alberta border. And currently there are really two elements in that box, the yellow box within that box representing the north assets or the assets being used to serve north customers, and the red indicating that there is some south or some TCPL that are underpinning service to south sales customers. 1002 Under the new regime, you'll see that there's a yellow line going to the north PGVA indicating that, again, primarily our north portfolio is a TransCanada portfolio and those assets, that commodity purchased at Empress to service north sales service customers will be captured in the north PGVA account. 1003 Now, there still may be some south TransCanada or some TransCanada commodities serving the south customers and so that commodity cost will be allocated to the big, red box on the right-hand side, titled south PGVA. And as of January 1, based on where our portfolio is today, those volumes are really relatively small, but in the future, it could be that we might contract for some TCPL to serve south customers and that, again, that would rightfully be allocated to the south PGVA account and not to the north PGVA account because it would be serving the south sales customers. 1004 So what we're trying to do there is distinguish between assets or commodity serving the north customer versus serving the south customers. 1005 MR. PENNY: All right. Then I see that the current other purchased gas account, the number 88 also contains inventory revaluation, spot purchases, and potential UDC. So what happens to those? 1006 MR. DENT: Yes, the other purchased gas account over the years has captured a number of variances. The elements in the red portion of the other purchased gas account would be transferred to the south purchased variance account. Again, those are assets, both transport, commodity and fuel, that are being used to serve the south customers. 1007 Spot purchases also have appeared in the other purchased gas accounts in the past and these now will be allocated in two different ways. Those spot purchases which are part of the plan will be part of the south purchased variance account. Any spot purchases which are above the plan will go into the mauve box on the right-hand side, one of the joint accounts titled "Spot purchases (above planned volumes)," those costs will be deferred in an individual account designated for the spot gas purchased above the plan. 1008 The inventory revaluation, again, will be deferred to both north and south customers, it will have a separate account so again there will be a separate joint account set up for the inventory revaluation account. 1009 And then finally, there has been some UDC tracking in the other purchased gas account, and rather than have that remain there, we're also proposing that we set up a joint account which captured unabsorbed demand charges which could both relate to south assets, or if you'll notice the bottom, left-hand box, the UDC under north TCPL tolls and fuel, that north UDC would also appear in that joint account as well. 1010 MR. PENNY: Why is it necessary to split spot purchases between planned volumes for the south and amounts that are above planned volumes? 1011 MR. DENT: In the spot account, or spot purchases which are part of the plan, again with the new structure, the load balancing and flexibility changes, those purchases are being made to serve sales-service customers and so therefore, those costs are legitimately captured in the south PGVA. 1012 Any spot acquisition above the plan may go to balance north TP customers, for example, or balance incremental self-sales customers, but until we determine what customer caused those purchases, we'll allocate them or track them in a separate joint account. 1013 MR. PENNY: All right. Thank you for that. And then the next category is the TCPL toll and fuel. And then, finally, the northern TCPL toll and fuel. Can you explain where they go and why? 1014 MR. DENT: Yeah. The south TCPL toll and fuel is really a companion to the firm-supply purchase above, and the red just indicates that the south commodity is tied to the south toll and fuel. And therefore, those costs will be allocated to the south PGVA, and therefore, you are capturing both commodity, toll, and fuel. 1015 In the lower left hand box titled "north TCPL toll and fuel," those elements are the toll and fuel which are being -- the costs which are being captured to serve north customers themselves and they will still be captured in the north toll and fuel account as noted on the third box down on the right-hand side. Again, that grey box matches to the north commodity purchase which is outlined in the firm supply purchase account number 179-80. 1016 MR. PENNY: And so at the end of the day, it seems as if the restructuring is really to try and rationalize the allocation of the various costs. 1017 MR. DENT: That's correct. We want to, as much as we can, allocate costs that are serving the north customers to the north PGVA account, those assets which are underpinning service to south customers in the south PGVA account, and then those assets or costs which are integrated in nature such as the inventory, spot, UDC, we're capturing those in joint accounts and they could be disposed of it to either south or north customers. 1018 MR. PENNY: I guess the last question is: At what point in time, then, with respect to the joint accounts, at what point in time would Union be making determinations as to the allocations of the amounts that accumulated in the joint accounts, and what is contemplated as the process by which those accounts would be reviewed and cleared? 1019 MR. DENT: For those accounts, there would be three different aspects depending on which account you're using. The inventory revaluation account, we would dispose of that as we currently do with the inventory revaluation. Again, based on the volume south versus north, those inventory revaluation credits or debits are allocated that way; and with the prospective recovery of deferral accounts, they would be cleared on a quarterly basis. 1020 The spot account itself, we will be in transition year, as you will remember from the load-balancing evidence; but once we're past the transition year, we would still anticipate that there would be a need to evaluate what the actual costs were and who drove those costs at the end of the year. And so there would probably be a year-end or at least a season-end true-up of those costs. 1021 And then the unabsorbed demand costs as well would be primarily an end-of-year true-up as you look at what UDC was incurred for the entire year. So we wouldn't necessarily be proposing that we would dispose of those prospectively, but that that there would need be to a hearing to look at who caused the UDC, and where those costs should be allocated. 1022 MR. PENNY: All right. Thank you. And I guess -- there actually is one final question. I understand that Union would like to implement, to be able to use the new structure to implement effective January 1, 2004. Does that have implications for when Union would prefer to have a determination of the -- just dealing with the deferral restructuring itself, when Union would need to have approval for the use of the restructured accounts? 1023 MR. DENT: Yes, that's correct. As you're aware, to do the work for January 1 QRAM, that needs to start around the middle of November and then we'll have evidence to submit to the Board prior to December 1. So it would really be very helpful to us to have a direction from the Board to be able to use the new deferral account restructuring in that QRAM process. That will assist us in not having to run parallel deferral models and certainly, in my opinion, would lessen the opportunity for mistake if we are only running one set of deferral models. 1024 MR. PENNY: All right. Thank you. 1025 Now, Mr. Chairman, with respect to that last point, it seems to me that we probably have to wait and see what the cross-examination reveals, whether there's any concern about this issue; I'm not currently aware of any but there could well be some. But I wonder, whether -- depending on whether we could return to that issue perhaps sometime next week to determine whether there might be some possibility of getting approval for the restructuring, if indeed there is no opposition to it or something of that nature. 1026 So I just highlight that as a possibility. 1027 MR. SOMMERVILLE: I think there's no hard-edged impediment in our process which would prevent that, provided there wasn't -- the issue wasn't joined -- 1028 MR. PENNY: Yes. 1029 MR. SOMMERVILLE: -- on special -- 1030 MR. PENNY: Right. Well, let's see where we get on that, then, and we can revisit it. 1031 The only other thing I wanted to mention to the Members of the Board Panel is that this is an area, gas supply is an area where one encounters a lot of acronyms. We try to use as few as possible, but just for the assistance of the Board, I wanted to remind you and the parties that there is a glossary of terms at Exhibit A, tab 21, of the evidence. And so we've got a lot of the -- well, we've heard a fair bit of it today with some other panels, too, like ABC, and a lot of those terms are defined at Exhibit A, tab 21. 1032 So that concludes my examination-in-chief of this panel so they're available for cross-examination. 1033 MR. SOMMERVILLE: Thank you. 1034 I think we will take ten minutes. We've -- I think we'll take ten minutes. We'll come back at ten after three and commence with your cross-examination. 1035 It is not particularly likely, it seems to me, that we're going to get beyond Mr. Quinn today. We can try. We'll see where we go. Thank you. 1036 --- Recess taken at 3:00 p.m. 1037 --- On resuming at 3:17 p.m. 1038 PRELIMINARY MATTERS: 1039 MR. SOMMERVILLE: Thank you. Please be seated. 1040 MR. PENNY: Mr. Chairman, before we start with the witness panel, there was one administrative matter that I had intended to raise when we got back from lunch and it slipped my mind. It simply has to do with the preparation of phase 2 evidence on the Coral issue. 1041 We've had a discussion with Mr. Kitchen. He has been devoting his energy to the preparation of the main update to the phase 2 evidence for the rate case as a whole, and so we were going to take you up on your offer to seek a further indulgence on the timing of that. I have left a message for Mr. Brown about this, but I haven't actually spoken with him so I don't know whether he will have any issue with this or not - but I'll certainly undertake to pursue it with Mr. Brown and advise the Board if it does create a problem for him and we will address that in some way - but what we were proposing to do was defer that deadline by a week, so I think the schedule would have called for the Union evidence by the 21st; we were proposing the 28th. That's still several days before Mr. Kitchen is scheduled to testify and a week before any intervenor panels are scheduled to testify, so I think it does leave sufficient time. But, as I said, if Mr. Brown has some concerns, we'll bring those back before the Board and deal with it in some way. 1042 MR. SOMMERVILLE: Thank you, Mr. Penny. 1043 We note that we do have an outside restriction on our time today. We have to adjourn no later than 4:30 in order to accommodate an important obligation. Mr. Quinn, don't take that as a restraint on your cross-examination, but one way or another, we simply must adjourn at 4:30. 1044 My apologies to this panel for this long trip for a fairly short appearance this afternoon. It's our hope to generally avoid that sort of thing. Our apologies in this regard. 1045 MR. PENNY: Thank you for that, sir. But, of course, our interest is to move the thing along so we're happy to be here. 1046 MR. SOMMERVILLE: Mr. Quinn. 1047 MR. QUINN: Yes, sir. I will accept that, and I will be cognizant of the time around 4:30 and look for an appropriate break. With your indulgence, though, Mr. Ryder may have to take over on Monday morning to finish off if we aren't able to get through. 1048 MR. SOMMERVILLE: He promised no tag teams, but in that circumstance, we'll -- I'm being facetious, Mr. Ryder. 1049 Please proceed, Mr. Quinn. 1050 MR. QUINN: Thank you, sir. 1051 UNION GAS LIMITED - PANEL 5; ISHERWOOD, NEWBURY, SIMPSON, DENT 1052 M.ISHERWOOD; Sworn. 1053 D.NEWBURY; Sworn. 1054 D.SIMPSON; Sworn. 1055 D.DENT; Previously sworn. 1056 CROSS-EXAMINATION BY MR. QUINN: 1057 MR. QUINN: As the panel is probably well aware, my name is Dwayne Quinn, representing the City of Kitchener. While your exhibit on deferral restructuring is of very great interest, to a lot of people, I think, it'll be helpful, our questions today refer to storage allocation, deliverability, the impact of the 20-year trend weather methodology, and your proposals for March park and the winter peaking service. 1058 In terms of the first, and I will address this to whatever panel member wants to speak to the area of storage allocation, the aggregate excess methodology, can you tell me when it was first approved? 1059 MR. NEWBURY: I'll probably handle a lot of the discussion around storage allocation. Actually, I don't know when that methodology was first approved. It was certainly in place in 499 and prior, but I don't know the exact first time that came on. 1060 MR. QUINN: Okay. If we deal with 499 time frame, and there was an exhibit that was previously provided to Union Gas under Exhibit M.4.1; do you have that? 1061 MR. NEWBURY: I believe we do. Just one second. That's transcript from the RP-29, is it? One moment. 1062 MR. NEWBURY: Yes, I have it. 1063 MR. QUINN: Thank you. For the purposes of the record, would you agree with me that Kitchener is customer A? 1064 MR. NEWBURY: Yes. 1065 MR. QUINN: And being customer A, our storage allocation under the methodology in this exhibit is 81,585 in the bottom line on line 5. 1066 MR. NEWBURY: Line 5 column A, that's correct. 1067 MR. QUINN: And subject to check, would you accept that that's 94 percent of the total indication of 86,777. 1068 MR. NEWBURY: Sure I'll go with that, yeah. 1069 MR. QUINN: At the time of 499, Union managed the storage service needed by Kitchener under the bundled rate of M9. The total allocation to M9 also included an amount of contingency space over and above the aggregate excess allocation, and this is shown in this exhibit on the first page as 14,748. 1070 MR. NEWBURY: Yes, I see it. 1071 MR. QUINN: Okay. Before we discuss contingency space, can you turn up Exhibit J.5.87, and keep M.4.1 also in front of you, please? 1072 MR. SOMMERVILLE: Sorry, Mr. Quinn, that reference? 1073 MR. QUINN: J.5.87. 1074 MR. SOMMERVILLE: Thank you. 1075 MR. QUINN: City of Kitchener interrogatory. 1076 MR. NEWBURY: Yes, we have it. 1077 MR. QUINN: The page also shows a recreation of that chart and it was actually an exhibit that was filed under C.19.15 and on page 2 of 2 you see that same table? 1078 MR. NEWBURY: Just so I'm staying with you, the table on page 2 is the same as... 1079 MR. QUINN: The table on page 2, I'm sorry of attachment 5, there were a number of attachments that were attached to it, my apologies. Attachment 5 has an exhibit reference of C.19.15 is the top right-hand corner. 1080 MR. NEWBURY: Page 2, attachment 5 of J.5.87, yes, I have it. 1081 MR. QUINN: And as noted by Union in its response, this was from RP-1999-0017. 1082 Now, if you start at the top line, you have a figure of 296,501 for the annual volume forecast, but as you go down the numbers seem to differ. Can you provide to me a description of what occurred to provide the difference in the access over average formula in number 5 of the two exhibits? 1083 MR. NEWBURY: Briefly, I think the difference is -- when we're looking at page 2 of this attachment number 5, on line 4, the winter consumption appears to be where the differences begin. Specifically, on the attachment 5, the volume of 198,584 10(3)s consumed during the winter versus the M.4.1 reference where you're looking at 204,247 10(3)s. 1084 MR. QUINN: So the numbers are different in line 4, can you tell me why? 1085 MR. NEWBURY: No, I can't, I don't have that information with me. 1086 MR. QUINN: We had a previous Union panel on here who did the forecasting. We tried to ask them a number of questions and we understand that the City of Kitchener volumes are not weather normalized, so if they're not weather normalized, what other reason would you have for adjusting the volumes for Kitchener? 1087 MR. NEWBURY: I couldn't speculate on what's causing that change. We'd have to ask, going back to RP-99, the November through March numbers, which months they are referring to. 1088 MR. QUINN: I think November and March is consistent on each exhibit. 1089 MR. NEWBURY: Right, I just -- which years would we be talking about? If you look at the top line number one, that's a calendar '99 reference, so what I would take from that is that's November and December of calendar '99, followed January, February, March of '99, that would be one way to calculate the math of it. 1090 The other way to calculate the math of is it is, you start with calendar '99, you go November, December, then you go January, February, March of 2000. So that could be the source of the two different numbers. 1091 MR. QUINN: You're speculating that may be the source? 1092 MR. NEWBURY: That's right. 1093 MR. QUINN: Could you confirm that for us, please? And I'd like it recognized that the date on the initial Exhibit M.4.1 is dated September 14th, 1998, so the subsequent exhibit that Union filed under the interrogatory is a later date so it is showing a reduction in winter volumes over that period of time. 1094 MR. NEWBURY: Right. That does lead to the conclusion, as well, there could have been another forecast done when the annual volume isn't changing, but the distribution of the annual volume has. So we'll look into it. 1095 MR. QUINN: So you would take that as an undertaking then to look into it? 1096 MR. NEWBURY: Yes. 1097 MR. PENNY: Just so I am clear, I think what you're asking is to reconcile the winter consumption number from M.4.1, page 2, to the winter consumption number that appears in attachment 5 to J.5.87. 1098 MR. QUINN: Yes, including whatever reasons or assumptions Union would have made to come up with that number. 1099 MR. MORAN: Undertaking N.9.10. Mr. Chairman. 1100 UNDERTAKING NO. N.9.10: TO RECONCILE THE WINTER CONSUMPTION NUMBER FROM M.4.1, PAGE 2, TO THE WINTER CONSUMPTION NUMBER THAT APPEARS IN ATTACHMENT 5 TO J.5.87, INCLUDING WHATEVER REASONS OR ASSUMPTIONS UNION WOULD HAVE MADE TO COME UP WITH THAT NUMBER 1101 MR. SOMMERVILLE: Thank you, Mr. Moran. 1102 MR. QUINN: So we are not flipping back and forth between the two, if I could ask you to focus on Exhibit M.4.1 because it outlines the contingency space of 14,748. I'd offered before the Kitchener's share was 94 percent of the storage allocation. Am I correct in thinking that the contingency space underpinning service to Kitchener in 499 was 94 percent of that contingency space, or 13,863, if you take that number subject to check, would Kitchener have a pro rata share of that contingency space? 1103 MR. NEWBURY: That really steps out of my area. Really, Mark Kitchen would be a better person to tell you how those allocations are coming through. 1104 MR. QUINN: Okay, we'll accept the allocation question relative to finance, but the overall aspect of contingency space, is that this panel's responsibility to speak to? 1105 MR. NEWBURY: As it operates certainly in the bundled-gas plan, certainly, yes. 1106 MR. QUINN: Maybe you could help me with this question then. The 14.5 percent that would be contingency space that is removed from the M9 as a result of this allocation contingency space, would you be able to tell me what the percentage was of storage that was identified as contingency space for other in-franchise rate classes? 1107 MR. NEWBURY: Just so I have that straight, we are talking in 499 what other rate classes were receiving, the 10.4 Bcf contingency that was in place at the time, is that the question? 1108 MR. QUINN: How much of it was allocated to each of the specific rate classes as contingency space? 1109 MR. NEWBURY: We can certainly take that up, but it really is again an allocation -- information that Mark Kitchen operates out of, not the gas supply group. 1110 MR. QUINN: Well, you can accept it as an undertaking then, or are you deferring it to that panel? 1111 MR. NEWBURY: I think I'll defer it to the other panel. He'll probably have some more clarity around that. He might have the numbers at hand even. 1112 MR. QUINN: Possibly we can reserve on that for a moment because we are going to go through contingency space. Is it fair to say that contingency space is also referred to as system integrity space in the current vernacular? 1113 MR. NEWBURY: In the current vernacular, the way I view it actually is the contingency-space term came forward in the unbundling hearing, and it's crossing over now between contingency space and system integrity space. The integrity, in my mind, gets across the function of that inventory and space when we're fully unbundled. The contingency space gets across -- just that, it's a contingency space that we are operating while currently in a fully bundled environment. So that's the way I, in internal conversations, talk about the same volume, about how it serves two different masters depending on your assumption about an unbundled world or a bundled world. 1114 MR. QUINN: Okay. What may help us, then, is if you can turn to Exhibit J.5.61. 1115 MR. NEWBURY: Yes, I have it. 1116 MR. QUINN: In the interrogatory response questioning system integrity space, Union outlined three areas in summary that would make up the system integrity space, and they were managing weather variances, backstopping supply failures, and operational integrity? 1117 MR. NEWBURY: That's correct. 1118 MR. QUINN: Okay. So Union is required to manage the weather variances and backstopping of supply failures for its customers and thus needs this system integrity space? 1119 MR. NEWBURY: Again, in the unbundling approved model, that's correct; that's the three functions of that 9.1 Bcf. 1120 MR. QUINN: So who would manage the weather variances and backstopping for customers inside of Kitchener's franchise? 1121 MR. NEWBURY: As a T3 customer, is that -- I just want to be sure I understood the reference. Are we back in 499, or are we talking about your current -- 1122 MR. QUINN: Today, a customer inside the City of Kitchener is obligated to provide it volumes. If it fails, who provides the backstop service? 1123 MR. NEWBURY: As a bundled customer, your load really is completely no notice, so the actual fact is, while you have contractual parameters that you are expected to stay within and operate within, in the event you don't, Union is the system operator and balances the whole system so we would, in fact, be doing that for you. 1124 MR. QUINN: May I be specific in my reference, that it is a customer inside of Kitchener who is obligated to provide Kitchener volumes who, in turn, then provides them to Union. If their supply does not get there that day, who backstops that failure, Kitchener or Union? 1125 MR. NEWBURY: Not knowing if you have any agreements between Kitchener and your own customer, I guess I'd go back to the point that you'll receive all of the T3 redelivery services that your contracted for, and they're backed by storage and by deliveries. If a component of that delivery doesn't take place and you still withdraw or take redeliveries at your city gate, we have, in fact, had to do that for you. But as a bundled load, that's the world we're operating in right now. We're not operating in the unbundled world, so for all customers, we're doing that, whether it be a City of Kitchener location, a customer of CCK or whether it be a customer in any of the other communities, Union will be providing that backstopping in the event they fail. 1126 MR. QUINN: So Union will provide that backstop at no cost to Kitchener should that occur? 1127 MR. NEWBURY: Without being the representative of your contract, I think you're probably getting into the areas in some cases of unauthorized or authorized overrun, so I'm -- I think I'm -- I'd really have to know the circumstance that we're exactly talking about. 1128 MR. QUINN: Okay. Well, in deferring to our time schedule and the panel here, I would choose to submit the rest of it in argument. You've placed a context on it that makes it difficult to qualify, so I think I'll move on. 1129 Putting this system integrity space in today's operation, you are responsible for operating the gas supply plan, do you plan for this space separately; so if you get your November 1st plan, do you plan for if that space is filled or not filled? 1130 MR. NEWBURY: So now I guess if I -- just to keep -- the terms that I talked about just a minute ago, now we're talking about the contingency space. Yes, it's the 9.1 Bcf and we are not talking now about the reference at 561 where it's integrity space. But now stepping back to where we are today, the gas plan for 2004, the way it's written, yes, yes, we've got late-season space to give us some flexibility around November 1 dealing with late-season weather. And the DP, current DP 4 percent tolerance that they're allowed, so we we've got a space set aside there. And also we've got March 31, the inventory that we hold in the event that there are April withdrawals still exceed -- the unexpected April withdrawals. So again it's contingency, it's sitting there, so if we were to consume in April unexpectedly, that's the function of that space. 1131 MR. QUINN: I think it might be helpful to us if we specify a date. November 1st of 2002, if you are looking at system integrity space, is that space designed to be full, empty, or a portion somewhere in between? 1132 MR. NEWBURY: November 2002? 1133 MR. QUINN: 2002, last year. 1134 MR. NEWBURY: The -- in that gas plan at that time, there would be three things going on with it, summing to 9.1 Bcf. The first is the LNG facility, the Hagar LNG facility in the north will be full. The second is my point around November 1st, contingency; we have 3.5 Bcf space that allows Union to take, for instance, late-season packed conditions from the DP customers if they are not going to balance to zero; it allows Union to taken inventory if, in the final weeks of October, it turns mild, so that space of 3.5 sits there. 1135 MR. QUINN: And is empty? 1136 MR. NEWBURY: Yes, on a planned basis so, again, i.e., the reason the word "contingency." 1137 And the final piece, again on November 1st, 2002, there is 5 Bcf of the contingency space is full and it sits full through the winter and its function, again, is for late-season withdrawals of up to 5 Bcf. Late-season withdrawals typically would be something in the early weeks of April where weather is ahead of what is expected. And those same principles, I think, when you go back to the unbundling here, you have heard the same breakout, at the time we were summing to a higher number but those were, again, the same three functions that were going ahead. 1138 MR. QUINN: So if I summarize what I was hearing at the end, April 1st, approximately 5 Bcf of system integrity space would plan to be full? 1139 MR. NEWBURY: Correct. 1140 MR. QUINN: Thank you. On page 1, Exhibit M.4.1, it says that if an M9 customer switches to unbundled T3, it gets the allocation on page 2? 1141 MR. ISHERWOOD: I'm sorry, what is the reference again? 1142 MR. QUINN: Exhibit 4.1. 1143 MR. NEWBURY: Sorry, you just threw me off for a second. What part of that were you reading from, sorry? 1144 MR. QUINN: I'm just trying to summarize what we understand it is to say, that if an M9 customer switches to unbundled T3, it gets the allocation on page 2. A summary of the last sentence. 1145 MR. NEWBURY: Right. I just wanted to put clarity around the -- in the movement from being bundled to unbundled, that particular customer, the excess-over-average calculation is the same; but then there is the 97.6 percent factor applied to it, just as it is for all -- even for carriage-service customers. So we started with a bundled M9 number. 1146 MR. QUINN: I think we can get to that in a moment. We are still in the days of 499 here and that 97.6 wasn't part of the change. 1147 MR. NEWBURY: Right. 1148 MR. QUINN: So this allocation without any -- is without any contingency space. So can you confirm that on a switch to unbundled T3 there is no assignment of contingency space? 1149 MR. NEWBURY: So I understand the word "assignment," you are a bundled load so Union will be providing you with bundled service. In describing earlier, we talked about a customer who might fail to deliver and Union would then be, obviously, under no-notice service, providing supply backstopping; similarly, another function in the contingency space will continue as our system integrity around storage and line pack, so you will -- you continue to get those services from Union as a T3 customer, yes. 1150 MR. QUINN: And we have a cost-based rate access to those services? 1151 MR. NEWBURY: All customers are getting those services. Again, what you're getting is supplied backstopping, you're getting the operator having the -- having his inventory in place to operate the storage and transmission. So yes, you, like all other bundled rate classes, are receiving that service, and it's in your rates, yeah. 1152 MR. QUINN: I will be more specific in the question. Can Kitchener fill that space, the contingency space? 1153 MR. NEWBURY: What you're getting is Union providing you with a service described as -- that's what we're doing with the contingency space that we're providing you with it's not -- it's no longer backstopping your weather risk, you've basically taken that on and you are operating your T3 account to balance your obligations to your customers and your city gate agreement with us, but you will still be receiving, and it's in your rates, the supply-backstopping service and the system-integrity service that I guess all the way back to RP-99 we described and all parties agreed that's something that, whether Union is providing a bundled or unbundled service, all customers receive it and as a system operator, Union, you need to provide it, and it's not something that you ever assign away to a customer. 1154 MR. QUINN: You said in that phrase that we would be managing the weather risk and we accepted that T3 rate. 1155 MR. NEWBURY: By that I mean, again, you have a customer who either burns beyond your expectations or doesn't supply gas that met your expectations, you will meet and that forces you out of your authorized or your contractual positions, you have a discussion I guess with your customer saying: Hey, you've left me with some overrun charges with Union. 1156 That is what I meant by you're managing a weather risk. 1157 MR. QUINN: So we manage the weather risk without the space allocation to us for our use under cost-based service? 1158 MR. NEWBURY: I guess I'd have to depart from you there. I mean, what we just went back to was an example where you've got the customer not supplying you and, in fact, that customer will in fact burn his gas that day, so what do you do? My point being through contingency, one of the functions Union is providing all bundled customers is in an unbundled world you will get supply backstopping. So that service will get to the -- the physical service gets to Kitchener. 1159 MR. ISHERWOOD: I guess an example might help here. To the extent that a customer overran their service because of peak-day weather, then that overrun service could be provided by that contingency space and I think it's been on the record through the unbundled case, the contingency space is for all customers, Union manages it, and as the word implies, it's for contingency reasons, it's not to be used for transactional services or for any other services. It's for all customer use whether you are bundled or unbundled, T3 or T1, or bundled T or system sales, it's for Union to use to operate the system for all customers. 1160 MR. QUINN: So that overrun space in your scenario, we would get that at a cost-based rate or are your overrun services designed to have a different rate associated with them? 1161 MR. ISHERWOOD: The overrun services there's authorized and unauthorized and others, and it's designed to provide an incentive not to overrun the parameters, to keep the customer within the parameters. 1162 MR. QUINN: So simply stated, the rates are higher than the cost-based service as an incentive to stay within the contractual parameters? 1163 MR. ISHERWOOD: I think that's safe to say, and also I would add to that that from a point of view of contingency space, in order for Union to be able to provide that unauthorized overrun service, you need to have the physical assets to do it, and that would derive from the contingency space in part. 1164 MR. QUINN: But so we don't loose that point, the overrun service would be at a higher rate than the cost-based rate? 1165 MR. ISHERWOOD: Mark Kitchen would probably be better to answer that question, he's the rate design expert. 1166 MR. QUINN: We'll come back to that panel at that time. 1167 Under the storage allocation that was done in the second table which we pulled up, 5.87, the last page of attachment 5 which we referred to previously. 1168 MR. NEWBURY: One second. 1169 MR. QUINN: I would ask, panel, if you would keep these exhibits up in front of you because I'm going to refer back to them at different points in the examination. 1170 Mr. Newbury started to provide a further clarification of the 97.6 factor. And it's evidenced in that table on page 2 of 2. 1171 MR. NEWBURY: Yes, line 6. 1172 MR. QUINN: So Kitchener then would end up with an allocation at that time of 7,100. Sorry 74,100. 1173 MR. NEWBURY: Yes, we have it. 1174 MR. QUINN: So since we have submitted Kitchener's contract for the record, and you don't need to turn it up, you can take subject to check that the actual allocation in our contract, which is also referenced in this interrogatory, is 89,300. So Kitchener went to the T3, it didn't have to live with this allocation of 74,100 but negotiated 89,300. Can you agree that the contractual allocation greatly exceeds what would have been allocated under the excess-over-average method? 1175 MR. NEWBURY: The allocation in your T3 contract would -- 1176 MR. QUINN: Is 89,300. 1177 MR. NEWBURY: Yes. 1178 MR. QUINN: It's referenced earlier in that interrogatory. 1179 So the question again was, can you agree that the contractual allocation exceeds what would have been allocated under the excess-over-average methodology? 1180 MR. NEWBURY: I think in your contract you'd find that the excess-over-average methodology was used to arrive at 89,300. 1181 MR. QUINN: Can you provide us an undertaking of how you would get there, given the two pieces of evidence in front of us, how you would get to 89,300? 1182 MR. NEWBURY: During the negotiation of your T3 contract, how the current storage that's in place 'til '05 was arrived at? 1183 MR. QUINN: Yes. 1184 MR. NEWBURY: I don't have that information. 1185 MR. QUINN: Well, I would like you to take, if you would, if that's what you are telling us, is to take an undertaking to show how you get to 89,300. 1186 MR. NEWBURY: Yes, I have it. 1187 MR. QUINN: Thank you. 1188 MR. MORAN: Mr. Chair, this would be Undertaking N.9.11, which is an undertaking to provide the derivation of the 89,300 figure that's referenced in Exhibit J.5.87, how that number was derived in the contract between Union and Kitchener. 1189 UNDERTAKING NO. N.9.11: TO PROVIDE THE DERIVATION OF THE 89,300 FIGURE THAT'S REFERENCED IN EXHIBIT J.5.87, AND HOW THAT NUMBER WAS DERIVED IN THE CONTRACT BETWEEN UNION AND KITCHENER 1190 MR. SOMMERVILLE: Thank you. 1191 MR. QUINN: Now, if you can turn to the next interrogatory which is J.5.88, page 2. 1192 MR. NEWBURY: Page 2 of 2? 1193 MR. QUINN: Yes. 1194 MR. NEWBURY: I have it. 1195 MR. QUINN: At the bottom of that page, the excess-over-average methodology comes up with a current allocation of 74,921. 1196 MR. NEWBURY: Yes, I have it. 1197 MR. QUINN: And would you agree with me that that is significantly less than the amount approved by the Board in 499 when Union was managing this space? 1198 MR. NEWBURY: That -- 1199 MR. ISHERWOOD: Can you clarify what you mean by approved by the Board in 499? 1200 MR. QUINN: The original Exhibit M.4.1. 1201 MR. NEWBURY: I guess just as far as approved, given that that's a bundled M9 storage, by rate class Union is bringing all of those allocations forward, not at a customer-specific level, when you are an M9 bundled rate you see it just as our M2 class or M4 class or M7 and on through 9. I would take it that's what you mean by approved in 499. 1202 When we proceed with carriage-service contracts of course, we have to have those individually brought forward, customer-specific. So just I have clarity around that, your M9 rate class had a total storage as described in M.4.1 for 499, and now your T3 contract has another number specifically negotiated and approved; is that the thread of where we're going? 1203 MR. QUINN: No, not completely. Let me try it this way. The amount of storage that underpinned the rate for the M9 rate class in 499 had an allocation of storage and an implicit allocation of contingency space in the rate. So if you add the two together subject to check, I gave you two figures before, and the total of those figures of 81,585 and the 13,863, which is 14.5 percent of the total contingency space, equates to a total of 95,448. 1204 Now, if you take those numbers subject to check that was what was underpinning the M9 rate class in 499, and would you agree with me that the allocation under Union's excess-over-average methodology proposed of 74,921 is significantly less? 1205 MR. NEWBURY: Starting with the 499 number, certainly we all can see how to arrive at the excess-over-average 86,777 amount. I think you need to also keep in mind that at the time, in talking about contingency space of 14,748, you are talking about now a volume of 10.3 -- 10.4, rather, Bcf. 1206 MR. QUINN: If you are going, Mr. Newbury, to talk about the differences between system integrity now and then, that's not the issue. I'm talking about the total amount of space that underpinned the M9 rate in 499. So there was an amount of space that, subject to check, was 95. In here, as proposed, it's 74 for the City of Kitchener. All I'm asking you is, would you agree with me that that's significantly less space? 1207 MR. NEWBURY: I'm with you on the numbers. I guess from 499, as a bundled customer receiving contingency services, a higher volume functioning in three ways to the agreed-upon excess-over-average allocation with the 97.6 percent using these numbers, yes, the numbers are lower. 1208 MR. QUINN: Thank you. So when the T3 contract with Kitchener expires in March of 2005, am I correct in thinking that the level of storage allocation is an issue which Union and Kitchener can negotiate on? 1209 MR. NEWBURY: In 2005? 1210 MR. QUINN: Yes. 1211 MR. NEWBURY: I really can't speculate. 1212 MR. QUINN: Mr. Isherwood, could you try on that, from your experience. 1213 MR. ISHERWOOD: I can't, actually. That's probably a question for the sales group. But I think the basis for any discussion would be the excess-over-average calculation, which -- this IR gives a couple of different options, and that's subject to Mr. Rogers and his group. But certainly it would be based on the excess-over-average calculation. They would not -- just going back to an earlier point Mr. Newbury made, it's inappropriate to be allocating a part of the contingency space towards -- as used for a whole rate class, to any one customer. It's used in total, for the whole system. 1214 MR. QUINN: So if I understand the summary of your answer, Mr. Isherwood, is that the basis for the negotiations would revolve around the aggregate access methodology? 1215 MR. ISHERWOOD: That's correct. 1216 MR. QUINN: Okay. So if we cannot agree on the allocation, am I correct in thinking that it's Union's view that it would be entitled to allocate the storage space to Kitchener based upon the aggregated excess method and Kitchener would have no recourse except to bring the matter to the Board in the next rates case? 1217 MR. PENNY: We're talking about 2005, are we not? 1218 MR. QUINN: We're talking the end of the current contract period, which happens to be March 2005, yes. 1219 MR. ISHERWOOD: I believe any customer that's frustrated in negotiations has the right to go to the Board at any point in time, even outside of a rate case. 1220 MR. QUINN: Are you aware of any other recourse? 1221 MR. ISHERWOOD: I think, generally speaking, we haven't had a lot of trouble with negotiating with customers to -- around contract parameters, so I would hope, in good faith, that both parties could find a mutually agreeable solution. 1222 MR. QUINN: And we would hope the same. Thank you. 1223 Under what process can you go to the Board? 1224 MR. ISHERWOOD: It's outside my area of expertise. 1225 MR. QUINN: Okay. We will come back to that later, then. 1226 Union appreciates, of course, that Kitchener is a public utility with a substantial amount of heat-sensitive load; is that -- 1227 MR. ISHERWOOD: Yes, that's correct. 1228 MR. QUINN: Okay. Can you agree that it would be seriously impacted by 16 percent reduction in storage level from the current level? 1229 MR. ISHERWOOD: I think the basic premise behind the calculation of excess over average, it calculates exactly what you need. 1230 MR. QUINN: I think we'll get to that later. But would you agree with the statement that a 16 percent reduction from current level can have a significant impact on a public utility? 1231 MR. ISHERWOOD: No, I would not. 1232 MR. QUINN: Okay. In managing such a space reduction, is it likely that Kitchener would overrun its withdrawal parameters causing penalties? 1233 MR. ISHERWOOD: I think the discussion around withdrawal parameters, you also have to look at a DCQ or the amount of volumes being delivered to a system as well as withdrawals. And, again, you'd want a contract parameters negotiated that would allow you to combine the proper DCQ with the proper withdrawal rate to get to your peak-day demands. 1234 MR. QUINN: And ... 1235 MR. NEWBURY: Just to add to that point. The discussion really can't start with storage allocation, it starts with the customer's demand. And from a customer's demand is derived the upstream arrangements required to serve that demand in the course of a year, and that's typically how you -- you then arrive at your DCQ, typically about 1/365th of your annual demand. 1236 From that then flows the excess-over-average calculation which looks at your DCQ that is now in place to serve your annual load and it says, However, weather-sensitive customers, you're burning more gas in the wintertime than the summer. So the excess-over-average calculation allows you to inject throughout the summer months to a full storage position November 1st; and by cycling, then, that storage to empty by the end of winter, you've served all our demand. 1237 And so that's the point I'm making. You know how much demand you have on an annual basis, you've got in place a DCQ that is flowing to serve that demand, and in the injection season, you have enough storage arrived at by the excess-over-average calculation to inject that storage before winter appears and withdraw that storage along with the DCQ that you've been flowing to meet all your demand. 1238 MR. QUINN: In whose opinion? 1239 MR. NEWBURY: In my opinion, the way -- if you've got an appropriate demand forecast backed by an appropriate DCQ that's meeting that demand forecast -- 1240 MR. QUINN: Whose opinion would rule, Union's or Kitchener's? 1241 MR. NEWBURY: On the outcome? 1242 MR. QUINN: On the forecast and the subsequent methodology result. 1243 MR. NEWBURY: On the demand forecast -- 1244 MR. QUINN: Yes. 1245 MR. NEWBURY: -- is that what you are speaking to? On that, I think both parties have to arrive at it at a belief that -- especially with the large customers, of what they really expect to see in the coming year for through-put; not only for the sake of making sure your rate is correct but for the sake of allocating the proper assets, not just storage but our Dawn-Trafalgar system -- 1246 MR. QUINN: That's an excellent answer, sir. I think you've answered it sufficiently. 1247 MR. PENNY: Sorry, Mr. Quinn, Mr. Newbury was in the process of answering your question and it's not appropriate to cut him off. 1248 MR. QUINN: I apologize, sir. I'm cognizant of the time and I was trying to move things along. 1249 MR. SOMMERVILLE: Mr. Quinn, we're not running a race. We have to finish this stage before 4:30, but that doesn't mean that you should feel as though you have to hurry unnaturally. 1250 MR. QUINN: Okay. Thank you, sir. 1251 MR. NEWBURY: There were just two points I wanted to make around this forecast. It's so important at our east end, the way it's designed, that we really take into account the DCQs that are flowing there. And it's also important that now you have the appropriate DCQ, you now stepped into an excess-over-average calculation that has been tied quite directly to that agreed-upon forecast level, that has given you the right DCQ. You are sending enough firm supply to Union for the design requirements of your system. Your rates are set appropriately. We're having the proper through-put so the assets that you are receiving from us, you are paying for the costs of those assets. And in the final point, the storage that you are receiving from us will be fully cycled. We're not going to take an extra Bcf, say, and have a bundled customer have this and either have no use for it -- the rates class bundled customers will fully cycle the storage if it's been properly sized for them, and so you're not going to take a Bcf of storage, have a customer use it around a forecast that might be too large for them. 1252 That is, simply, the point I wanted to make about DCQ being tied to the demand and storage allocation flowing from that. But given those three things, they all do operate in tandem and you would not be underserved. 1253 MR. QUINN: And I think we'll leave it at that, sir. We'll take further questions up with later panels. And I apologize for cutting you off. I thought that you were completed. 1254 I want to turn now to another stage of what we would be concerned about in reduction of our allocation. In the T3 rate schedule, I think you are familiar with the aspect of deliverability of inventory as supplied by the customer? 1255 MR. NEWBURY: Yes, I have an understanding of that. 1256 MR. QUINN: Okay. In the clause of deliverability inventory, we -- the customer is required to maintain 20 percent of the annual storage space to be able to have full withdrawal rights; is that correct? 1257 MR. ISHERWOOD: I would say to have full withdrawal rights, that's correct; but the customer is entitled to go down to zero in its space and gets reduced withdrawal rates once you get below the 20 percent level. 1258 In the type of service that you've selected, which is customer-provided deliverability, there was another option in the T3 schedule where Union provides the deliverability, in which case there was no restriction whatsoever for the customer getting full deliverability, right down to zero. 1259 MR. QUINN: Okay. Can I ask you to turn to the T3 rate schedule page 3 of 5. 1260 MR. PENNY: Do you have an evidence reference for that, Mr. Quinn? 1261 MR. QUINN: I don't handy, sorry, I'm not too familiar with our T3 rate schedule. I'm not sure where it is in the evidence, I apologize. 1262 MR. PENNY: Read out the evidence reference for the assistance of the Board, would you? The T3 rate schedule. 1263 MR. ISHERWOOD: It's under H.3, tab 3, about halfway through, Brian is suggesting. Right after T1. Which page? 1264 MR. QUINN: Initially page 2 to confirm note 4, deliverability inventory is defined as 20 percent of the annual storage space. 1265 MR. ISHERWOOD: That's correct. 1266 MR. QUINN: If you turn the page to the next page, overrun service. 1267 MR. NEWBURY: Page 3 of 5, yes, we have it. 1268 MR. QUINN: Under annual storage space, under the unauthorized section in the second paragraph, the last sentence reads: 1269 "If a direct-purchase customer is contracted to provide its own deliverability inventory, zero inventory levels shall be deemed to mean 20 percent of the annual storage space." 1270 You can see that there? 1271 MR. NEWBURY: Just so we get the proper reference, it's the last sentence of page 3 of 5 of T3 general terms and conditions, yes. 1272 MR. QUINN: That's the same 20 percent we're talking about? 1273 MR. ISHERWOOD: That's correct. 1274 MR. QUINN: So "If on any day..." In the top of that paragraph: 1275 "If on any day of the gas storage balance for the account of the customer is less than zero the unauthorized overrun will apply for each gJ below the inventory level and that amount of gas will be deemed not to have been withdrawn from storage." 1276 MR. NEWBURY: Yes, you've read the first sentence of the last paragraph. 1277 MR. QUINN: Right. So if the zero inventory level is the same definition as the last sentence, can you reconcile for me how the rate schedule is applied in the instance where the T3 customer's volumes go below 20 percent by this rate schedule? 1278 MR. ISHERWOOD: I think in terms of interpretation of that clause, I would defer that to the rates panel. They are the ones that are responsible for the language in the toll schedule. I will be happen to address, however, any questions around self-deliverability. 1279 MR. QUINN: I'll accept the deferral to the rate allocation panel for that question. 1280 The fourth area that has recently led to reduction for most all customer classes is the application of the 20-year trend. As we understand it, this reduction or the use of the 20-year trend weather normalization is only to the general-service customers; is that correct? 1281 MR. NEWBURY: Yes, that's correct. 1282 MR. QUINN: And the general point, because of the reduction of degree days expected using the 20-year trend versus the 30-year average, would you agree that the amount of storage allocated general-service customers would reduce accordingly? 1283 MR. NEWBURY: I guess I'll go just -- the short answer is yes. Again though, my earlier point being the storage allocation flows from the annual demand so it's falling -- driven by the formula, it's telling you that the annual demand that the storage is to serve has reduced. 1284 MR. QUINN: Okay. Is it possible this panel could provide us with a table which illustrates the magnitude of the reductions we've talked about today in storage space taken from in -- storage space that was allocated to infranchise customers since 499, showing the removing of the contingency space, the 97.6 percent factor, the impact of the 20 percent deliverability inventory? Would you be able to provide something like that? 1285 MR. NEWBURY: I think if you turn to -- I believe it's J.1.60, we were asked for a storage space continuity schedule from 499 and that was -- and 499 being the time Union was applying the 30-year average. And I'm just going to draw it up for a minute. That reference was J.1.60. 1286 And I was going to proceed from there, there were two tables provided, table A and table B. Towards the questions you were asking, I think I would go to table B and on that would be between lines 6 and 11 a description from 499 of Union's infranchise customer requirement, the bundled customers, followed by the carriage service customers, line 7, at the time those would have only been T1, the M9 customers would have included Kitchener at the time and they would have been in the line 6 total. 1287 The next line, contingency line 8, and I just draw my eye to the upper left-hand corner, those numbers that I'm talking now are in pJs, and for those who don't hop back and forth quite as easily, you go from a pJ to a Bcf by taking the pJ number and dividing it by 1.06. So what you're seeing there is total infranchise space of 88.2 pJs in '99 and the way we've deployed it to serve. And then if you go across on the same line 9, the 2004 infranchise allocations, the bundled customers, the ones who remained fully bundled north and south while they are now at 63 pJs as opposed to 70, a lot of that is the movement over to T1 and T3 service, and that's why you see the next line pick up. 1288 Line 8 draws your attention to it. In 499, we had 11.4 pJs of contingency space and when we went to RP-17, the unbundling agreement, we dropped that. So the total hasn't changed infranchise, in fact, it's really a switch on how those assets are being deployed to the infranchise customers. I guess the easiest thing to draw a measure of is storage space as a percentage of demand in 499. We were serving 16 percent of our anticipated infranchise through-put from our storage assets. In blue page we'll still be doing that, and again, it's just rigorously tied to our through-put how access over average allocations and DCQs hold that relationship there. 1289 So by going from a 30-year trend to a 20-year trend, you also have to draw a note that we've had customer growth and we've agreed throughout, since the unbundling hearing, that we would serve that customer growth at cost. I guess dramatically you could look at the 1.3 Bcf of contingency that there was in 499, the 1.3 and the 10, that was part of the 10.4 total when we converted that, and in fact that's what we talked about at the time, was that would now be deployed to serve infranchise customers. 1290 The contingency space is now for those three reasons so we're even. So it's not a good comparison to say you were at 30 on 499, you're at 20 now, you must have had a bunch of cost-based storage that isn't infranchise anymore. It is infranchise, it's actually grown a little bit, and it's serving the same function. Forecasted through-put leads to upstream pipe requirement leads to an excess-over-average storage calculation. 1291 MR. QUINN: We may have gone a little far afield from our questions, so to bring us back to the reductions that we were concerned about, some of these reductions were implemented to facilitate unbundling, the 97.6 as an example? 1292 MR. NEWBURY: That 97.6 is how Union, operating fully unbundled customer base, you arrive at your 88.2 Bcf of storage. That number is now fixed. And when you unbundle, you follow the excess-over-average calculation for each and every customer who is now unbundled and Union is not providing any molecule back in balancing services. So what that gets to is, the easiest thing to think of is asphalt plants and food plants, their whole demand is in the summer and they ship gas to Union all year round. The gas they're shipping all year round in the wintertime is like storage; they're bringing molecules to Union, Union's operating the whole system, and that gas that they're bringing in is actually going to customers so we're not having to withdraw gas from storage. That 97.6 percent factor, it recognizes how customers load when they are summer-dominant loads, allows the whole bundled excess-over-average calculation to fall. 1293 When you then take that number and split it up across 1.2 million customers, you have to use this 97.6 percent factor. I see I'm frustrating you with a long answer. 1294 MR. QUINN: I appreciate there was an awful lot of evidence that supported Union's 97.6, and we can all point to 1999-0017, which I want you to confirm. In 1999-0017, as a part of unbundling, that's when the 97.6 factor was introduced? 1295 MR. NEWBURY: That's correct. 1296 MR. QUINN: How customers have gone fully unbundled? 1297 MR. NEWBURY: Currently none. 1298 MR. QUINN: Okay. Thank you. I want to turn us back. The space that was allocated, then, to the customers for the 97.6 in terms of reduction to individual customers, what has happened to that space in the interim? 1299 MR. NEWBURY: I think I missed on my earlier explanation, I won't drag you through that again, that space continues to serve -- all the space that we had in 499 bundled-wise continues to serve bundled customers. There isn't, I guess if my math is correct, there isn't 2.4 percent less space, it's the bundled -- when you go from a bundled -- fully bundled franchise to a completely unbundled franchise, it was the same amount of storage you had in both cases; you've simply used this 97.6 percent factor to recognize that if you gave every single unbundled customer a full excess-over-average allotment, when you added that list up, you would have a number that was larger than when you started with a fully bundled storage allocation. So there has been no loss of space. 1300 MR. QUINN: I'm going to leave that as it is on the record, and thank you for it. 1301 I want to turn to the actual aggregate excess method. Is that still used, Mr. Newbury? 1302 MR. NEWBURY: That's correct. 1303 MR. QUINN: Okay. Can you confirm that the method is based upon the assumption that the withdrawal season is 151 days, starting November 1st to March 31st? 1304 MR. NEWBURY: That's correct. 1305 MR. QUINN: Is 151 supposed to be representative of the withdrawal period when storage is used? 1306 MR. NEWBURY: It's the full winter season, yes, so it can start earlier and last later. But for the planning purpose, correct. 1307 MR. QUINN: For the planning purpose, the assumption is it's 151 days, November 1st to March 31st? 1308 MR. NEWBURY: That's correct. 1309 MR. QUINN: And the withdrawal season represents the use that the customer would make of a storage facility, then? 1310 MR. NEWBURY: That's correct. 1311 MR. QUINN: What data does Union have to support the assumption of the -- respecting the average length of the withdrawal season to 151 days? 1312 MR. NEWBURY: I think it's a planning principle that goes back quite far. You've got to -- to the extent you make the winter longer or shorter, you make the summer -- the different length. You're not going to end up with a different calculation. 1313 MR. QUINN: I'm not dealing with the calculation, I'm dealing with the number of days assumed. 1314 Can you confirm that net withdrawals continue into April in Union's franchise area? 1315 MR. NEWBURY: Just so I understand, "net withdrawals," by that you mean? 1316 MR. QUINN: For infranchise, not anything to do with S&T activities, that the net withdrawals before you turn to net injections - some customers are maybe in a withdrawal phase; some are in an injection phase at the same time - but when it turns from net injection to net withdrawal, can you confirm that that occurs in April? 1317 MR. NEWBURY: Sure, on an actual basis, it can occur any -- for any particular customer, it can occur at any particular time on a planned basis. Winter's over the end of -- the 31st of March, on a planned basis, for the bundled customer base. 1318 MR. QUINN: Okay. 1319 MR. ISHERWOOD: Likewise, you can have net injections in February as well. 1320 MR. QUINN: I'd like to ask if you could provide us with the date. If you're looking at the last ten years, let's say, when the -- at what point net injections exceed net withdrawals for Union's storage for infranchise customers. 1321 MR. NEWBURY: Does this go to how we operate our storage system? 1322 MR. QUINN: This goes to what Union has actually experienced in terms of withdrawal from storage in the month of April. 1323 MR. ISHERWOOD: I think we need to be somewhat careful here. You can also have net injections during the winter as well. So looking at April, having a day or two or several days of withdrawals, it may well happen where; but you also have days during the winter where you have net injections. It all depends on the weather. 1324 MR. QUINN: I'll be very specific, then. I appreciate your concern, Mr. Isherwood. If you average the last -- the days for the last ten years, take the last 10 April 1st's, the last ten April 2nd's, and do the math, when does it change from net injections to net withdrawals -- sorry, from net withdrawals to net injections? 1325 MR. NEWBURY: That would be so dependent on DCQs that are flowing as well, the supplies that our customers are bringing leading to withdrawals or injections. Using an average across five years would just state everything is fixed and you're just dealing with degree days as opposed to customer balancing activity in April. 1326 MR. ISHERWOOD: A good example there would be if we have a mild winter, our system operation would be -- we have a lot of gas on the system and it's quite possible that our system capacity management group would allow a lot of diversions off the system in April which would have the effect of reducing storage, and we do that deliberately. 1327 MR. QUINN: Is that S&T? 1328 MR. ISHERWOOD: No, it would be DP. Direct purchase customers on our system that are coming out of winter long may want access to the market in April and ask for a request to get out. 1329 MR. QUINN: Okay. To simplify further, then, if you would take that calendar year and take the average load, so the total load for the system, what has been served to your customers, divided by 365, and use that as your average, at what point does the amount of gas used by your customers -- when does it become less than the average annual daily consumption? 1330 MR. ISHERWOOD: I'm struggling a little bit with the question. 1331 MR. QUINN: You've told us a number of reasons why you have a challenge in answering the original question. So if you take example -- take any year, 2002, take the total load for the year, divide it by 365, and review in April, when you have no more days, when the actual amount of consumption exceeds the average, so maybe if you just -- so there's no judgment, provide the average amount for the year and show the amount taken on April for each year, and when you take ten years' worth of average. 1332 MR. ISHERWOOD: Are you looking for the month of April or -- 1333 MR. QUINN: The month of April. 1334 MR. ISHERWOOD: -- a day in April? 1335 MR. QUINN: The month of April. Show us the month of April, because then, as you say, there could be a warm -- the 2nd could be warm, the 3rd and 4th could be cold. Just average it over the ten years and show us how it compares to the average for that year. 1336 MR. ISHERWOOD: And you want calendar years or gas years? 1337 MR. QUINN: Calendar years, please. 1338 MR. ISHERWOOD: To be upfront, I'm not sure if we can go back ten years, but we can go back and see how far back we can go. 1339 MR. QUINN: Okay, thank you. 1340 Do we need an undertaking number? 1341 MR. MORAN: It will be Undertaking N.9.12. 1342 MR. MORAN: Mr. Chair, I'm not sure if there's a nice snappy description of this undertaking. 1343 MR. SOMMERVILLE: I think what would be helpful is if Mr. Newbury took a shot at restating the undertaking. 1344 MR. NEWBURY: I believe what you were asking for on a calendar-year basis, for a number of years, as we go back, and for now we'll call it ten years, can Union provide the storage -- the planned storage withdrawal activity for the month of April. 1345 MR. SOMMERVILLE: I think it's actual -- let me try. I think what Mr. Quinn is asking you to do is to determine the number of days in April, in the last, say, 10 years, where the average withdrawal exceeded the average for the year. So the take the average withdrawal on a daily basis for the year, by taking the total amount of through-put and dividing by 365, and you take the number of days in April which that average was exceeding for withdrawals in April, I think that's what Mr. Quinn is looking for. 1346 MR. NEWBURY: So we've got sort of a base-line withdrawal for a year called an average and then where are the points around that in the month of April exceeded? 1347 MR. ISHERWOOD: Is it withdrawals or -- 1348 MR. SOMMERVILLE: Ostensibly, we're looking for cold days in April where there were withdrawals that exceeded the annual average. 1349 MR. ISHERWOOD: And to, I guess, strip out the effects of the direct-purchase market is it fair to look at consumption? Is it consumption on days -- 1350 MR. SOMMERVILLE: That's another question and Mr. Quinn, you need to comment on that. 1351 MR. QUINN: I think, sir, that would be helpful. We've done the analysis ourselves and we recognize in our franchise it is well into April when that turns, so I would like Union to do the same analysis, and based on consumption it allows us to use actual and it strips out, as Mr. Isherwood was saying, direct purchase swings that may be occurring by customers balancing. 1352 MR. ISHERWOOD: So you are looking the number of days consumption exceeds average consumption for the year? 1353 MR. QUINN: Using an average of -- averaged for 10 years of the number you can and using April 1st, April 2nd and April 3rd and all the way through. 1354 MR. ISHERWOOD: The number of days of consumption in April that exceed the average consumption for the year. 1355 MR. QUINN: Okay, I'll accept that, yes. 1356 With the ten minutes left and I'm watching the clock -- 1357 UNDERTAKING NO. N.9.12: TO PROVIDE THE AVERAGE WITHDRAWAL ON A DAILY BASIS FOR THE PAST TEN YEARS, BY TAKING THE TOTAL AMOUNT OF THROUGH-PUT AND DIVIDING BY 365; THEN YOU TAKE THE NUMBER OF DAYS IN APRIL WHICH THAT AVERAGE WAS EXCEEDING FOR WITHDRAWALS IN APRIL 1358 MR. SOMMERVILLE: With that startling clarity, I think we will adjourn, Mr. Quinn. I think we'll stop here and Mr. Ryder can take up on Monday morning at 9:30. 1359 I'd like to thank everyone for their participation, cooperation and is there anything we need to address before we adjourn for the day? 1360 Thank you very much, until 9:30 on Monday morning. 1361 --- Whereupon the hearing was adjourned at 4:25 p.m.