Rep: OEB Doc: 12YPH Rev: 0 ONTARIO ENERGY BOARD Volume: 2 17 JUNE 2004 BEFORE: R. BETTS PRESIDING MEMBER P. NOWINA MEMBER P. SOMMERVILLE MEMBER 1 RP-2003-0203 2 IN THE MATTER OF a hearing held on Thursday, 17 June 2004, in Toronto, Ontario; IN THE MATTER OF the Ontario Energy Board Act, 1998, S.O. 1998, c.15 (Schedule B); AND IN THE MATTER OF an Application by Enbridge Gas Distribution Inc. for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution, transmission and storage of gas commencing October 1, 2004. 3 RP-2003-0203 4 17 JUNE 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 JENNIFER LEA Board Counsel COLIN SCHUCH Board Staff JAMES WIGHTMAN Board Staff FRED CASS Enbridge Gas Distribution Inc. DENNIS O'LEARY Enbridge Gas Distribution Inc. TOM LADANYI Enbridge Gas Distribution Inc. MICHAEL CADOTTE Union Gas Limited ROBERT WARREN CAC & CCC MICHAEL JANIGAN VECC ROGER HIGGIN VECC PETER THOMPSON IGUA JAY SHEPHERD School Energy Coalition DAVID POCH Green Energy Coalition MELANIE AITKEN Direct Energy Marketing Limited ELISABETH DeMARCO CEED, OESC, Superior Energy Management, TransAlta Energy Corporation MALCOLM ROWAN CME CAROL STREET CME MURRAY KLIPPENSTEIN Pollution Probe BRIAN DINGWALL Energy Probe VALERIE YOUNG OAPPA, Casco, Maple Lodge Farms, Markham District Energy MURRAY ROSS TransCanada PipeLines 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [21] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON UNION GAS STORAGE CONTRACT - SMALL, BRENNAN, CHARLESON; RESUMED: [47] CROSS-EXAMINATION BY MR. JANIGAN: [51] CROSS-EXAMINATION BY MR. SHEPHERD: [149] CROSS-EXAMINATION BY MS. AITKEN: [214] CROSS-EXAMINATION BY MR. WIGHTMAN: [362] QUESTIONS FROM THE BOARD: [379] PRELIMINARY MATTERS: [425] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RISK MANAGEMENT - PLECKAITIS, RUBINO, SIMARD, BRENNAN: [437] EXAMINATION BY MR. O'LEARY: [443] CROSS-EXAMINATION BY MR. JANIGAN: [544] CROSS-EXAMINATION BY MS. AITKEN: [678] CROSS-EXAMINATION BY MR. SHEPHERD: [827] PRELIMINARY MATTERS: [918] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RISK MANAGEMENT - PLECKAITIS, RUBINO, SIMARD, BRENNAN: [939] CROSS-EXAMINATION BY MR. DINGWALL: [944] CROSS-EXAMINATION BY MS. STREET: [1152] CROSS-EXAMINATION BY MS. GIRVAN: [1205] CROSS-EXAMINATION BY MR. WIGHTMAN: [1288] RE-EXAMINATION BY MR. O'LEARY: [1333] QUESTIONS FROM THE BOARD: [1346] 10 EXHIBITS 11 EXHIBIT NO. K.2.1: CV OF TIM SIMARD [30] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.2.1: TO PROVIDE A PERCENTAGE ALLOCATION BY CLASS OF STORAGE CONTRACT COSTS [60] UNDERTAKING NO. J.2.2: TO PROVIDE GMI PRICE FOR STORAGE WITH QUALIFICATIONS TO BE INDICATED [92] UNDERTAKING NO. J.2.3: TO PROVIDE 2002 AND 2003 ESTIMATE OF TRANSACTION COSTS FOR RISK MANAGEMENT [891] UNDERTAKING NO. J.2.4: TO PROVIDE A BEST-EFFORTS UNDERTAKING TO SEARCH FOR AND, IF FOUND, PRODUCE COPIES OF THE 1995 AND 1996 CUSTOMER SURVEYS WHICH WERE USED TO ESTABLISH THE $25 AND $35 TOLERANCE LEVELS; TO INDICATE THE SURVEY SAMPLE SIZE AND HOW THE SURVEY WAS CONDUCTED IN EACH CASE [984] UNDERTAKING NO. J.2.5: TO PROVIDE THE COMPANY'S PROPOSAL WITH RESPECT TO RECOVERY OF COSTS ASSOCIATED WITH THE FIRST CUSTOMER SURVEY [1239] UNDERTAKING NO. J.2.6: TO PROVIDE THE NUMBER OF SYSTEM-GAS CUSTOMERS ON Enbridge GAS DISTRIBUTION'S EQUAL BILL 14 --- Upon commencing at 9:32 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. How is the volume at the back? It's fine, thank you. 17 I understanding we weren't transmitting on the Internet yesterday. We were on air according to our signals in here, but it wasn't getting out to everybody. Hopefully that problem has been revolved. 18 We're now reconvening in the matter of RP-2003-0203. This is day two of the evidentiary portion of the hearing. Yesterday we were in the midst of cross-examination with this panel for issue 5.1, gas storage. We're expecting to have cross-examination today from Mr. Janigan, Mr. Shepherd and Ms. Aitken. 19 First of all, are there any other intervenors that would like the opportunity to cross-examine this panel? I see none so we'll stay with that list. 20 Before we begin, are there any preliminary matters, Ms. Persad? 21 PRELIMINARY MATTERS: 22 MS. PERSAD: I have one. And before we get into that cross-examination, I have a preliminary matter regarding this panel and a preliminary matter regarding the panel that will take the stand after this, the risk-management panel. 23 I don't believe that the curriculum vitaes for two of the witnesses on that panel have been filed yet, so I've brought copies for everyone this morning so they can have at least some limited advance notice of what those CVs say. 24 One is an internal witness, Mr. Fred Rubino, and the other is an external witness, an independent witness, a Mr. Tim Simard from the risk advisory group. So if I could file those with the Board and ask for exhibit numbers. 25 MS. LEA: So they need exhibit numbers they haven't been numbered as CVs usually are? 26 MS. PERSAD: Sorry, one has been. Mr. Rubino's curriculum vitae has been numbered as an Exhibit A1, tab 8, schedule 9, but the other one has not. 27 MS. LEA: Okay. Then that second CV and the name of the person again on that CV? 28 MS. PERSAD: Mr. Tim Simard. 29 MS. LEA: CV of Mr. Simard then will be K.2.1. 30 EXHIBIT NO. K.2.1: CV OF TIM SIMARD 31 MR. BETTS: Do we have sufficient copies? Oh, they're being circulated now. Thank you. 32 Are there any other matters, Ms. Persad? 33 MS. PERSAD: Yes, for this panel, Mr. Chair, by way of undertaking, and responses to undertakings, I have two from yesterday. I have J.1.4 which were the excerpts from the old contract that we had provided to Mr. Thompson, he had referred to in his cross-examination. As well, I have the response to Undertaking J.1.5 which was Union's written notice to Enbridge Gas Distribution dated March 11, 2002. 34 MR. BETTS: Thank you. 35 MS. LEA: Can you give me the number, please, of the undertaking? It appears to be a letter dated March 11. 36 MS. PERSAD: Yes, that was J.1.5. 37 MS. LEA: 1.5, thank you. 38 MR. BETTS: Thank you. Is there anything further? 39 MS. PERSAD: I have nothing, Mr. Chair. 40 MR. BETTS: Thank you. Ms. Lea. 41 MS. LEA: Mr. Chairman, we received a letter dated today, actually, June 17th, which advised us that a complete settlement has been reached on issue 8.1 -- I'm sorry, no. Am I being premature with this? 42 MS. HARE: Yes. 43 MS. LEA: My apologies. I take it all back. No settlement has been reached. I am presuming then that the company will update us when this is ripe for discussion. I beg your pardon. Sorry about that, it was an obvious miscommunication there. 44 MR. BETTS: And are there any other preliminary matters that the panel needs to consider? Thank you. Then I see that the witness panel has returned and welcome and good morning, gentlemen. And, at this point, we recognize the witness panel has been sworn in and Mr. Janigan, if you would please proceed with your cross. 45 MR. JANIGAN: Thank you, Mr. Chair. I have some clean-up questions from yesterday that I would like to put to the panel. 46 First of all, some questions put by Mr. Thompson relating to cost allocation. 47 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON UNION GAS STORAGE CONTRACT - SMALL, BRENNAN, CHARLESON; RESUMED: 48 D.SMALL; Previously Sworn. 49 F.BRENNAN; Previously Sworn. 50 D.CHARLESON; Previously Sworn 51 CROSS-EXAMINATION BY MR. JANIGAN: 52 MR. JANIGAN: I wonder if you could provide an undertaking to show how these costs of the storage contacts will be allocated to each rate class by percentage, the percentage allocated to each of the rate classes or at least storage contracts, the cost of these storage contracts. 53 MR. SMALL: I guess before we accept the undertaking, I'm just trying to think. My understanding is that the costs associated with the new storage contract are no different than the costs that would have been associated with the cost of service to the extent that we're going to be paying a cost for Union's storage, that those costs will be allocated in the same manner as the old contract would have been. 54 MR. JANIGAN: We know that. I wonder if we could get the percentages that follow out from that. 55 MR. SMALL: We'll undertake to provide you a response. 56 MR. JANIGAN: Thank you. 57 MS. LEA: That would be Undertaking J.2.1. Could you give a summary title of the undertaking. Pardon me, could we have a summary title for the undertaking, please. 58 MR. JANIGAN: A percentage allocation by rate class of storage contract costs. 59 MS. LEA: Thank you. J.2.1. 60 UNDERTAKING NO. J.2.1: TO PROVIDE A PERCENTAGE ALLOCATION BY CLASS OF STORAGE CONTRACT COSTS 61 MR. BETTS: Thank you, please proceed, Mr. Janigan. 62 MR. JANIGAN: And just following up on some questions from Mr. Dingwall yesterday, I understand that with respect to the RFP, to obtain proposals from storage services of the same magnitude that one of the conditions of the RFP was that the identities of those that provided a proposal would be kept can have confidential, am I correct in that? 63 MR. BRENNAN: I'm not sure, but I don't know whether there was or not but I think any time someone comes out with an RFP, I think it's almost implicit that those who are responding would not want their name attached to whatever price they were bidding. 64 MR. JANIGAN: Okay. And did I understand correctly that you indicated to Mr. Dingwall you would find out whether or not the individuals that did submit a proposal would object to the release of their names? 65 MR. BRENNAN: Yes, that's correct. And I think the undertaking is that we'll provide a summary of the information that Mr. Dingwall was looking for. 66 MR. JANIGAN: Okay. That's fine. 67 Now, are there any other regulated companies that purchase storage from Union that you're aware of? 68 MR. BRENNAN: Regulated? 69 MR. JANIGAN: Yes. 70 MR. BRENNAN: Yes. 71 MR. JANIGAN: And is one of those companies Gaz Metropolitain? 72 MR. BRENNAN: That's correct. 73 MR. JANIGAN: And has Enbridge looked at the price that Gaz Metropolitain is paying to Union for storage services to determine what they -- what they have negotiated as reasonable? 74 MR. BRENNAN: No, we have not. We have -- again, it is a negotiated rate. GMI or Gaz Metropolitain have not revealed that to us. That's between them and Union. 75 MR. JANIGAN: Well, if Gaz Metropolitain is a regulated company, wouldn't they have to file this information with their own regulatory board? 76 MR. BRENNAN: I would assume they would. Again, I'm not sure in what form they would file it. 77 MR. JANIGAN: But you haven't obtained that information, have you, from the regulatory board? 78 MR. BRENNAN: No, we have not. And I've had discussions with GMI and they've never disclosed what they were paying for storage. 79 MR. JANIGAN: Is it possible that you can undertake to see what GMI is paying for Union storage through the regulatory process? 80 MR. BRENNAN: I guess I'm just trying to get a sense, I guess, of where this is leading because, you know, we may or may not be able to get a copy or numbers on what that price may be, but it may be for a different term, it may be for a different amount of storage, it may be for a different deliverability and all the flexibility. So having that number I'm not sure is going to do anything for you, if we were able to get it. 81 MR. JANIGAN: Well, presumably that would be one of the qualifications associated with any number. We would have to look at what the volumes are, the nature of the term of the storage and these sorts of things. But what we are looking for is comparables here to assess the statement that Union has made that they obtained a good deal from Union with respect to this storage. 82 MR. BRENNAN: That Union got a good deal? 83 MR. JANIGAN: Sorry, that Enbridge got a good deal from Union. Sorry. 84 MR. BRENNAN: We'll do our best to see what we can find. 85 MR. JANIGAN: Okay. Thank you. 86 MR. BETTS: Mr. Janigan, I think I'd probably also note that if that is in the public realm, you may have an opportunity yourself to get that or similar information. But I don't disagree with the company undertaking to do that. 87 MR. JANIGAN: I'm ashamed to say that I thought that Enbridge's French language capacity might be greater than ours. 88 MR. BETTS: I'm sorry, Ms. Lea, you were about to... 89 MS. LEA: Yes. Undertaking J.2.2, GMI price for storage. And I understand, gentlemen, that you may have qualifications to add to the simple number, that you may need to indicate to us its comparability. 90 MR. BRENNAN: Correct. 91 MS. LEA: Thank you. 92 UNDERTAKING NO. J.2.2: TO PROVIDE GMI PRICE FOR STORAGE WITH QUALIFICATIONS TO BE INDICATED 93 MS. LEA: J.2.2. 94 MR. BETTS: Thank you. 95 MR. JANIGAN: And panel, I understand from your discussion with Mr. Dingwall yesterday that the future market price may be affected by Enbridge storage developments but not other new storage developments that come on the market. 96 MR. BRENNAN: I'm not sure that's correct. Did I understand you to say that the future market prices are going to be influenced by -- 97 MR. JANIGAN: New storage developments and that in effect you have negotiated a contract where you have the ability to rachet down, I believe, 20 percent of your requirement under the contract based on new developments of storage by Enbridge, but you haven't included a provision that allows such flexibility in the event of new storage developments, apart from those that are developed by Enbridge. 98 MR. BRENNAN: That's correct. And I think Union obviously understands that Enbridge or the company is and has developed storage over the past and so that's why that condition, they have accepted that. They were not prepared to accept it from anyone other than Enbridge. 99 MR. JANIGAN: And as I understood your answer to Mr. Dingwall yesterday, as part of the deal-making process, the idea that you would be able to rachet down on the basis of new storage developments was something that was conceded in the context of getting a deal with Union. 100 MR. BRENNAN: Yes, we felt that was a great deal for our ratepayers. And again, it wasn't included in the net present value, so any benefits that would approve from that would be on top of that $8.6 million. 101 MR. JANIGAN: Now, I believe other LDCs obtained storage from Union at cost-based rates; is that correct? 102 MR. BRENNAN: Are you talking ex-franchise customers? 103 MR. JANIGAN: Ontario LDCs, such as Kitchener. 104 MR. BRENNAN: Ontario LDCs? 105 MR. JANIGAN: Yes. 106 MR. BRENNAN: At cost-based rates? 107 MR. JANIGAN: Yes. 108 MR. BRENNAN: I'm not aware of any. 109 MR. JANIGAN: Well, Kitchener is served under the T3, which I understand is a cost-based storage allocation, is it not? 110 MR. BRENNAN: I'm not familiar with Kitchener. Are they under an M12? 111 MR. JANIGAN: T3. 112 MR. BRENNAN: T3. Well, I think the Board's decision in RP-1999-0017 made reference to those parties that were under an M12 rate schedule, receiving storage services under an M12 rate schedule. At the termination of those contracts, they would be moving to market-based prices. So Kitchener may be in a different situation in that they're not contracting for an M12 storage. 113 MR. JANIGAN: And they are served under -- by a cost-based storage allocation, I take it, under the T3. 114 MR. BRENNAN: I'm not aware of -- of the T3 contract. 115 MR. JANIGAN: Now, if you could turn up Exhibit A3, tab 2, schedule 5, attachment B, your scenario analysis. And you've produced an annual NPV calculation there at the bottom line. 116 MR. BRENNAN: Yes, we have. 117 MR. JANIGAN: Can you tell me the discount rate that was used in the NPV analysis? 118 MR. BRENNAN: I believe it was, subject to check, 9.6-some-odd percent. 119 MR. JANIGAN: I'm sorry, 9.6? 120 MR. BRENNAN: I believe that's what it was, subject to check. 121 MR. JANIGAN: And why was that particular discount rate chosen? 122 MR. BRENNAN: That was just, I believe, the regulated rate of return. 123 MR. JANIGAN: And in the attachment B analysis, it indicates that ratepayers in the April 2004 to March 2006 period are paying more for storage service by about 11.387 million than they would have under the cost-based storage contract; is that correct? 124 MR. BRENNAN: That's -- and you're taking the difference between the first two -- 125 MR. JANIGAN: Column 1 and column 2. 126 MR. BRENNAN: Right, and between those two scenarios for the first two -- yes. 127 MR. JANIGAN: Yes. 128 MR. BRENNAN: Now, having said that, though, that was based on, as we mentioned yesterday, the old Union rates. That difference would be somewhat less than that if you factor in the new Union rates. 129 MR. JANIGAN: And presumably Enbridge's position is that those customers from April 2006 to March 2014 will benefit as a result of those additional costs borne by the customers in this period in order to get the benefits over the long term of the contract. 130 MR. BRENNAN: That's correct. 131 MR. JANIGAN: Okay. Now, it brings up the issue of generational equity here insofar as customers in that April 2004 to March 2006 period are paying an additional amount to ensure a good deal across the April 2006 to March 2014 period, does it not? 132 MR. BRENNAN: I'm not sure that it does. As I mentioned yesterday, a lot of our customers that are utilizing storage are heat-sensitive customers, residential customers, if you like, or small-volume commercial. Unless those customers for some reason disappear, then I suspect they're going to be there well beyond 2014. 133 MR. JANIGAN: What would be the response of Enbridge to a proposal of the additional amounts, the amounts additional to cost-based rates for the period up until March 2006 as put in a deferral account to be allocated to customers in the period of time of April 2006 to 2014? That's the 11.387 million, subject to adjustments, that we're talking about. 134 MR. BRENNAN: I guess our initial position, we would probably not be willing to do that. It just adds another complexity to dealing with deferral accounts and how they get disposed. We're talking here the impact -- Mr. Small, I guess, was able to determine what the impact is for different rate classes. I think it's going to be relatively small. Once you then correct for the difference in the new rates, you're talking a relatively small amount that would have to get spread out over an eight-year period. So I think from our perspective, it just adds another complexity I don't think that we really need. 135 MR. JANIGAN: Finally, just a question I probably should have touched on earlier, that you have, in paragraph 3 of Exhibit A3, tab 2, schedule 5 at page 1, paragraph 3, the term "competitive pricing." Do you see that, you have the final -- 136 MR. BRENNAN: Yes, I see that. 137 MR. JANIGAN: I wonder if you could just define for me what competitive pricing means; is that something less than the market price? 138 MR. BRENNAN: I view that as a negotiated price. 139 MR. JANIGAN: That effectively is something less than the market price? 140 MR. BRENNAN: Well, you know, there is this distinction between, you know, a negotiated price and a market price. One could argue that in some cases they are the same. It's whatever either party is willing to -- the buyer and the seller are willing to agree on, I guess. 141 MR. JANIGAN: Presumably in this case you've defined it as a good deal. 142 MR. BRENNAN: Absolutely. 143 MR. JANIGAN: You did get better than the market price, I assume? 144 MR. BRENNAN: Yes. 145 MR. JANIGAN: Thank you, Mr. Chairman. Those are all my questions. 146 MR. BETTS: Thank you, Mr. Janigan. 147 Mr. Shepherd. 148 MR. SHEPHERD: Thank you, Mr. Chairman. I just have a couple of various questions. 149 CROSS-EXAMINATION BY MR. SHEPHERD: 150 MR. SHEPHERD: Mr. Brennan, perhaps you could turn back to that Exhibit A3, tab 2, schedule 5, attachment B. If I understand correctly, the essence of your business deal was that the ratepayers in the Enbridge area would pay 11.4 million extra now, in the first two years, in return for getting about $31 million of savings in the last eight years; that's the tradeoff, right? 151 MR. BRENNAN: Essentially, yeah, that's -- so basically, the net present value of all those numbers you get the eight and a half million dollars. 152 MR. SHEPHERD: But you're asking the ratepayers to, in effect, invest or buy insurance for market prices, that's the point? I'm not saying that's a bad thing. 153 MR. BRENNAN: No, I know. Yes, we're saying that there is an additional cost above cost-based rates for those first two years, but we see the benefits not only just in what we've shown here, but as I mentioned, the ability to reduce the capacity by 20 percent as well which has not been factored into here. And this incorporates all of the flexibility that we were able to negotiate with Union as well. 154 MR. SHEPHERD: Now, it's true that the $11.4 million part of the equation -- 155 MR. BRENNAN: Maybe if I could just stop you there. I know we're using 11.4, but I think that number, as we mentioned earlier, is not necessarily the appropriate number. 156 MR. SHEPHERD: Well, do you have the new number? 157 MR. BRENNAN: That number is part of an undertaking that we're doing where we will update this table to reflect the new Union rates. So I just caution you when you say $11.4 million that it's not $11.4 million. 158 MR. SHEPHERD: Understood, but can I use it for now until we have a number? 159 MR. BRENNAN: You can use it for now with that understanding. 160 MR. SHEPHERD: So the $11.4 million number, subject to correction, is a sure thing, you have to pay that you know already, it's not maybe you'll have to pay it, you'll have to pay it, right? The ratepayers will have to pay it. 161 MR. BRENNAN: Yes, assuming the Board allows recovery in rates. 162 MR. SHEPHERD: Conversely, the 31 million at the last eight years is a lot more uncertain; right? It's uncertain because you don't actually know what the market's going to be, it's uncertain because you may be able to get even greater benefits if you take the right steps, use your 20 percent rule et cetera, and it's uncertain because the Board could change its policy and treat Enbridge customers as infranchise rather than ex-franchise for Union, right, all three of those things make it uncertain? 163 MR. BRENNAN: There is a certain amount of uncertainty. When you address the first one around price, our view is we don't see the market price for storage going down any time soon. With respect to the 20 percent, yes, that has been factored in and there are benefits that have not been incorporated into that so it would depend on whether or not we're able to develop additional storage. We know that we are looking at incremental storage for our own requirements as well, so whether the company can do that to meet our own needs then if some of that would be available to us at some of this storage then it would be a benefit to ratepayers as well. 164 MR. SHEPHERD: Well, now, let's just -- 165 MR. SMALL: Could I just add one other thing, too? 166 MR. SHEPHERD: Sure. 167 MR. SMALL: You're talking about the uncertainty in the future, those future eight years. There is a degree of uncertainty in the first two years in the sense that Union's tolls could change over that time frame and rates could go up so that number could be lower as well. 168 MR. SHEPHERD: Well, yes, except that it's a two-year period and the first six months are already passed or we know what they were, and so you could have a change for next year. 169 MR. SMALL: January 1, '05 and then January 1, '06. I just want you to know that may be a possibility. 170 MR. BRENNAN: And not just 2006. If we were to stay on cost-based rates, there's no guarantee they are going to stay at the rates they are today either. 171 MR. SHEPHERD: Now, you're not going to change for 2006, right, because Union's already decided -- or for 2005, rather, because they're not going to file for 2005; right? 172 MR. SMALL: Right. 173 MR. SHEPHERD: So you know the rates right until end of next year. So you have three months at the end that could -- it's certainly a lot more certain than the 31 million; right? 174 MR. BRENNAN: Yes, that's fair. 175 MR. SHEPHERD: So let's come back to the 20 per cent. The point of the 20 percent clause is, if you can -- if the Enbridge companies, whether it's EGD or some other company, can build or buy or whatever, develop, its own storage, cheaper than this contract, you're allowed to back out 20 percent; right? 176 MR. BRENNAN: Per year on two years' notice. 177 MR. SHEPHERD: So you can get a bigger savings for the ratepayers. 178 MR. BRENNAN: Correct. 179 MR. SHEPHERD: But the converse of that is if you were able to do that, then without this contract you could back out at 100 percent and so you could get five times as much savings. 180 MR. BRENNAN: If we didn't have the contract, how would we meet our demand? I don't understand when you say if we don't have this contract -- 181 MR. SHEPHERD: If you don't have this contract. 182 MR. BRENNAN: You mean if we have a -- continue to have what type of contract -- 183 MR. SHEPHERD: Well, what happens if the Board disallows the cost consequences? 184 MR. BRENNAN: For 2005/2006 we would be paying cost-based rates, but 2006 we would be going to market-based rates at that point in time. 185 MR. SHEPHERD: Well, you would be going to whatever the Board's decision is at that time, right? 186 MR. BRENNAN: That's correct, but based on what we've seen to date, and the decisions that the Board has made to date, it would suggest that it was going to be market-based pricing. In fact, by 2006, the Board may not be regulating storage at all. We don't know. 187 MR. SHEPHERD: One part of this is that, of course, we're talking about this as if this is an Enbridge issue, but whatever dollars Enbridge ratepayers pay extra, Union ratepayers benefit from; right? It's a zero-sum game. 188 MR. BRENNAN: Yes, Union ratepayers do benefit from this based on the sharing mechanism that the Board has approved. 189 MR. SHEPHERD: Well, okay, so let's get to that. If the Enbridge ratepayers pay $11.4 million or whatever more this year and next year, the Union ratepayers don't get 11.4 million more, do they? 190 MR. BRENNAN: No. 191 MR. SHEPHERD: They get 75 percent of that. 192 MR. BRENNAN: That's correct. That's my understanding anyway. 193 MR. SHEPHERD: And 25 percent goes to the shareholder. 194 MR. BRENNAN: That's correct. 195 MR. SHEPHERD: Okay. So then if the Board disapproves the cost consequences of this contract in this case, as some intervenors may request, tell me whether this is true, three things happen: Number one, your termination dispute with Union is already resolved because how you've structured the contract, you've got that benefit anyway; correct? 196 MR. BRENNAN: That's correct. 197 MR. SHEPHERD: So you still have basically the old contract terms until when you thought it should end. 198 MR. BRENNAN: That's correct. 199 MR. SHEPHERD: Okay. So we already have that win, don't have to do anything for it. 200 Secondly, the Enbridge ratepayers save 11.4 million or whatever dollars. 201 MR. BRENNAN: They do, but they will forgo potentially another $30 million over the next eight years. 202 MR. SHEPHERD: Absolutely. And the third -- I'm just dealing with the things that we know for sure. The third is that the Union -- 203 MR. BRENNAN: I know that they will be giving up something if they don't -- beyond the next eight years. 204 MR. SHEPHERD: And the third is that the Union ratepayers will lose the benefit of 75 percent of $11.4 million, whatever that is, $8.6 million or whatever; true? 205 MR. BRENNAN: Yes. 206 MR. SHEPHERD: And the one consequence -- so those all -- if you just take those three, it sounds like it's actually good for the Enbridge ratepayers if the Board says no to the cost consequences. The one thing that's left -- 207 MR. BRENNAN: No, I -- it may on its appearance, but I guess I come back to what's going to happen come April 1st, 2006. 208 MR. SHEPHERD: And so that's what I'm trying to get to. So there's the crux for this Board to determine is, are those benefits sufficient to offset the uncertainty on April 1st, '06. That's the question, isn't it? 209 MR. BRENNAN: That's right. And from what we've been able to demonstrate here, that benefit to ratepayers over that ten-year period is around $11.8 million. 210 MR. SHEPHERD: Those are my questions, Mr. Chairman. 211 MR. BETTS: Thank you, Mr. Shepherd. 212 Ms. Aitken. 213 MS. AITKEN: Thank you, Mr. Chairman. 214 CROSS-EXAMINATION BY MS. AITKEN: 215 MS. AITKEN: I'm just going to ask a few questions about the negotiation of the contract. 216 When you decided to sit down and renegotiate the contract with Union, that was notwithstanding your view that your case on when it should terminate was strong and the fact that there'd been no threat of litigation by Union at that time. 217 MR. BRENNAN: It was premised on the fact that we, Enbridge and Union, are both large players in Ontario. We deal with each other on a constant basis. We obviously did not want to damage that relationship that we have between the two companies. And, yes, I guess in the back of our minds there always was that thought that, push comes to shove, Union may want to pursue this further. 218 MS. AITKEN: Right, but -- 219 MR. BRENNAN: So to avoid that and maintain that relationship, and under the explicit understanding that if we were able to come up with any agreement, that it had to be -- that we would have to be able to demonstrate before this Board that it is in the best interest of our ratepayers. 220 MS. AITKEN: Right. And Mr. Brennan, I can appreciate that EGD wanted to do things to maintain a good relationship with Union for reasons quite apart from this storage contract, as you've just gone into. But it is true that when you sat down to renegotiate with them, it was in an environment where you thought, number one, your case on the termination date was strong; is that right? 221 MR. BRENNAN: Yes. 222 MS. AITKEN: And number two, they hadn't actually threatened any litigation to you; is that right? 223 MR. BRENNAN: That's correct. 224 MS. AITKEN: And did you ever, or anybody at EGD, do any estimate of what that litigation risk might be as to the termination date? 225 MR. BRENNAN: No. 226 MS. AITKEN: Could you just give me a sense of -- you've said some in answer to my first question, and maybe you can tell me if there are other factors that had a role in those negotiations. 227 MR. BRENNAN: I think the primary one that we've -- that we started from the very beginning with Union was that we were quite comfortable that we had a good case for the termination date, and that any reason why we might want to move away from that, we would have to clearly be able to demonstrate that it was in the best interest of our ratepayers. And we went into that negotiation based on that assumption -- with that premise, I should say. 228 MS. AITKEN: Okay. And the three contracts that have resulted from that negotiation, they were negotiated as a package; is that fair to say? 229 MR. BRENNAN: I'm sorry, I missed the first part of that. 230 MS. AITKEN: Sorry. The three contracts that are now replacing the one omnibus contract, those were negotiated as a package; is that right? 231 MR. BRENNAN: Not necessarily. I mean I would say two of them probably were. You may remember that the old S&T contract had several parts to it. So when Union gave us notice on March 11, 2002, they terminated the entire S&T contract, which would include both the transportation, dehydration and everything else along with it. So we replaced that with three contracts, one being the storage, one for transportation easterly, which basically stays at cost-based rates, and the third was for westerly transportation which was under a C1 rate schedule, so that was a negotiated rate as well. 232 MS. AITKEN: Okay. But just my general question was, the negotiation was taking place at the same time for three contracts to replace one contract. 233 MR. BRENNAN: Yes, that's correct. 234 MS. AITKEN: Did either of the other two contracts have a condition of the sort in Article 4.04 of the storage contract, i.e., that the condition is waivable at EGD's option? 235 MR. BRENNAN: No, they don't. First of all, the first contract, the easterly one is at cost-based rates anyway, so that wasn't an issue. The C1 or the westerly transportation, there was no additional charge for the first two years in any case, so we didn't see a need to waive that because our assumption of whether that contract, whether we actually went forward with these contracts, we would still be paying -- have to pay a negotiated rate come April 1st, 2006 in any case. 236 MS. AITKEN: So were there any conditions attached to those contracts? 237 MR. BRENNAN: Those two, no. 238 MS. AITKEN: Okay. And you indicated that Union held the pen on negotiating this contract. You, presumably, I don't want you to say what it was, but you presumably had legal advice when you were negotiating this contract. You didn't have to do it without that benefit -- 239 MR. BRENNAN: Absolutely. 240 MS. AITKEN: -- if you consider it a benefit. 241 MR. BRENNAN: I do, actually. 242 MS. AITKEN: So I heard -- your evidence yesterday was that if the Board did not approve the cost consequences, notwithstanding there is an option for EGD to waive that condition, your evidence was that EGD would not enter into this contract or keep this contract in force? 243 MR. BRENNAN: Not if we weren't able to recover the cost in rates, no. 244 MS. AITKEN: But it was clearly something that would be open to you to do. You're just saying that it's not the intention of the company to do. 245 MR. BRENNAN: It was never our intention. 246 MS. AITKEN: And if you did, just so that I understand how that would have worked, if you had stayed with this contract, notwithstanding the Board did not approve the cost consequences, the way it would work for ratepayers is they would pay the M12 rates for the next, well, two years, until March '06, and then EGD would recover from ratepayers whatever amount EGD was able to negotiate on what you say would be a market-based premise thereafter; is that right? 247 MR. BRENNAN: If the Board were to deny recovery of rates and we stayed with the contract, this contract, ratepayers would be recovering or would be paying, I guess, market-based -- cost-based rates for those two years, and I'm assuming that the shareholder would have to pick up the difference. 248 MS. AITKEN: Okay. If I could just ask you, it might be helpful, you might want to have it in front of you, though - you probably know it by heart - but Article 4 of the agreement at Exhibit A3, tab 2, schedule 5, got the contract appended there and if I could just ask you to turn up Article 4. 249 MR. BRENNAN: I have that. 250 MS. AITKEN: Just looking at Article 4.01, to paraphrase it, basically this contract will go 2014 unless one of two things happens, one is that there is a default under the general terms and conditions that are incorporated by reference. 251 MR. BRENNAN: Yes. 252 MS. AITKEN: And the other thing is that EGD elects not to waive a Board approval of cost consequences and that Board approval has been denied. It's a bit backwards. It's really that the Board does decides not to approve the cost consequences and Enbridge decides to go ahead with it anyway. 253 MR. BRENNAN: That's a bit easier, yes. 254 MS. AITKEN: Now just to be clear, EGD didn't negotiate any right to terminate on it's own election with or without -- 255 MR. BRENNAN: I'm sorry, let me just -- I just want to make sure that we understand each other on that last point. 256 MS. AITKEN: Sure. 257 MR. BRENNAN: If the Board does not approve the recovery in rates, this contract does continue to March 31st, 2006. 258 MS. AITKEN: Correct. It doesn't continue, however, until 2014 unless EGD waives that condition. 259 MR. BRENNAN: Right. 260 MS. AITKEN: Thank you. So just so I'm clear, EGD has no right to terminate on its own election with or without notice to Union; is that right? 261 MR. BRENNAN: Apart from these conditions here, you mean? 262 MS. AITKEN: Apart from a default under the general terms and conditions. 263 MR. BRENNAN: Right. 264 MS. AITKEN: So unless, subject to assignment, Enbridge has to stay with this contract through to 2014 subject to a default under the general terms and conditions. 265 MR. BRENNAN: Yes, assuming that, again, the Board approves it and it carries on until 2014. 266 MS. AITKEN: Of course. 267 MR. BRENNAN: That's correct. But that's no different than the 26-year contract that we previously had. 268 MS. AITKEN: And just if I could ask you to turn up Article 13, that's the assignment provision. 269 MR. BRENNAN: Yes, I see that. 270 MS. AITKEN: Now, it's right, I believe you've confirmed, that EGD is not entitled to assign the contract unless Union approves; is that right? 271 MR. BRENNAN: Well, there's that as well as the approval of the OEB and -- yes. 272 MS. AITKEN: You can't even go down the road unless Union approves; is that right? 273 MR. BRENNAN: That's correct and I guess as I mentioned yesterday, in our understanding, the only reason why they wouldn't have that in there is to make sure that whoever the contract is being assigned to is a creditworthy party and I'm assuming that approval for the OEB is to make sure that if there's a need for additional infranchise requirements for Union, as opposed to assigning it to someone outside the province, then there may be a need to take a look at that. 274 MS. AITKEN: But what you're saying about when Union would or would not approve, that's just speculation on your part, I take it? A reasonable speculation, perhaps, but you have no guarantee of that; is that correct? 275 MR. BRENNAN: That's correct. 276 MS. AITKEN: And there's nothing in the agreement requiring Union to not unreasonably withhold approval or anything like that; is there? 277 MR. BRENNAN: No, there isn't. 278 MS. AITKEN: Okay, and again, I'm just asking you to turn up these provisions so you know what I'm talking about. I'm just going back to Article 5. 279 MR. BRENNAN: Okay. 280 MS. AITKEN: And this is the storage space reduction provision. 281 Now, in order to elect to reduce your storage, you have to give Union 24 months notice; is that right? 282 MR. BRENNAN: That's correct. 283 MS. AITKEN: And you're limited in exercising this right to storage that's been developed by EGD or one of its affiliates; is that right? 284 MR. BRENNAN: That's correct. 285 MS. AITKEN: So you can't utilize this provision just because, if it were to happen, EGD's requirements for storage were to drop. 286 MR. BRENNAN: That's correct, but as I mentioned, I do not see our need for storage decreasing, in fact, over the next five years, we're looking at potentially 10 to 15 Bcf of additional storage requirements so... 287 MS. AITKEN: But it is fair to say the need for sort of traditional storage of this type is something that could change over time, you just can't say at this point presumably? 288 MR. BRENNAN: Decrease over time? I just can't understand why it would. I mean, given the make-up of our particular market in that it's fairly heat sensitive, you know, we keep adding 50,000 customers a year, the majority of those being heat-sensitive customers, I just don't see, in my mind, where we would need less storage going into the future. 289 MS. AITKEN: What about alternatives such as what we all hear about LNG options and things like that? Could that not reduce your need for traditional storage of this nature? 290 MR. BRENNAN: Not at all because I view LNG -- particularly, I guess, the ones that are being contemplated are going to be a base-load supply, so whether that base-load supply is coming from LNG or whether it's coming from out west, we want to be operating those volumes at 100 percent and so the pipelines would be operating at 100 percent, and obviously, our loads are not at 100 percent so there's going to need to be some balancing done and that's where storage comes into play. 291 MS. AITKEN: I take it this is obviously something you've predicted but you -- this is not your fault, nobody could -- you can't predict with certainty that your needs are not going to drop off, is that right? 292 MR. BRENNAN: I can't predict with certainty, no. 293 MS. AITKEN: And just finishing off with this provision, you're not entitled to trigger this storage reduction requirement simply because a more competitive or other competitive offering comes along; is that right? 294 MR. BRENNAN: Other than Enbridge or an affiliate. 295 MS. AITKEN: Right. 296 MR. BRENNAN: Right. 297 MS. AITKEN: And that's irrespective of how good that option might be for ratepayers? 298 MR. BRENNAN: That's correct, but as I say, we're always looking for additional storage, we may be able to take it to metre incremental requirements. 299 MS. AITKEN: And in any event, you can only reduce in 20 percent increments every two years. 300 MR. BRENNAN: No every year. 301 MS. AITKEN: Oh, every year. But with two years' notice in each case. 302 MR. BRENNAN: As long as you give that notice, you could potentially reduce it every year. 303 MS. AITKEN: But you couldn't get started until at least until -- 304 MR. BRENNAN: Two years. 305 MS. AITKEN: Right. If I could also just take to you that chart B at the end of Exhibit A3, tab 2, schedule 5, please. Without taking you back to the paragraph 14 of your evidence, but if you'd like to please do, you indicate there that scenario one reflects a situation where you keep the old terms and conditions of the contract in place for two years and then you go to market-based prices and you've based the scenario that you've illustrated on schedule B, on an average of two proposals; is that fair? 306 MR. BRENNAN: That's correct. So in the scenario one, if you like, they are cost-based rates again or cost-based rates would have to be updated, and then from year three out to year ten, that $20 million includes market pricing based on the average of two bids that we had that were closely related to the Union storage contract, and in there it also includes some additional C1 transportation costs as well. So that number does not just relate to storage. It also includes the additional cost of the C1 transportation. 307 MS. AITKEN: Okay. Now, I think this is covered already in your undertaking, but I wonder if you could just confirm for me whether the RFP information that you're going to share would reflect whether it was stand-alone storage and the transportation associated with it or the bundling of all of contracts that you entered into at the same time to replace the original old contract. 308 MR. BRENNAN: No, the RFP only looked to replace the storage component and the associated transportation if -- in order to get a common point such as Dawn, for example. It doesn't include any transportation downstream of Dawn. 309 MS. AITKEN: Okay. And the numbers, though, that are reflected as referable to the LST039 storage contract, do those include such elements? 310 MR. BRENNAN: In the storage contract itself? 311 MS. AITKEN: No, just the numbers that are here reflective of LST039 that we're comparing against the existing M12 plus market-based rents going forward, are we basing them on exactly the same -- well, within the parameters of the RFP are they -- are we comparing apples and oranges is all I'm trying to ask? 312 MR. BRENNAN: No, I think we're comparing apples to apples. The transportation costs in the second scenario relates to again the C1 transportation that we would start paying as of April 1st, 2006. 313 MS. AITKEN: So both figures then reflect just the storage and the associated transportation with that storage? 314 MR. BRENNAN: Storage and the associated C1 transportation to be specific. 315 MS. AITKEN: Okay. Thanks. 316 And again I think this is covered in your previous undertaking but will you be producing the particulars of the lower of the two averaged bid proposals? 317 MR. BRENNAN: I think we'll provide a summary of the bids and -- I guess in the fashion that we feel comfortable after talking to the bidders. So whatever information they're prepared to allow us to release then we'll provide that in summary format. 318 MS. AITKEN: Well, I guess I'll just state what our concern will be on the record, and if there's any need to respond to it or deal with it, we can perhaps do so at a later date. The concern I would have is to be able to have all of us to review the particulars of the lower bid just because if there was, for example, a big differential between the two that you've averaged you might be losing real sight of a perhaps more competitive proposal which has been muted by averaging of the higher. 319 MR. BRENNAN: No, I can assure you that the two that were averaged were reasonably close, very close, actually. Once you factored in all aspects in terms of where that storage is and taking it to a common point. 320 MS. AITKEN: Right. And I guess my concern, again, I'll just express it in case we need to come back to it is that the evaluation of whether those terms and conditions are such as to justify a conclusion that they really were quite close given that you've just, in fact, articulated - which I'm not surprised to hear - that it's kind of on balance that those terms and conditions, when added to the price, make them close, it's something that, in my view, would merit an opportunity for intervenors to probe so I just put that out there. 321 MR. BRENNAN: Yeah. 322 MS. AITKEN: In calculating this average, the scenario one, was -- were those bids at all subject to negotiation or did you just receive them? 323 MR. BRENNAN: We just received them. 324 MS. AITKEN: And that's in contrast to the Union offer, which as I believe you said yesterday, you initially got their first cut at it and then it was subject to negotiation; is that right? 325 MR. BRENNAN: Yes. The arrangement was that Union would give us their best bid, in quotation marks. 326 MS. AITKEN: Sorry, I didn't hear what you said, sorry. 327 MR. BRENNAN: Union was to give us their best "bid," if you like, and that we would go to the market to see what other participants in the market would be compared prepared to offer for the same, similar storage -- I lost my train of thought. 328 MS. AITKEN: I'll just ask my question again. Maybe if it's just helpful that I say my question again. Maybe I'll trigger something for you. 329 My question was just that you haven't confirmed that these bids were not the subject of further negotiation yet. 330 MR. BRENNAN: No, I'm sorry. That's right. So the idea was that when we received the bids, the ones that we felt that were -- that met the requirements, for one thing, in what we're looking for, and also that were simply true storage as opposed to synthetic storage, they were considerably higher than what Union was offering so then it didn't seem any point going out and negotiating with these other parties, we thought the agreement was then we would go back and negotiate with Union to see if we can get something that was to the benefit of ratepayers. 331 MS. AITKEN: Okay. Now, did those who were submitting bids pursuant to the RFP appreciate that they were doing so in consideration of the an offer on the table from Union? 332 MR. BRENNAN: No, they did not. 333 MS. AITKEN: I appreciate you're going to give us the terms of the RFP so we understand for what term in terms of years these -- 334 MR. BRENNAN: Yes. 335 MS. AITKEN: -- RFPs were soliciting; is that right. 336 MR. BRENNAN: Yes. I think one of the undertakings was to provide a copy of the RFT that was issued. 337 MS. AITKEN: Okay. Now, maybe can you just help me here, the RFPs that you would have issued, were they to start in March of 2006, that ten-year period or an eight-year period. 338 MR. BRENNAN: No, I believe we had word that that could start as early as 2004, April 1st, 2004. 339 MS. AITKEN: And my last question is just when you look at the cost difference line, the third to the last on your chart in schedule B. 340 MR. BRENNAN: Yes, I have that. 341 MS. AITKEN: Is there a breakdown between the cost difference attributed to storage and to transportation? 342 MR. BRENNAN: Obviously there isn't in this table, but can we break it down? The answer is yes, we can break it down. 343 MS. AITKEN: Yes, sorry, I apologize. Yes, if you would provide us with that information we would be grateful. 344 MR. SCHUCH: Mr. Chair, I wonder if that's an undertaking. It would be J.2.3 and that would be a breakdown of the chart on Exhibit A3, tab 2, schedule 5, attachment B, a breakdown of the NPV between storage and transportation. Is that correct? 345 MR. BRENNAN: I wonder if maybe before we go there, we are -- one of the undertakings is to update this table in any case. Could we maybe just incorporate what you're looking for in that same undertaking? 346 MS. AITKEN: That would be great. The only thing I would like to clarify with respect to Board Counsel's comment, it was the cost difference line that were interested in breaking down, but I think you understood that. 347 MR. BRENNAN: okay. 348 MS. AITKEN: I think you did understand that. And I actually do have one more question. 349 When you were considering obviously what to do in -- faced with what you thought would be a dispute about termination date, did you consider keeping the M12 rates until March 2006 and negotiating C1 rates thereafter? 350 MR. BRENNAN: Well, obviously that's what would have happened if we didn't negotiate something with Union. Our view was that the contract would have expired -- the storage contract would have expired March 31st, 2006, and then April 1, we'd be operating not only negotiated or market pricing for storage but market pricing for C1 as well. 351 MS. AITKEN: And independent for soliciting the bids, which you obviously took at face value, I understand they weren't negotiated, did you do any independent consideration of what those market-based prices would be and what the negotiated C1 rate would be? 352 MR. BRENNAN: No. Well, we knew what the range rate was for the C1 transportation to start with so we had an idea of what the max would be, what we expected to pay. But the storage, no, we left it to the market to determine what the market pricing was, what our process of going out for the bids, I guess, for the RFP would determine what the value of the storage would be at market-based prices pricing. 353 MS. AITKEN: So that was your exclusive reference point was for those market-based prices. 354 MR. BRENNAN: Yes, that's correct 355 MS. AITKEN: Thank you very much. 356 MR. BETTS: Thank you, Ms. Aitken. 357 Question from Board Staff. 358 MS. LEA: Yes, Mr. Wightman has a few question, thank you. 359 MR. BETTS: Thank you. 360 MR. WIGHTMAN: Thank you, Ms. Lea, and thank you, Mr. Chair. Good morning, panel. 361 MR. BRENNAN: Good morning. 362 CROSS-EXAMINATION BY MR. WIGHTMAN: 363 MR. WIGHTMAN: Just two things left, and you could just confirm them, and probably Mr. Brennan. The first one is with respect to the C1 storage contract, that's a range rate that you negotiated; correct? 364 MR. BRENNAN: It's negotiated within a range, correct. 365 MR. WIGHTMAN: Yes. On that rate schedule, my recollection is that there's a clause that says for multi-year agreements, prices can be negotiated that are not in the range; is that true? 366 MR. BRENNAN: Just give me a moment. I don't think I have the rate schedule. 367 MR. WIGHTMAN: Yeah, the C1. 368 MR. BRENNAN: Yes, that's what it says. 369 MR. WIGHTMAN: Okay. Thank you. Can you confirm that whatever price you negotiated was within that range? 370 MR. BRENNAN: Yes. Subject to check, it looks like it's well within the range. 371 MR. WIGHTMAN: Thank you for that. The other question is with respect to the discount rate, I believe you said you used 9.61 percent. 372 MR. BRENNAN: I couldn't remember, 9.6-something, that's all I can remember. 373 MR. WIGHTMAN: My question is: Is this the rate you would use to evaluate capital projects? 374 MR. BRENNAN: Yes, it would be. 375 MR. WIGHTMAN: Thank you. Those are my questions. 376 MR. BETTS: Thank you. And Ms. Persad any questions in redirect? 377 MS. PERSAD: I don't have any, Mr. Chair. 378 MR. BETTS: I'll see if our panel -- 379 QUESTIONS FROM THE BOARD: 380 MR. SOMMERVILLE: Mr. Brennan, Ms. Aitken asked you about the differential between the two bids that you used arising from the RFP process. Your answer was to the effect that the bids were quite close. I wonder if you could quantify that in response to the undertaking related to that RFP. 381 MR. BRENNAN: As to how close those two bids were? 382 MR. SOMMERVILLE: Indeed. 383 MR. BRENNAN: Certainly. 384 MR. SOMMERVILLE: Thank you. 385 MR. DINGWALL: Mr. Sommerville, I believe Mr. Brennan indicated yesterday that there were four bids in respect to the RFP. Was it the four bids that you want quantified or the two that they used for the purpose of the response on attachment B? 386 MR. SOMMERVILLE: I think Mr. Brennan's response, Mr. Dingwall, was to the effect that there were only two bids that really fell within the reasonable scope of what they were looking for as real comparators for the Union proposal and so it's really the two bids that I'm interested in. 387 MR. BETTS: I have a few questions for you and I apologize if they're in evidence or if I should have known them otherwise, but I'm going to ask anyway. 388 First of all, I'm assuming that there was no clause in the previous storage contracts that were anything similar to a right of first refusal for Union in terms of any bids that came in on a new contract? 389 MR. BRENNAN: You're talking about the ability to rachet down that type of provision; is that what you were thinking of? 390 MR. BETTS: Anything that would allow Union -- yes, the opportunity to interact with bids for subsequent contracts, whether it be to have the right to take over that price of another lowest bid, was there any implication in the existing contract as to what might happen from Union's perspective with new bids coming in, other than the opportunity to bid freely? 391 MR. BRENNAN: I think you're asking the question: Did Union have the right to match any of the other bids? 392 MR. BETTS: That would certainly be an example of what I'm looking for. 393 MR. BRENNAN: No. 394 MR. BETTS: Thank you. That was my assumption, by the way. 395 In 5.02 of the contract, there's the reference to developing storage, can you give me an example of what developing storage is? Is that finding new storage, is it purchasing new storage, is it leasing new storage, is it all of those things? 396 MR. BRENNAN: My view would be developing would be bringing on new storage, developing new storage as opposed to purchasing it or leasing it from another party. 397 MR. BETTS: So that would be currently non-existing storage? 398 MR. BRENNAN: Correct. 399 MR. BETTS: Does EDGI have other gas storage capacity serving its franchise area? 400 MR. BRENNAN: Other than this Union contract? 401 MR. BETTS: Yes. 402 MR. BRENNAN: Yes, obviously we have our own Tecumseh which is over 90 Bcf of storage. 403 MR. BETTS: So could you approximate for me what the percentage is for this contract relative to the total capacity? 404 MR. BRENNAN: Right, it would be roughly 20 Bcf over 110 Bcf roughly, if you add our existing capacity with Tecumseh which is in the neighbourhood of 91, 92 Bcf for the 20 Bcf you get to just over 110, so you take 20 over 110 would give you a percentage of our total storage, the percentage of this contract over our total storage. 405 MR. BETTS: Something slightly less than 20 percent total, thank you. 406 And I believe I understood this from comments already but in the initial results of the RFPs, Union was the lowest bidder; am I correct? 407 MR. BRENNAN: We didn't send the RFP out to Union per se. Union was required to give us, if you like, their best offer ahead of time and we went to the market at the same time and then once we had them all back we looked at them, and Union on its face value had the lowest and having said that, it still wasn't necessarily -- it may have been the lowest of all those bids, it still didn't provide any benefits to ratepayers at that point and it was at that point, then, that we started negotiations to see if there was a way we could come up -- that we'd be able to demonstrate and enter into this contract that we would have benefits to ratepayers. 408 MR. BETTS: Thank you, Mr. Brennan, that clears that up for me too and those are all my questions. 409 Did that create any need for any further re-examination? 410 MS. PERSAD: It didn't, Mr. Chairman. 411 MR. BETTS: Thank you very much. Then I believe we are through with this particular panel on this particular subject. And I thank you all very much for your assistance in dealing with this issue. 412 Are we ready to bring forward the next witness panel. I think we will then and we'll -- why don't we actually schedule our break now then, and we'll allow you to get your new witness panel organized and we'll reconvene here at 11:00 a.m. 413 MS. PERSAD: Just before we break, Mr. Chairman, I do have the response to another undertaking from yesterday ready to file, and it was the Utilities Kingston decision, I'll just find the undertaking number. 414 MS. LEA: J.1.6. 415 MS. PERSAD: Yes, that's right, J.1.6. 416 MR. BETTS: Thank you. 417 MS. PERSAD: Thank you. 418 MR. BETTS: I guess we can distribute that, then, through the break and we'll break now and reconvene at 11:00 a.m. Thank you. 419 --- Recess taken at 10:40 a.m. 420 --- On resuming at 11:03 a.m. 421 MR. BETTS: Thank you, everybody. Please be seated. 422 Thank you. I see some new faces again. Mr. O'Leary, how are you? 423 MR. O'LEARY: Thank you, Mr. Chair. 424 MR. BETTS: And we have new witnesses appearing before us, and at least one from a previous panel. So are there any preliminary matters that arose through the break? 425 PRELIMINARY MATTERS: 426 MR. O'LEARY: Mr. Chair, we have a preliminary matter. It doesn't arise out of something that occurred during the break, it's in relation to yesterday's transcripts, there two corrections that I would wish to identify. The first is at paragraph 360. It's the evidence of Ms. Marika Hare. As it presently reads: 427 "Well, we retained an expert because we thought an interview would be helpful to the Board." 428 It should read: 429 "Well, we retained an expert because we thought an independent view would be helpful to the Board." 430 And the second correction is at paragraph 446, again it's the evidence of Ms. Hare. It presently reads: "No, I understand the issue. I don't understand how it relates to what year talking about," and that should be replaced with the word "we're" obviously. And those are the two corrections -- I'm advised that there is one other. It's simply a typo in respect of a question asked by Mr. Peter Thompson and it's at paragraph 639. As it presently reads: 431 "I'm just trying to, I guess, understand the ambit of your emotion," and we believe that means "the ambit of your motion." But we do have an answer to the first question. 432 MR. BETTS: Thank you for those corrections. 433 Are there any other matters that arose or have arisen for the panel's consideration? 434 Mr. O'Leary, would you like to introduce your new panel. 435 MR. O'LEARY: I -- thank you very much, Mr. Chair. Closest to the panel is Arunus Pleckaitis. Next to Mr. Pleckaitis, as you know, is Mr. Brennan. Then we have Mr. Fred Rubino. All three are, of course, with Enbridge Gas Distribution. The final panel member of the panel is Mr. Tim Simard of Risk Advisory. If I could have three of the four be sworn. 436 MR. BETTS: Thank you. I'll ask Ms. Nowina to do that. 437 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RISK MANAGEMENT - PLECKAITIS, RUBINO, SIMARD, BRENNAN: 438 A.PLECKAITIS; Sworn. 439 F.RUBINO; Sworn. 440 T.SIMARD; Sworn. 441 F.BRENNAN; Previously Sworn. 442 MR. BETTS: Thank you. The panel has been sworn in. You can proceed, Mr. O'Leary. 443 EXAMINATION BY MR. O'LEARY: 444 MR. O'LEARY: Thank you, Mr. Chair. The company's evidence in respect of the issue of risk management at 5.2 is filed as Exhibits A3, tab 3, schedule 2; and A3, tab 4, schedule 1; and A6, tab 5, schedule 2. If I could first ask Mr. Rubino if there are any corrections to the company's evidence. 445 MR. RUBINO: Yes, there is one. 446 MR. O'LEARY: All right. Would you take us to that, please. 447 MR. RUBINO: Sure. It's at Exhibit I, tab 1, schedule 17, Board Staff Interrogatory No. 17. And fiscal 2002 should read fiscal 2003, and where it says fiscal 2003, that should read fiscal 2002. 448 MR. O'LEARY: Simply a matter of reversing the headings? 449 MR. RUBINO: Yes. 450 MR. O'LEARY: Thank you. Perhaps I could start with you, Mr. Rubino. Could you advise the Panel what your involvement is with the company's risk-management program? 451 MR. RUBINO: I was responsible for coordination and preparing the company's response, the risk-management issue, in the 2003 settlement proposal, and I assist Mr. Brennan with the day-to-day operation of risk management. 452 MR. O'LEARY: And that means you have been involved in the preparation of the evidence that is before this Panel? 453 MR. RUBINO: Correct. 454 MR. O'LEARY: And do you adopt it for the purposes of your testimony in this proceeding? 455 MR. RUBINO: Yes, I do. 456 MR. O'LEARY: May I ask you the same question, Mr. Pleckaitis. First of all, what is your role with the risk-management program? 457 MR. PLECKAITIS: I am the officer responsible for the company's gas-supply function, and as such, risk management falls under that, and I'm also chair of the company's Gas-Supply Risk-Management Committee. 458 MR. O'LEARY: And can you advise whether the prefiled evidence and any of the relevant related interrogatory responses of the company were prepared by you or under your direction or with your involvement? 459 MR. PLECKAITIS: Under my direction. 460 MR. O'LEARY: Thank you. And do you adopt the company's evidence for the purposes of your testimony in this proceeding? 461 MR. PLECKAITIS: Yes, I do. 462 MR. O'LEARY: And, Mr. Brennan, may I ask you your involvement in respect of the risk-management program? 463 MR. BRENNAN: Yes. My responsibility is to manage the day-to-day operations of the gas-supply risk-management program. That includes ensuring that everything is met in terms of the policy as well as the relationship with Enbridge Gas Services who manages part of the program for us. 464 MR. O'LEARY: Thank you. And was the prefiled evidence and the interrogatory responses the company prepared by you or with your direction and involvement? 465 MR. BRENNAN: Yes, they were. 466 MR. O'LEARY: And do you adopt the same for purposes of your testimony? 467 MR. BRENNAN: Yes, I do. 468 MR. O'LEARY: Thank you. The final member of the panel is Mr. Tim Simard, and I hope that earlier a copy of Mr. Simard's curriculum vitae was filed. Mr. Simard is one of the principals of the Risk Advisory consulting firm, and you will note that Mr. Simard's evidence is filed at Exhibit A3, tab 3, schedule 1. 469 And may I ask you, Mr. Simard, first of all, was this evidence and any related interrogatory responses prepared by you and/or under your direction and with your involvement? 470 MR. SIMARD: Components of the report were prepared directly by me, and all aspects of the -- and I was involved in all aspects of the report. 471 MR. O'LEARY: All right. And do you adopt this evidence for the purpose of your testimony in this proceeding? 472 MR. SIMARD: I do. 473 MR. O'LEARY: Thank you. If we could turn, Mr. Chair, to the curriculum vitae of Mr. Simard. The company is requesting that Mr. Simard be confirmed as an expert in energy risk management and qualified to, therefore, give opinion evidence in respect of such matters. Perhaps I could ask Mr. Simard a few questions. 474 I understand that you have a bachelor of commerce with the University of Toronto which was granted in 1984? 475 MR. SIMARD: Yes, sir. 476 MR. O'LEARY: And you, shortly thereafter, moved to an employment position with Burns Fry Limited. Can you, perhaps, highlight some of the activities with Burn Fry that are relevant from a risk-management perspective? 477 MR. SIMARD: Certainly. As Burn Fry Limited I acted as an institutional energy futures broker. 1986, when I moved out to Calgary in that role, it was shortly after the deregulation of the oil markets in Canada, and for the first time, oil producers were facing price risk and also had instruments available to them, namely future contracts, to manage those price risks. So much of my function at that point was the education of the oil industry around the appropriate use of financial instruments, futures contracts, to manage those risks inherent in their business and to set up prudent risk-management programs. 478 MR. O'LEARY: Thank you. I understand, then, in 1990 you moved to Bankers Trust Canada first as the vice-president, later as the vice-chairman of that entity. 479 MR. SIMARD: Yes, sir. 480 MR. O'LEARY: Could you advise us of the nature of your involvement at Bankers Trust from the perspective of how it added to your experience and expertise in relation to risk-management matters? 481 MR. SIMARD: Certainly. A similar role to the functions I performed at Burn Fry, except that at Bankers Trust, it was an educational effort around the use of over-the-counter derivative products in addition to the futures contracts that had been used by the industry prior to 1990. 1990 really marked the birth of the over-the-counter energy derivative markets in Canada, and that was followed shortly thereafter with an expansion of those derivative capabilities from oil into natural gas with the development of the natural gas forward markets. So there was a lot of educational services provided as well to the members of the natural gas industry at that time, and in fact, while I was at Bankers Trust we provided a lot of assistance to both energy marketers and gas utilities across Canada with respect to the renegotiation of their long-term contracts away from fixed-price one-year contracts to indexed contracts. 482 MR. O'LEARY: All right. And I understand, Mr. Simard, that you're one of the founding principals of your firm, RiskAdvisory? 483 MR. SIMARD: Yes, sir. 484 MR. O'LEARY: And that occurred in and around 1995. Can I ask you to provide us with a brief summary of some of the relevant activities of you and your firm in respect to risk-management activities? 485 MR. SIMARD: Yes. RiskAdvisory is a boutique energy risk-management consulting firm. We only provide advisory services with respect to energy risk-management to companies in the energy sector. The firm has worked on mandates for over 200 companies since our inception back in 1995. Personally, I've worked on mandates for in excess of 80 companies over that period. The services we provide range from the design and implementation of risk-management programs, the crafting of policies and procedures documents, the quantification of risk, industry surveys, and educational services. Clients have included electric and gas utilities, oil and gas companies, energy marketers, and financial institutions. And I've worked directly with quite a number of gas and electric utilities; I think it's five gas utilities in Canada and ten electric utilities in Canada as well. 486 MR. O'LEARY: And I see at the bottom of your curriculum vitae, Mr. Simard, that you've had some regulatory experience. As I understand it, you've appeared as an expert witness before various utility or energy board's in Canada? 487 MR. SIMARD: Yes, sir. 488 MR. O'LEARY: And you've indicated Consumers Gas, Ontario Energy Board, at the very last bullet of your curriculum vitae, my understanding is that relates to an appearance as an expert witness in relation to risk-management-related activities in the early 1990s? 489 MR. SIMARD: Yes, that's correct. 490 MR. O'LEARY: And our understanding is that you were qualified by the Board at that time as an expert witness. 491 MR. SIMARD: I believe that's the case, yes. 492 MR. O'LEARY: Thank you. One last question. Do you have a sense of how your degree of experience compares to others that are similarly engaged in risk-management consulting in Canada? 493 MR. SIMARD: I don't think anybody else in the energy risk-management realm in Canada has as much as experience as I do dealing with electric and gas utilities in their energy and risk-management programs. 494 MR. O'LEARY: Thank you, Mr. Simard. 495 Mr. Chair, we offer Mr. Simard as an expert witness for the purposes of giving evidence in respect of energy risk-management and request that he be qualified as such. 496 MR. BETTS: Thank you. 497 Are there any questions from any parties that can be directed to Mr. Simard with respect to this status, or any submissions to the Board? 498 The Board accepts the expert status for Mr. Simard. 499 MR. O'LEARY: Thank you, Mr. Chair. 500 We have some brief evidence in chief, Mr. Chair, if I may. 501 Turning to Mr. Pleckaitis, may I ask what is it that the company is looking for the Board to approve in this proceeding in relation to risk management? 502 MR. PLECKAITIS: Three things. First we're looking to the Board to approve the recommended changes that we are proposing to make to the company's current risk-management program. 503 Secondly, stemming from those recommended changes there are specific amendments to the company's risk-management policies and procedures that we're proposing that the Board approve. 504 And finally, stemming from those same recommended changes, there are amendments to the service-level agreement that is in place with Enbridge Gas Services that we also wish the Board to approve. 505 MR. O'LEARY: Before we come to those requests a little more specifically, perhaps, Mr. Pleckaitis, could you provide us with a brief overview of the company's history in respect of gas supply risk management? 506 MR. PLECKAITIS: Yes. In 1995, or in fiscal 1995, the Board granted Enbridge a one-year approval to begin operating its risk-management program. In the next year, fiscal year, 1996, the Board granted basically a complete approval for the Board -- the company to continue to operate its risk-management program on a continuous basis. And in the ADR process for fiscal 2003, the issue arose again of the company's risk-management program and the company was requested by a number of intervenors and the company agreed to undertake to hire an independent third-party consultant to assess basically its current risk-management program. The company complied with that, agreed to do that, and so retained RiskAdvisory. And it is, in fact, the RiskAdvisory report that stemmed from that ADR agreement and the recommendations that we are proposing to adopt into our new or modified risk-management program. 507 MR. O'LEARY: Thank you. Mr. Pleckaitis, what is the purpose or objective of the company's risk-management program? 508 MR. PLECKAITIS: The primary objective is to reduce price volatility for system gas customers. 509 MR. O'LEARY: And could you, please, now highlight the key changes that the company is proposing to make to its risk-management program? 510 MR. PLECKAITIS: Yes. There's basically two. There are a number of, I would call them lesser changes, but I would say that the two more significant changes relate, first of all, to the percentage of hedgeable volumes, so those volumes that we deem that we will -- that is system gas volumes that will be delivered into our system in the particular year. Our current program allows us to hedge at any one time 10 percent of those volumes. We're proposing to remove that limitation and provide the Gas-Supply Risk-Management Committee the flexibility to hedge larger percentages of that particular volume. 511 The second change we're proposing is a rolling 12-month hedging program. Currently, the program basically allows us to hedge within the fiscal year alone. As we approach to go through the year, basically, the subsequent year is totally unhedged until we are very close into entering into the hedge in that particular year. 512 MR. O'LEARY: Thank you. And can you tell us why the company is proposing these changes at this time? 513 MR. PLECKAITIS: Yes. I'm sure it comes as no surprise to anyone here that price volatility of the natural gas markets is the principal driver. There was, I believe, I think it was common consensus at least in our industry that when the first real shock wave of gas-price volatility hit, which was the winter of 2000-2001, some describe it as a perfect storm; that it was a circumstance that was unlikely to be repeated in the future. Our industry has now reached the consensus that the price volatility that we have seen in the last three years is something that is likely to continue for the next short to medium term. And, therefore, the changes that we're proposing to the risk-management policy address, in fact, a changing environment that we've entered into, which is one of much more volatility in gas prices. 514 MR. O'LEARY: All right. And can you advise the Board how the company proposes to proceed with these changes? 515 MR. PLECKAITIS: The company intends to operate its current risk-management program as has been currently approved by the Board until the company receives the decision in this particular case as to how it may proceed. 516 MR. O'LEARY: And can you advise us what are the risks and benefits from a customers' perspective with the implementation of the requested changes? 517 MR. PLECKAITIS: Yes. I see no incremental risks from the customers' perspective for us entering into these changes, and in fact, I see substantial benefits to customers that will be realized through reduced price volatility. 518 MR. O'LEARY: Thank you. If I may now turn my questions to you, Mr. Simard. Perhaps I could ask you first of all to briefly describe the role of your firm from the perspective of risk management for the company. 519 MR. SIMARD: Certainly. As Mr. Pleckaitis mentioned, there was a commitment made by Enbridge coming out of the 2003 fiscal year settlement proposal that the independent third-party consultant, firm B, engaged to conduct a review of the company's gas-supply risk-management program, and RiskAdvisory was the firm that was chosen to conduct that review, I believe, last September and we prepared and issued our report in December of 2003. 520 MR. O'LEARY: Thank you, Mr. Simard. Pursuant to this engagement, could you advise the Board as to the -- briefly, the nature of the activities that you and your firm undertook? 521 MR. SIMARD: Yes. We conducted extensive interview sessions. We interviewed all members of the Enbridge Gas Distribution Gas-Supply Risk-Management Committee, a number of other key employees at Enbridge Gas Distribution who are involved in the program process, as well as several employees at Enbridge Gas Services and Enbridge Inc. who also played various roles in the management program. We reviewed the Gas-Supply Risk-Management Policies and Procedures Manual, the Natural Gas Procurement Policies and Procedures Manual, and the agency that exists between Enbridge Gas Distribution and Enbridge Gas Services. We also conducted a review of the quantitative models that the company uses to determine the hedge volumes and the hedge instruments that should be manage the price risk. As part of the report, we also touched upon some of the experiences in other jurisdictions in Canada and the approaches used by other utilities when it comes to the management of ratepayer energy price exposure. 522 MR. O'LEARY: Mr. Simard, would you please advise us as to the, at a high level, the conclusions reached as a result of the work you just described. 523 MR. SIMARD: RiskAdvisory does support the underlying objective of the program to limit gas-price volatility and to mitigate rate exposure -- mitigate ratepayer exposure to an escalation in gas costs. We also believe that the implementation processes that Enbridge currently has in place have been effective at achieving those objectives and would continue to be effective. Also drawing attention to the fact that we believe those processes are pretty much in line with processes used by other utilities across North America who are proactively managing their ratepayer exposure to commodity prices. 524 However, having said that, the evolution of the gas markets over the last seven or eight years, or nine years since the policy was initially drafted, has resulted in a couple of recommendations that we made through our report that we think will enhance the effectiveness of the program with respect to achieving the underlying objective. 525 MR. O'LEARY: Mr. Simard, could you please highlight several of these recommendations that you've made in your report. 526 MR. SIMARD: Yes. There's two recommendations that we believe will have the greatest impact with respect to increasing the effectiveness of the program. The first centers around the determination of hedgeable volumes. We have recommended that the company move to a determination of hedgeable volumes that is more closely aligned with the company's estimate of minimum monthly system load requirements. The way the hedgeable volumes is currently being calculated oftentimes results in an estimate of hedgeable volumes that lies below this minimum amount and by moving to a determination that more closely reflects the minimum monthly volumes, the company, I think, will be moving more in line with other utility practices in this area. 527 The second issue centers around a hedging constraint that currently exists within the policy. As the policy currently stands, there is a restriction on the company that they cannot hedge more than 10 percent of remaining hedgeable volumes at any given time. Our concern with this approach is that situations can arise where an unacceptable level of risk is identified, and yet that 10 percent restriction may handcuff Enbridge to a certain extent with respect to effectively mitigating that risk in a timely fashion. 528 The existence of that 10 percent restriction, I believe, is tied to the historical time frame when the policy was initially developed in 1995, and at that time, Enbridge had no experience administering gas-hedging programs, and the natural gas forward markets also were still in a state of illiquidity at certain times. Both of those have disappeared. Enbridge has now had approximately a decade of experience in administering these programs and built up a solid system of internal controls. 529 In addition, the liquidity around the forward markets where Enbridge participates has improved substantially since 1995. So from our perspective, there is absolutely no reason any longer for this 10 percent constraint to be in place. 530 MR. O'LEARY: Thank you, Mr. Simard. May I ask you: From the perspective of ratepayers, do you have a view of whether there are any benefits to implementing your recommended changes? 531 MR. SIMARD: I do. The first benefit is that by adjusting the hedgeable volume definition and removing the 10 percent constraint, there's a much greater likelihood that Enbridge will be able to defend ratepayers against an increase in gas costs in excess of the tolerance amount. The existence of the lower hedgeable volume calculation and the 10 percent constraint makes it more difficult for the company to ensure that that tolerance amount is not exceeded. 532 And secondly, the volatility conditions that Mr. Pleckaitis alluded to and that forward markets agree with, if you look at forward markets today and where option prices are trading, there's no question that market participants continue to believe that we are going to experience high levels of gas-price volatility for the foreseeable future. And in that type of environment, I think it exacerbates the need to incorporate enhancements into the program that will serve to improve the efficiency of the program with respect to muting some of the gas-price volatility for ratepayers. 533 MR. O'LEARY: Thank you, Mr. Simard. 534 Mr. Chair, that is the evidence in chief of this panel and they are now available for cross-examination. 535 MR. BETTS: Thank you very much. 536 Can I have an initial indication from parties that would like to cross-examine the witnesses. Okay, Mr. Dingwall, Janigan, Ms. Street, and Ms. Girvan, and Mr. Shepherd, Ms. Aitken, I think pretty much everybody. I always see your hand last, I'm sorry, Ms. Aitken. 537 Is there any order? 538 MR. DINGWALL: I think from discussions between the parties, it would appear that the panel would be vulnerably and directly probed with some educational and manufacturing concerns as well. 539 MR. BETTS: Okay. Help me with names, then. 540 MR. JANIGAN: I'm going first, Mr. Chair. 541 MR. BETTS: We'll start off with that and then I'll ask who's next. 542 Mr. Janigan, please proceed. 543 MR. JANIGAN: Thanks very much. 544 CROSS-EXAMINATION BY MR. JANIGAN: 545 MR. JANIGAN: I want to deal first with the changes in the -- the proposed changes in the objective of the risk-management program, and I'm looking on page 11 and 12 of the report. 546 First, at the top of page 12, it indicates the current objective which is: 547 "To maintain a system gas-supply commodity portfolio that contains a proportion of floating price supply sufficient to provide an opportunity for customers to obtain the benefits of market-based prices while limiting gas-supply volatility and unacceptable price increases." 548 That's the current objective, as I understand it; correct? 549 MR. BRENNAN: Yes, that's correct. 550 MR. RUBINO: Yes, it is. 551 MR. JANIGAN: And this objective was reviewed and approved in August 2001 by stakeholders, as I understand it. 552 MR. BRENNAN: That's right. There was a meeting of the stakeholders and it was agreed, with minor wording changes, that the existing objective was appropriate. 553 MR. JANIGAN: Okay. And that has been the operative principle for the risk-management program since then. 554 MR. BRENNAN: Yes, that's correct. 555 MR. JANIGAN: Now, on pages 11 and 12 there are recommendations to do a little bit of surgery to this objective by removal of the wording of "floating price is a means to participate in falling prices," and to change "avoiding unacceptable price increases" with "mitigating ratepayer exposure to an escalation in gas costs"; is that correct? 556 MR. RUBINO: Yes, it is. 557 MR. JANIGAN: And if we sort of do that surgery, I come out with an objective which is to maintain a system gas-supply commodity portfolio that will limit the gas-supply volatility and mitigate exposure to an escalation in gas costs. Is that essentially what the objective becomes now? 558 MR. RUBINO: We've actually provided a black-line version of how that change would be reflected at Exhibit A3, tab 3, schedule 2, appendix 1, which is the "Gas-Supply Risk-Management Policies and Procedures Manual." 559 MR. JANIGAN: Okay. 560 MR. RUBINO: And if you turn to page 4. 561 MR. JANIGAN: Could you read it. I don't have the manual. 562 MR. RUBINO: Sure. From the black-line version it would read: 563 "The company's objective for the gas-supply risk-management program is to maintain a system-gas supply commodity portfolio that attempts to limit gas-supply price volatility and mitigates ratepayer exposure to an escalation in gas costs. 564 MR. JANIGAN: Okay. Now, in looking at the old version and comparing it to the new version, it appeared to me that in the old version there were two objectives. One was effectively the limitation of gas-price volatility and the other was, for lack of a better term, to try to get the best price. Would you agree with me? 565 MR. BRENNAN: Yes, that's fair to say. 566 MR. JANIGAN: Okay. And as I understand it, the objective of trying to get the best price will be eliminated. 567 MR. BRENNAN: Well, maybe I'll ask Mr. Simard to explain -- comment on that as well. But I guess from our perspective, it appeared that those two may be in conflict from time to time, that you can't do necessarily both all the time, reducing volatility and trying to get the lowest price. 568 MR. SIMARD: And if I could add my comments. RiskAdvisory does not believe that it is appropriate to expect utilities to use risk-management programs to achieve a better price. Inherently that would suggest that utilities have the capability to use risk-management instruments to beat the market, and that is a very, very difficult skill, a very rare skill, and a skill that we do not think utilities should be expected to have. 569 MR. JANIGAN: Mr. Simard, what do you think of those programs in the United States that incent utilities to essentially beat the market, as it were, or beat a market baseline in terms of their gas purchasing policies and effectively give them a share of the amount that they beat the market by? 570 MR. SIMARD: I'm not a big advocate of those plans for a couple of reasons. First of all, I still don't think, even though the utility is incentivized to beat the market, that over the long run these utilities will be able to beat the market. So while there certainly is a more symmetrical sharing of risk-reward between ratepayers and shareholders if such a system is put in place, I still don't think in the long run it's going to benefit the ratepayer. 571 Secondly, whenever you inject that kind of beat-the-market mentality for the benefit of the shareholder, you increase the likelihood of some potential wrong-doings and operational difficulties with the problems. People are now motivated to take chances that they otherwise might not, and I think most people in the room would be familiar with situations where traders are who are incentivized to beat the market have ended up generating significant losses for their firms. 572 MR. JANIGAN: I guess my question that follows out of that, there seem to be a number of independent players in the market that really sustain their operating revenue by attempting to beat the market. Are you saying that they can do something that the utility can't? 573 MR. SIMARD: Well, I would suggest that you should look closely at how those firms are making their money and how consistent they are at making money. I think you'll find a couple of things, that a lot of the money they generate is on a relatively risk-free basis; that through a network of contacts in the industry, they are able to buy from some counterparties at one price and almost simultaneously sell to another counterparty and extract a margin from that. 574 Those companies who do rely on taking risk positions to profit, what you'll find is that earnings can fluctuate dramatically, and that those companies who are in that game have to have a high tolerance for risk in order to stay in that business over the long run. 575 And thirdly, even those companies that may have a track record of performing very well for four or five years in a row, some of us might argue that the more years in a row you're successful, the more likely it is that next year you won't be. 576 MR. JANIGAN: I wonder if you had an opportunity to review Union's risk-management program and their objective. I have their objective here. I wonder if you could accept that, subject to check. It's to achieve a market-responsive price to provide reasonable value through a diversified portfolio. It seems as if they have not eliminated sort of the idea of value or best price from that equation. 577 MR. SIMARD: If I was the consultant to Union Gas, I would recommend to them that they not try to beat the market in their hedging program. 578 MR. JANIGAN: Now, in terms of the operation of the program under the new objective, effectively what this means is that Consumers will be, to some extent, insulated from price volatility, large changes in the market, whether positive or negative. 579 MR. SIMARD: And I think that is largely correct, except I would like to say that it's Enbridge's ratepayers that would be protected, not Enbridge. 580 MR. JANIGAN: Sorry, yes, that's what I meant. 581 MR. SIMARD: Right, which is an important distinction from my perspective, that there is a recognition here that this risk-management activity is being undertaken on behalf of ratepayers. 582 MR. JANIGAN: Now, if we turn up Board Staff Interrogatory Response No. 17, that's Exhibit I, tab 1, schedule 17. This is the one where we flipped the fiscal years. It shows over a two-year period customers were better off from your risk-management program by about 17.4 million; am I correct on that? 583 MR. BRENNAN: I believe it's the other way around, Mr. Janigan. 584 MR. JANIGAN: It was a -- 585 MR. RUBINO: A net cost of the difference between those numbers. 586 MR. BRENNAN: A net cost of $17.4 million. 587 MR. JANIGAN: 17.4 million is the -- I'm sorry, go ahead. 588 MR. BRENNAN: I'm just going to ask, can you repeat your question because I'm not sure I accept necessarily how you phrased your question in terms of what this means. 589 MR. JANIGAN: Well, I was -- my question is whether or not, over the two-year period, whether or not as a result of the program the customers were better off or worse off as a result of the risk management? 590 MR. BRENNAN: Well, I think this shows only one part of it, the part that I guess from our perspective is not the one that should be looked at. Our perspective is, what has it done to reduce volatility. 591 MR. JANIGAN: Certainly. This is the best price part of the analysis, I agree. 592 MR. BRENNAN: And be careful with "best price." I mean, it's never been part of our policy to try to get the best price. We have a portion of -- well, a large portion of our portfolio is with index pricing, and depending on what instrument that we put on any particular time would allow the customer to achieve some benefits of falling prices. 593 MR. JANIGAN: Maybe "value" might be a better term, the value portion of the objective. But am I correct or not correct that, in terms of the value portion of the objective over those two fiscal years, the program saved 17.4 million? 594 MR. BRENNAN: I think maybe you might want to go -- 595 MR. JANIGAN: Of costs. 596 MR. BRENNAN: -- to interrogatory -- Exhibit I, tab 6, schedule 20, which is CME Interrogatory No. 20. 597 MR. JANIGAN: Unfortunately, I don't have that interrogatory. 598 MR. BRENNAN: Well, that interrogatory basically -- 599 MR. JANIGAN: So it's a gain to ratepayers of 23.5 million for -- 600 MR. BRENNAN: Over the four-year -- 601 MR. JANIGAN: -- over the four-year period. 602 MR. BRENNAN: That's correct. So, I mean, it's difficult just to isolate any one time period. Again, our view is that that -- while this is an impact to ratepayers, obviously, the benefit to ratepayers is not shown here in terms of the reduced volatility in prices. 603 MR. JANIGAN: Now, I want to deal with what you're seeking in this proceeding and look to tables 1 and 2 that you've included in your evidence, and that's A3, tab 3, schedule 2. And table 1, I assume, has -- involves no increased incremental costs. 604 MR. BRENNAN: That's not quite correct. If you look at, I believe it's item number 8 which deals with the issue that Mr. Pleckaitis raised earlier about the ability to hedge more than 10 percent of the remaining hedgeable volumes at one particular time -- 605 MR. JANIGAN: Yes. 606 MR. BRENNAN: -- that -- before doing that, it was the company's intention to go out and conduct a survey to get a better -- or an update, if you like, of the customers' tolerance to volatility. And there would be a cost to that, and that cost is going to be in the range of $80,000. 607 MR. JANIGAN: And that will be done in the current rate year? 608 MR. BRENNAN: That would be a cost in the 2004 -- thank you, 2004. 609 MR. JANIGAN: And in table 2, are you seeking to implement any of the changes in table 2? 610 MR. BRENNAN: Not at this time, no. We're looking more towards fiscal 2006 for those changes. 611 MR. JANIGAN: And effectively these changes are being implemented in advance of the Natural Gas Forum because it's felt that volatility exists in the here and now and these changes are needed in the here and now? Would that be an appropriate paraphrase? 612 MR. PLECKAITIS: Mr. Janigan, can you repeat that again, please? 613 MR. JANIGAN: Sorry, these changes are being done in advance of the results of the Natural Gas Forum because these changes are needed in the here and now because of price volatility, would that be a fair -- 614 MR. PLECKAITIS: That's fair. 615 MR. JANIGAN: Now, I want to look at some of the other objectives that are going to -- 616 MR. BETTS: Mr. Janigan, just a moment. The panel is conferring. 617 MR. PLECKAITIS: The clarification my panel members are asking me to make is that none of the changes are being implemented now in the sense that we're still waiting -- we would wait for Board approval. 618 MR. JANIGAN: Yes. 619 MR. PLECKAITIS: But subject to Board approval, yes, we would implement them because the changes are needed now, sort of today, as opposed to waiting for some future event. 620 MR. JANIGAN: Okay. I would like to turn to table 1 and some of the recommendations, and in particular, number 3 in terms of the restriction of the degree of discretion. 621 I understand from this that the recommendation from RiskAdvisory is to effectively make risk management a more mechanistic process and to eliminate -- not to eliminate, but to reduce the amount of discretion in terms of what is to be done as part of the risk-management process; is that correct? 622 MR. SIMARD: That is correct, yes. 623 MR. JANIGAN: And in the circumstances where discretion is to be exercised, I understand there was a recommendation to have such circumstance documented by Enbridge. 624 MR. SIMARD: Yes, that's correct. 625 MR. JANIGAN: And with respect to that documentation, will the results of the documentation, or at least summaries of that documentation, be filed in the context of rates proceedings? 626 MR. RUBINO: We've agreed that we would document the rationale that the Gas-Supply Risk-Management Committee used for using its discretion. We haven't indicated that we would file that with the Board. 627 If you turn to that exhibit I mentioned earlier, Exhibit A3, tab 3, schedule 2, appendix 1, on page 15, the black line there indicates how we're interpreting RiskAdvisory's recommendation and it clearly states: 628 "In authorizing any hedge requests, the company will strive to follow the hedge mix as determined by the gas-supply risk-management model. In the rare circumstances that the authorized officers or other officers believe that there is a need to exercise discretion, i.e., not follow the hedge mix determined by the gas-supply risk-management model, then the company will maintain documentation detailing the discretion used and the rationale for exercising that discretion." 629 MR. JANIGAN: And presumably that documentation could be available in the context of any rates case? 630 MR. PLECKAITIS: Yes. 631 MR. JANIGAN: Now, dealing with item 4, the recommendation to narrow the execution window to two days for the Alberta -- AECO transactions and three days for Chicago, I take it that this is not so much a change to what -- the kind of risk-management program you're going to be carrying out, rather a refinement, and an imparting of more flexibility to the risk-management team; am I correct on that? 632 MR. SIMARD: It's actually reducing the amount of flexibility that the execution function has with respect to these transactions. I think historically the ten-day window was there primarily as a result of the fact that liquidity conditions in the marketplace may have been such that the prompt execution of these positions might not have been possible in an effective manner. Over the years, the liquidity in the forward markets in which Enbridge transacts has improved to the point where the type of extended ten-day window is no longer required, and if given a ten-day window, somebody with an execution responsibility might start to judge when was the best day to execute in that window based on price view. And it was the opinion of RiskAdvisory that the exercise of that price view was not appropriate, and that with the improved liquidity conditions, the policy should be adjusted to reflect a shorter execution window. 633 MR. JANIGAN: I wonder if I could go to item 8 of the recommendation concerning the recommendation regarding the removal of the 10 percent restriction for hedgeable volumes. 634 As I understand it, one of the reasons why a restriction is to be eliminated is that delays or missed opportunities could occur during a window time that it takes to process a trade because you had to process the existing 10 percent before you could process any other transaction; am I correct on that? 635 MR. BRENNAN: I think you're -- that really gets back to, in my view, item number 4, not necessarily item number 8. Number 8 is a different situation, where how much we can hedge at any one particular time. The ten-day in item number 4 is the time frame that we have to be able to -- once the committee has approved that a hedge be placed, that the trader has ten days to exercise that. And then in this case, we're asking that that time frame be shortened between two and three days, depending on whereabouts the transaction occurs. 636 MR. JANIGAN: Well, I understood on page 27 of the RiskAdvisory report that -- if you look midway down here: 637 "... that additional hedges cannot be executed until the existing 10 percent tranche is hedged. If hedges are not executed until the latter part of the hedge window, there will be delays in establishing further hedges at times when the model continues to show that EGD is in a hedgeable position." 638 My understanding is if you remove that 10 percent restriction, that problem will not occur. 639 MR. SIMARD: Well, that's correct. The removal of the 10 percent restriction allows for an accelerated implementation of a requisite hedge position. 640 MR. JANIGAN: And there's no other -- there is no other percentage requirement that is being recommended be put in place, as I understand it. 641 MR. SIMARD: There is not, no. 642 MR. JANIGAN: Now, I understand that one of the reasons for the limit was to ensure that the utility doesn't lock all its volumes into one hedge on a given day, which may display an unusual volatility change; am I correct on that? 643 MR. BRENNAN: No, I don't think that's correct. I think as Mr. Simard may have already mentioned there are probably two reasons. Again, the 10 percent restriction had to do with liquidity in the market in the early stages of the program, as well as maybe a potential cooling-off period such that we weren't getting into a situation where we maybe overhedged. 644 MR. JANIGAN: But that 10 percent limit, I assume, had that particular effect, that it did avoid the problem of being locked in with too much volume on a given day, which is unusually volatile. 645 MR. BRENNAN: Well, I think what it was doing, it -- yes, it does, and I think for the very reason that we're here today is that we think that that number should be increased, because then it would allow ratepayers to take advantage of reducing volatility over a large portion of the volume. 646 MR. SIMARD: If I could add, I think this has to do with the merits of averaging into a position, and there are many who believe that it may be more prudent to average into a position than just simply execute the position once you know the exposure exists. There's no question that by averaging into a position you raise the possibility of being able to establish a hedge price that is more attractive than the one you might establish if you executed the hedge immediately. 647 However, one has to remember that the opposite is equally true; that by delaying the entry into the position, there is just as strong a likelihood that you'll end up with a price that is less attractive than the price that can be locked in. And I think the thrust of the policy is that there is a process undertaken whereby Enbridge determines when it is in a position that it has unacceptable risk, or its ratepayers have unacceptable risk. And as soon as it is determined that there is an unacceptable risk level, we would argue that what should be done is that steps are taken as quickly as possible to bring that risk level back down within tolerance levels. 648 MR. JANIGAN: And the adjudication of when an unacceptable risk exists is done according to the parameters of the model; am I correct on that? 649 MR. RUBINO: Yes, that's correct. 650 MR. BETTS: Mr. Janigan, can you just, to assist a little bit in the hearing, can you speak more directly into the microphone? 651 MR. JANIGAN: Sorry, I'm starting to lean the other direction, I think. Maybe I should take another microphone. I will stop leaning. 652 MR. BRENNAN: Mr. Janigan, I would just like to follow up on that. It is not just the model per se. It is based obviously on customer surveys which get to what tolerance level our customers are prepared to accept, and of course that tolerance is built into the model. 653 MR. JANIGAN: I wonder if I could ask you to turn up VECC Interrogatory No. 10, which is Exhibit I, tab 18, schedule 10. And the response here lists a number of attributes to a database model, and one of the reasons for a database model is that it is less vulnerable to human error. Now, have there been any human errors associated with this Excel model in the past? 654 MR. BRENNAN: Not that we're aware of, no. 655 MR. JANIGAN: Okay. And some of the other reasons that are in the IR list benefits that could result from better documentation of the existing model; would you agree with that? 656 MR. SIMARD: That's correct, yes. 657 MR. JANIGAN: Okay. Now, on table 2, going back to the previous exhibit, there's a recommendation for RiskAdvisory to carry out customer surveys. I believe that you indicated that there was to be, as part of the -- 658 MR. RUBINO: There's no indication that RiskAdvisory would conduct customer surveys. 659 MR. JANIGAN: I'm sorry, it would be EGD that would be carrying out those surveys; right? 660 MR. RUBINO: Yes. 661 MR. SIMARD: That's correct, and RiskAdvisory is not in that business. 662 MR. JANIGAN: And I take it that is going to be carried out not only with respect to table 2 recommendations but also table 1, as detailed earlier in your evidence? 663 MR. BRENNAN: Yes, there are two separate surveys that are contemplated here. The first one, as related to table 1, deals with customers' preference or -- not preference, but tolerance to price variation. So that's establishing a new tolerance amount, if you'd like. The current one is $35 per residential customer. 664 The survey that's contemplated in table 2 is a survey that would go to establishing what customers' preferences are in terms of when we would transact certain types of hedges; for example, at what point would the customer want us to see doing a swap versus a collar versus a cap. That's what that survey is talking about. 665 MR. JANIGAN: I take it that would be done not so much in terms of the technical terms but rather in terms of asking a series of questions that might glean their response to different price levels. 666 MR. BRENNAN: Yes. And of course, one of the other recommendations that is included in that table, too, is to educate in a forum, the Board and intervenors on risk-management matters, so that would be included as part of that as well. 667 MR. JANIGAN: And Enbridge -- you don't need to turn it up, but I believe in VECC Interrogatory No. 122, that you've indicated that Enbridge has considered holding consultations relating to the Customer Focus Group in the fall of 2004? 668 MR. RUBINO: Yes, that's correct. 669 MR. JANIGAN: And that's still your intent? 670 MR. RUBINO: Pardon me? 671 MR. JANIGAN: That's still your intent? 672 MR. RUBINO: Yes, it is. 673 MR. JANIGAN: Thank you, Mr. Chair. Those are all my questions for this panel. 674 MR. BETTS: Thank you. 675 And who is next? 676 MS. AITKEN: I believe I'm the lucky one. 677 MR. BETTS: Ms. Aitken. 678 CROSS-EXAMINATION BY MS. AITKEN: 679 MS. AITKEN: Mr. Brennan, I have a few questions at the outset for you. Am I correct that the utility's role in risk management is among those slated to be considered in the pending Natural Gas Forum? 680 MR. BRENNAN: Are you -- 681 MS. AITKEN: I'm not trying to trick you at all. I could give you the reference. And actually, for no particular reason, I'm using IGUA's brief from yesterday wherein they attach the October 24, 2003 letter from the Board where the Board expresses its intention to continue certain initiatives to consider, among other things, and I quote: "How might the gas distributor in a regulatory context better respond to changed in natural gas prices?" 682 So that's what I'm referring to in particular. 683 MR. BRENNAN: Right. And in that, I guess, one could infer that it refers to risk management, yes. 684 MS. AITKEN: Thanks. 685 MR. PLECKAITIS: If I could just add to that. I think, having reviewed some of the documents that have come out of the OEB with respect to the forum, I think that -- I don't think it's fully clear yet exactly the scope as to which that forum will cover. I think it's clear that all of the words that are -- have been issued as part of the original scope of the forum could include as extremely ambitious. At least from Enbridge's perspective, we believe that in order to complete that forum, the Board will need to narrow down the extent of that forum; otherwise it could be endless. 686 So I'm saying that because we don't know what will end up being at the end of the day covered by the forum. When you use the word generally the role of the utility with respect to gas pricing or whatever, I mean that can cover a very wide range of issues, everything from long-term contracts to, yes, potentially risk-management issues. But to the degree of specificity that the Board may get into, we have no idea. 687 MS. AITKEN: I'm sure the Panel appreciates your perspective on that. But you're not aware of any Board communications echoing that restriction on the scope to date? 688 MR. BRENNAN: Well, I actually, I have here before me a decision on the settlement proposal that was issued in our own -- 689 MS. AITKEN: From this panel; correct? 690 MR. BRENNAN: Yes. And it says here: 691 "While this panel of the Board is supportive of the participation of the intervenors in the consideration of the issues in question, this Panel cannot determine the nature or extent of funding for the reference forum. Likewise, this Panel cannot establish the list of issues that the forum will address." 692 MS. AITKEN: And while I appreciate -- perhaps I'm coming at it from a particularly lawyer-type of way, but there is a distinction between the judicial panel and the institution of the Board itself. 693 The distinction in my question was: You're not aware, are you, of any communications from the Board itself echoing this intention to limit the scope of the Natural Gas Forum, are you? 694 MR. BRENNAN: Other than this, no. 695 MS. AITKEN: And "this" being the Panel's decision on the settlement proposal? 696 MR. BRENNAN: Correct. 697 MS. AITKEN: Thank you. Now, the original purpose of this RiskAdvisory study was to assess two things. It was to assess the effectiveness of the program to meet the stated objectives, and to consider whether the objectives and hedging procedures and the continuance of the program was in the interest of ratepayers and appropriate for management of system gas supply. Is that a fair statement? 698 MR. BRENNAN: Yes, I believe it is. 699 MS. AITKEN: And so to the extent the objectives considered the appropriateness of this risk management in the context of system gas supply, that would have the potential to overlap with at least what so far the Board has stated are contemplated to be the issues of the Natural Gas Forum. 700 MR. BRENNAN: That may be the case. But I believe when the agreement, I guess, in ADR in 2003 was undertaken, I'm not sure that at that point anyone knew whether or not there was going to be a Natural Gas Policy Review, and if there was, whether it was going to include risk management. 701 MS. AITKEN: Absolutely, fair enough. But to the extent that it does proceed along the parameters of that letter I took you to earlier of October 24, 2003, there would appear at least facially to be some overlap. 702 MR. BRENNAN: That's fair. 703 MS. AITKEN: If the Board were to adopt the proposal that you've put forward with respect to changing the objective and to lifting the current 10 percent cap, I just want to suggest to you that there's possibly three potential outcomes when we get to the Natural Gas Forum, assuming that the issue is addressed there. And maybe you could just comment on them. 704 The first one I see is that the new status quo, i.e., your proposal is maintained or recommended to be maintained. Secondly, a recommendation is made to either revert to the current amount of -- and parameters of risk management or alternatively to argue for something more. And then the third outcome could potentially be a guidance that risk management should be done away with completely. 705 Have I missed any potential outcomes that you could foresee? 706 MR. PLECKAITIS: I would add another -- there's another alternative, I presume, that that is completely a different direction from either no necessarily the current direction we are currently operating in, nor the direction that we are proposing to change, nor eliminating -- 707 MS. AITKEN: Sorry, what did you mean by direction? 708 MR. PLECKAITIS: If I understood your three scenarios, the three scenarios you put forward is supporting, basically, the position that the company is advocating in this particular hearing. 709 MS. AITKEN: Right. 710 MR. PLECKAITIS: Your scenario 2 was to revert back to the position we're in today -- 711 MS. AITKEN: Or cause for more greater risk management, more -- 712 MR. PLECKAITIS: Or some other direction, a modification of the risk management. 713 MS. AITKEN: Right. 714 MR. PLECKAITIS: And the third one being stopping risk management altogether. 715 MS. AITKEN: That's right. 716 MR. PLECKAITIS: I think that covers the gamut. 717 MS. AITKEN: Okay. My question is, as potentially, then, under the two of the three of those scenarios, we'd only be changing the risk-management guidelines to the extent you propose they'd be changed for potentially a relatively short period of time, under two of those three scenarios; the one where it's scrapped altogether, and the one where it's changed in direction, to use your colleague's phrase. 718 MR. PLECKAITIS: Well, your comment on the short period of time, I think, is a fairly significant assumption, first of all, that this forum will -- this forum that you are speaking to will address the specific issues that we're addressing here. 719 MS. AITKEN: Right. That's an assumption. 720 MR. PLECKAITIS: And that it will be done within a short period of time. And I guess the definition of "short period of time" is we have no idea of when a decision might come out of that. I think there are two significant assumptions in that statement of yours. 721 MS. AITKEN: Absolutely fair. But with those two assumptions? 722 MR. PLECKAITIS: I would accept the fact that were the Board to render a decision in that forum that causes us to change our risk-management procedures, then we would require to -- depending on how quickly the Board wishes us to act on those, we would need a change. And I don't know if I would qualify that as short or not. The point is that we're saying that the changes are needed now and we are prepared to accept that the Board may change its time at some subsequent date. 723 MS. AITKEN: Thank you. Mr. Simard, I just picked up on what your colleague said in terms of these changes are needed now. It's fair, though, to say that the current model, including its objective and the 10 percent cap, is effective, is it not? 724 MR. SIMARD: It's effective at muting the gas-cost volatility. It is much less effective than it could be in terms of defending against the tolerance amount. 725 MS. AITKEN: Okay. But you've concluded that the objectives are generally sound, have you not? 726 MR. SIMARD: We've concluded the objectives are generally sound, yes. 727 MS. AITKEN: And as well, you've concluded that best-industry practices are in place and are being observed? 728 MR. SIMARD: There are best-industry practices in place around internal controls. I would suggest that relative to the standards we have seen among other gas utilities who are managing their ratepayer exposure, that the limits on volumes are more conservative than we've seen elsewhere. 729 MS. AITKEN: But you're not changing your view from your executive summary, though, that, and I'll quote, "Best-industry practices have been put in place and are being observed." 730 MR. SIMARD: That is correct. 731 MS. AITKEN: And that was a general conclusion restated in your executive summary; is that correct? 732 MR. SIMARD: Right, along with the fact that there are a number of enhancements to improve the effectiveness. 733 MS. AITKEN: Sure. And so your proposals are really more along the lines of -- and I borrow your word, "prudent recommendations for future conduct." 734 MR. SIMARD: They are prudent recommendations to improve the performance of the program, which is more important in an environment where the expectations are for continued high volatility. 735 MS. AITKEN: But you haven't made any suggestion that the current system is in any way in some sort of distress, have you? 736 MR. SIMARD: The current system isn't in distress. It can be made more effective. 737 MS. AITKEN: I think you acknowledged this, or you do acknowledge this in your report, that other utilities, such as Alberta, notably, adopt less risk-management activity than currently EGD's current model does. 738 MR. SIMARD: That is correct. 739 MS. AITKEN: And it's true, isn't it, that part of the reason that the Alberta Board accepted that that's right the level, i.e., none, of risk management was that it was with a desire to foster a competitive retail market? 740 MR. SIMARD: Yes. I think the situation in Alberta was that there was a sense that if the ratepayer was left exposed to movements and spot prices, that it might hasten the move to direct marketers. And what one has to remember with the Alberta situation is that, given the nature of the Alberta economy and the strong tie to energy royalty revenues, that the province, to a certain extent, is self-hedged; that it has the ability, in the case of a disaster scenario where gas prices escalate dramatically, that it can rebate to customers. So in effect there's a provincially-funded cap that protects the ratepayer against sudden spikes in price. 741 MS. AITKEN: Right. And that's the context in which you make the observation that among the reasons the Board was comfortable with no risk management, other than what the company did by way of just beyond storage was something that you found acceptable. 742 MR. SIMARD: That's correct. 743 MS. AITKEN: Okay. And so in that sense, risk management by the utility on the one hand and a competitive retail market on the other are related issues; is that fair to say? 744 MR. SIMARD: I think they are related issues, yes. 745 MS. AITKEN: And when I say "related," I mean in the sense that -- to the extent that a utility risk manages to decrease volatility in prices, the less that the retail market's offering of a fixed rate is differentiated from system gas offerings. 746 MR. SIMARD: I will agree with that, but it makes a potential retail offering tied to [cough] rates. 747 MS. AITKEN: I'm sorry, I missed that with the cough. 748 MR. SIMARD: I will agree that it lessens the attractiveness of a direct marketer's fixed rate alternative. But now if you have ratepayers that are locked into a fixed rate as a result of their utility's actions who are potentially desirous of an index rate exposure, then that creates an opportunity for a direct marketer to come in and offer an index pricing term that differentiates from the utility offer. 749 MS. AITKEN: That absolutely remains the scope for differentiation, but that is a differentiating feet, is it not, currently between the -- well, let me start again. There is a relationship, I think you've acknowledged, between the degree to which a utility risk manages and the degree to which the offering of a fixed price by a direct marketer comes -- 750 MR. SIMARD: I think when it comes down to it, if the utility is offering a number of different risk-management alternatives, so a whole slate of different pricing mechanisms to its customers who then get to pick and choose from those different slates, which involve -- all of them involve a component of risk management, that certainly would have the effect on the development of the direct market. But in an environment where there is a single rate, whether it's established as entirely index pricing or entirely fixed price or some combination of the two, it still allows the direct marketing community to come in with an array of pricing structures that are different from that single pricing structure. 751 MS. AITKEN: Fair enough. But just to put it very simply, and I think we agree, but to the extent that the utility risk manages the predictability of the utility price, you do take away that one. I grant you it's not the only one. But it mutes or dilutes the one differentiating feature that retail marketers have currently; is that not fair? 752 MR. SIMARD: The reason I agreed to the initial comment that the risk management can affect the impact of the direct market was in the example where the risk management allows the utility to offer a number of tiers of pricing. If the utility is offering one pricing structure, I don't think it does mute the ability of the direct marketer to make penetration into the marketplace, because he can always offer a pricing structure that is different from that single price alternative. 753 MS. AITKEN: I appreciate that, and I wasn't really looking for a conclusion as to whether it does or it does -- it increases or decreases the competitive influence of retail marketers. All I wanted to understand is that, to the extent that a utility engages in managing its risk so as to decrease the volatility in prices, that feature which is a feature among others, offered by the fixed rate contracts offered by certain direct marketers, that is a diminution in the differentiation that you would observe without risk management. 754 MR. SIMARD: Well, I'm sorry, I go back to the fact that it may result in a diminution in the attractiveness of the fixed price offering of the direct marketer, but it increases the attractiveness of an indexed price offering. 755 MS. AITKEN: But they are two different things, is the point. So to the extent you're looking for a fixed price from a direct marketer. 756 MR. SIMARD: It will reduce the attractiveness of that, yes. 757 MS. AITKEN: Thank you. You note in your report that ratepayer risk preferences are anything but uniform; is that right? 758 MR. SIMARD: Yes, I did. 759 MS. AITKEN: And that's because some ratepayers have a high tolerance for risk and some have a very low tolerance for risk; is that fair? 760 MR. SIMARD: Yes, that's correct. 761 MS. AITKEN: And for those with a very low tolerance for risk, they currently have the option, in addition to system supply, the option of going to a retailer and securing for themselves the predictability that that low risk tolerance profile would suggest they want. 762 MR. SIMARD: I believe that alternative is available to them, yes. 763 MS. AITKEN: Okay. And so for those with a high risk tolerance, would you agree that increased risk management of system gas prices leads to prices to that consumer that are less consistent with their desire to experience the ups and downs in the utility -- or in the commodity price? 764 MR. SIMARD: I would agree with that, which gives them the option to go to a direct marketer and acquire gas on the basis of a pricing formula that is attractive to them. 765 MS. AITKEN: Right. Now, the intent of the current risk management with or without this new proposal, I appreciate is not to lower long-run costs to the ratepayer; is that right? 766 MR. SIMARD: That's right. 767 MS. AITKEN: Rather, it is to provide ratepayers with prices that reflect a reduced volatility; correct? 768 MR. BRENNAN: That's correct. 769 MS. AITKEN: Sorry, Mr. Brennan, if I should be going to you, I will. And there is a cost to the ratepayers associated with achieving that decreased volatility. 770 MR. BRENNAN: Yes, there is. It's basically O&M costs, for the most part. 771 MS. AITKEN: And so if you increase the potential for this benefit you've identified as being a reduction in the volatility of the price, you correspondingly do increase the potential risk in the following sense, do you not: That being the performance of the hedging activity and the transaction costs associated with them. 772 MR. SIMARD: I don't think you can look at the performance of the hedge as an input into the cost. I think people need to recognize that when you enter into hedge transactions, the expected value of entering into any hedge transaction on the date you enter into that hedge transaction is zero in an efficient market. And for the markets that Enbridge is operating is in, with the number of players and the liquidity that is exhibited there, I would be comfortable saying that those markets are liquid. So when I enter into a swap contract, the expected payout on that swap contract is zero. When I pay a dollar for a call option, the expected payout on that call option is a dollar; my profit on that transaction, in isolation, zero. So over the long run, in a program where when one is executing risk-management transactions to mute volatility, you would expect that the gains and losses in isolation on those hedge transactions will net to zero. 773 Now, in any given year, there could be a big gain or a big loss. But over the long run, in an efficient market, the gains or losses will be zero, except for the marginal transaction costs associated with entering into these transactions. And once again, in a liquid market, for the type of term that Enbridge will be active, the transaction costs are minimal, I would argue, within a penny per gJ. And then the one other cost that exists are the O&M costs that Mr. Brennan referred to. 774 MS. AITKEN: Mr. Simard, I appreciate that you don't put that risk as very high in the long run, I believe that you acknowledged though that in the short run there could be those risks associated with more rather than less risk-management activity. 775 MR. SIMARD: In the short term, the trade off for the ratepayer with respect to the fact that they are mitigating exposure to an increase in prices is that they forfeit part participation to the exposure in downward prices. 776 MS. AITKEN: I'm not probing the benefit at this time. I just wanted to understand whether there is this corresponding risk, no matter how great the benefit on the other side of the ledger. 777 MR. SIMARD: My only concern is the definition of risk when you're talking about that. What's your definition of risk? 778 MS. AITKEN: I get to ask the questions. I may not get an answer to my question if I don't ask it properly. 779 MR. SIMARD: That's fair. Can you clarify for me what you mean by risk? 780 MS. AITKEN: Let me just try my question again. I appreciate that there are a couple of things. First of all, you make the assumption that it's an efficient market, and I'm not going to comment on whether that's fair or not. But is it not, on occasion, the case that efficient markets, for various reasons, operate in an inefficient way? 781 MR. SIMARD: Yes, that can happen. 782 MS. AITKEN: Okay. My next question is that, while I heard your evidence about in the long run, assuming for the most part an efficient market, there will not be the exposure to the performance of the hedge visited upon those engaging in the hedge or paying the costs associated with engaging in that hedge. But in the short term, there is that "exposure," perhaps is a different word. 783 MR. SIMARD: In the short term, the hedged gas costs may result in a higher gas cost to the ratepayer than if there was no hedging activity being conducted. 784 MR. PLECKAITIS: I just want to take issue with your definition, because you use the word "exposing" the customer," and, in fact, the whole purpose of the risk-management program is to remove the exposure or reduce the exposure to the customer. So again your question was, by extending the parameters of the risk-management program as we're proposing, are we increasing the exposure? Quite the contrary. I believe that we are reducing the exposure to the principal objective of the program which is to reduce price volatility. 785 MS. AITKEN: And I appreciate the distinction you're making between the exposure in volatility as opposed to the exposure of not enjoying a reduced price. But subject to that, you don't disagree with Mr. Simard's comments, do you? 786 MR. PLECKAITIS: I just -- the difficulty I have is that you're using terminology in terms of risk, and I'm interpreting it different than maybe Mr. Simard is interpreting your comments. So I'm just trying to clarify, when you made that statement, I just wanted to explain -- because I said at the beginning of my opening remarks that there is no increased risk of what it is we're proposing, and I stand by that statement. There is no increased risk. 787 MS. AITKEN: And when you make that comment, am I right in saying that you're focusing on the volatility in the price to the ratepayer? 788 MR. PLECKAITIS: I'm making it in the context of what's the purpose of the program, and is there a cost implication of what it is we're doing. And from the point of view if there's a cost implication, the program, as we're designing it, will not have any negative cost implication on the customer. If anything, it allows us to take advantage or to mitigate, again, the extreme price volatility that exists in the market today. 789 MS. AITKEN: To the extent that the risk-management activity ends up as it did, for example, in the 2002 year, which prompted the RiskAdvisory study, ends up in a differential of 40 million that year, that is something that is borne by ratepayers, is it not? 790 MR. PLECKAITIS: Yes. 791 MS. AITKEN: I'm not sure who this is for. The question is that to the extent that price volatility is reduced by risk management, that does mute the signal to the consumer or ratepayer as to fluctuations in the commodity price, does it not? 792 MR. BRENNAN: Yes, I believe it does. But then I think even the process that we have today of setting rates through the QRAM process does the same thing as well. 793 MS. AITKEN: And frankly, that's the objective of the program is to mute that effect on ratepayers, is it not? 794 MR. BRENNAN: It does, but I think it also mutes, I think, the price signals as well. 795 MS. AITKEN: The price? 796 MR. BRENNAN: Price signals to customers. 797 MS. AITKEN: And that was actually my only point in asking that question. 798 Could I ask you just to turn up the chart you have, the set of -- table 1, rather, attached to Exhibit A3, tab 3, schedule 2, and in particular if you could just turn up table 1, please. And if I could just ask you, and I'm not sure who I'll be asking, I'll start with Mr. Simard but please interrupt if I've started with the wrong one. 799 Under "Other Changes," towards the bottom, really the last item in the box which refers to, "Change the Gas-Supply Risk-Management Policy Manual to explicitly allow the company to hedge volumes on a 12-month rolling basis." Are you with me? 800 MR. SIMARD: Yes, I am. 801 MS. AITKEN: I just have a few questions with respect to that box, and if you want to take a minute to read it, please do. But it refers on the fourth line to the fact that, "This change in policy will require operational changes that have yet to be studied." I wonder if you could tell me, first of all, what are the changes -- what are the operational changes that you refer to there? 802 MR. BRENNAN: It has to do with how it's going to interact with the QRAM process. While we have here a 12-month rolling average, what we're considering, I guess, was every three months, so when we go forward with a QRAM, we will look out 12 months from there. So it wasn't, like, say going month to month rolling, it was like quarterly rolling 12 months, if you like. 803 So the concern there is how is that going to impact how we deal with the QRAM. That's what that was trying to address. 804 MS. AITKEN: Now. On the 12-month rolling basis, I may be wrong on this, but as I understand it now, the term during which you would enter into a hedge, and I use that term generically, would be limited to the starting date to the end of that rate year; is that correct? 805 MR. BRENNAN: Over the fiscal year, that's correct. 806 MS. AITKEN: I'm sorry, the fiscal year. I misspoke. 807 MR. RUBINO: Which is currently up to 15 months. 808 MS. AITKEN: Which is currently up to 15 months. Right. But whatever's left is what you're stuck with a maximum; is that correct? 809 MR. RUBINO: Correct. 810 MS. AITKEN: Okay. And under the 12-month rolling basis, the maximum you'd be able to avail yourselves of, and I use "you" meaning your risk-management folks, would be 12 months. 811 MR. RUBINO: That's correct. 812 MS. AITKEN: Now, what would the -- what effect could that change potentially have in terms of potentially, and maybe I'm wrong about this, but potentially aggravating the phenomenon currently with migration of people in and out of system gas supply given that you've got a longer period, potentially. 813 MR. BRENNAN: Well, I don't think it's any different than it is today. I mean, right now, we risk manage over, as you say, the fiscal year which is a 12-month period. What we're looking to do here, as we go through that year, let's say by the time we get to June, we only have -- we can only risk manage for another three months. What we're saying now is let's be able to risk manage for another nine months on top of that, so a total of 12 months. So you have that issue today within -- in the fiscal year where customers can move from system gas to direct purchase and vice versa, so I don't know how it impacts it one way or another, really. 814 MS. AITKEN: It seems the phenomenon is not new, if I understand what your evidence is. But is it not the case that, to use your example, if you were to do it today with three months left, that would be a shorter period of time over which the remaining system gas customers would be disproportionately bearing the risk than it would be the case if today you had 12 months going forward. 815 MR. BRENNAN: That's fair to say. 816 MS. AITKEN: Just on those operational changes. You mention that the change in policy will require operational changes that have yet to be studied. Is that still the case, they haven't been studied? 817 MR. BRENNAN: We've had a few discussions, but they haven't been settled yet. 818 MS. AITKEN: So there's no evidence filed on that, is there? 819 MR. BRENNAN: On those operational changes, no. Yes, I think what we would probably do would be advance that as part of a QRAM proceeding. 820 MS. AITKEN: And there is no evidence filed likewise about the implications of changing to this 12-month rolling basis from what you have today, is there? 821 MR. BRENNAN: No, no additional evidence. 822 MS. AITKEN: Thank you. Those are my questions. 823 MR. BETTS: Thank you, Ms. Aitken. I wonder whether we could go for another 15 minutes or so. Is the panel okay for that before we break? And everybody else? 824 MR. DINGWALL: Given that that is the constraint that the Board is working with, Mr. Shepherd and I have had a quick discussion, and he would like to switch in the order and go ahead with me, given that I will be somewhat longer than 15 minutes and he will likely meet your deadline. 825 MR. BETTS: That will work well. Thank you for your flexibility. 826 Mr. Shepherd, please proceed. 827 CROSS-EXAMINATION BY MR. SHEPHERD: 828 MR. SHEPHERD: I just have two areas. First, Mr. Simard, you talked about efficient markets and said that in this sort of market, you would anticipate that there would be zero cost for these transactions, except for the transaction costs; correct? And I guess I'm having a hard time with that because I'm trying to understand how, if you offload a risk, my understanding is normally the markets value that and you have to pay to offload a risk. That's why we have insurance companies. 829 And in the case of hedging transactions, risk-management transactions, the same thing applies. If you offload a risk, generally speaking, it will cost you something; isn't that true? 830 MR. SIMARD: Well, not the way these markets work. You can look at it that when you are buying gas to offset your exposure to rising prices, someone else, like a producer of natural gas who is exposed to falling prices, is simultaneously offsetting their exposure to falling prices. So you can marry the buyer of gas and the seller of gas who conduct their transaction at the market consensus forward price and both have served to reduce their risk profiles without any cost transfer flowing from one to the other. 831 MR. SHEPHERD: Precisely. You hit the nail right on the head. So that's not just a function of an efficient market, is it? It's also the function of a symmetrical market. It's a market in which, as a general rule, the market participants equally expect prices to go up or go down or equally have a risk of prices going up and going down, and therefore, have to act to cover that off; isn't that right? 832 MR. SIMARD: That is true. But in terms of looking at that balance between buyers and sellers, one cannot forget the role that the investment community is playing these days in our forward markets for commodities. So at one time or another there will be investors who believe that prices are going down and will gladly enter into a contract that allows them to sell that commodity forward in order to participate in that move that they anticipate in the marketplace. 833 So while you have your commercial interests who, for the most part, are using the forward markets for hedging purposes, there is also a very important component to the overall marketplace that adds liquidity that is a speculative component, and that speculative component will often be a source of liquidity for those commercial interests who are looking to hedge. 834 MR. SHEPHERD: Okay, but we're still mixing up liquidity, which is an issue of efficiency, from symmetry. Do I understand your evidence to be that in the current market, the market participants are equally expecting rising and reducing prices? 835 MR. SIMARD: That's correct. I would argue that when you look at a three-month forward price, for example, if that forward price is trading today at $6, that there is a 50 percent probability that that price will be higher than $6 at maturity and a 50 percent probability that it will be lower than $6 at maturity. And I might put a footnote to that based on a logged normal distribution, it's not quite 50 percent, but it's pretty darn close. 836 MR. SHEPHERD: Now, when you are looking at a future price, that's not the same as an equal expectation that prices will rice or fall generally, because that future price will be already higher or lower than today's price; right? 837 MR. SIMARD: That future price or that forward price represents the market's expectation, the market's consensus expectation of where that price will be at maturity. And if we get into a scenario, for example, where the market is overwhelmed by commercial buyers relative to commercial sellers in the forward market such that even though everyone in the marketplace thinks the forward price is going to be $5 but the buyers are so eager to come in and hedge away their exposure that they're willing to pay up to $6, some might make the argument that, "Well, then you've got a price at $6 when the fair forward price should be $5." 838 What I can tell you is that if there are trading companies and investors out there who believe the price is going to $5 in three months' time, then as soon as that price gets to 5.02, they will sell that to potentially capitalize on their knowledge that the price is going to be back down at $5. And certainly, if the price gets up to $6, there will be a hoard of investors and marketers who know the price is going to be back down at 5 that will come in and sell that price. 839 So the existence of that speculative component in the market ensures that the forward market prices we see today represent the market's consensus expectation of where that price is going to be in the future at maturity. 840 MR. SHEPHERD: Just to take that to its logical conclusion, then. It sounds like what you're saying, and I've heard from this traders before, that because the market acts as a sort of a group psychology, it produces the results it expects. If it expects the price will be $5, then it will produce that result because people will act to end up with that answer. Is that what you're saying? 841 MR. SIMARD: If the market participants believe that the price in three months' time is going to be $5, then today's forward price for that commodity will be -- did I say $5? $5. Does that mean that the price in three months' time will actually be $5? No. But it does represent today's market consensus expectation as to what that price will be in three months' time. 842 MR. SHEPHERD: Maybe I misunderstood, and I'll have to go back over the transcript to see what you said. But it sounded to me like you were saying that if the market expectation is $5, then the market will buy or sell to make sure that three months from now it's $5. 843 MR. SIMARD: No. If that's the connotation or the understanding of what I said, that's incorrect. If the market believes today that the price in three months will be $5, then the price at which that three-month forward contract will trade today will be $5. Tomorrow there could be very easily an event in the marketplace that adjusts everyone's expectations about where that price will be in three months, and of course, a multitude of events could occur over that three-month period, so that by the time we get to maturity in three months' time, the price could be materially different from where people's expectations were today. But the important thing is that whenever a hedger goes into the market, in an efficient market, to buy or sell forward, they are buying or selling forward at the consensus market expectation today of what that forward market price will be at maturity. 844 MR. SHEPHERD: Let me take you back to your $6 speculator example, which I had understood to be an example of a market anomaly, an inefficiency creeping into the market. I take it you're not saying that at all. 845 MR. SIMARD: Well, my example was such that when you do get anomalies like that, what will happen is people will come immediately in and drive the price back to the equilibrium expectation, so that you'll never get those situations where the price moves up to $6, because way before it gets to $6, there will be a host of speculators coming in driving the price back down to that equilibrium expectation of $5. 846 MR. SHEPHERD: Right. It sounds like a little bit of a tautology to me, but I understand what you're saying. 847 You talked then about the net cost being transaction costs and O&M, and that's cost of risk management. Just order of magnitude, what's the total of that? Is it a million, 5 million? What is it? 848 MR. RUBINO: The administration costs are detailed in an IR response. They are about $167,000. 849 MR. SHEPHERD: Yes, and the transaction costs? 850 MR. SIMARD: It's 1 cent per gJ. 851 MR. SHEPHERD: Give me dollars. 852 MR. PLECKAITIS: The typical residential customer uses about 120 gJs, so you're talking about $1.20, if you were to take that entire volume and hedge it, $1.20 a year. 853 MR. SHEPHERD: In the test year, what does the company expect the transaction costs to be for the risk-management program? Is it a million, is it 5 million, is it 100 million? Tell me. 854 MR. SIMARD: It is a function of the hedge signal model. There could be some years where the model indicates there isn't much hedging required and other years where a substantial amount of hedging is required. 855 MR. SHEPHERD: This isn't a really hard question. What was it last year, then? 856 MR. O'LEARY: Would it be helpful, Mr. Chair, if we simply gave and undertaking to come back with the number when we've had a chance to do the math? 857 MR. BETTS: That would be fine. 858 MR. SHEPHERD: Actually, I wonder if I can take you to an interrogatory response, and that is Exhibit I, tab 8, schedule 11. Is this the answer you were looking for? 859 MR. BRENNAN: I have the exhibit. 860 MR. SHEPHERD: I'm asking, is this the answer to the question I just posed, your transaction costs? 861 MR. BRENNAN: No, it is not. 862 MR. SHEPHERD: Okay. 863 MR. BRENNAN: These are premiums. These are premiums that are used when you're placing a call. 864 MR. SHEPHERD: So this is only part of the cost. 865 MR. BRENNAN: I'll let Mr. ... 866 MR. SIMARD: If I could. This is not what I would define as a cost of the program. This defines those instances where Enbridge went out and acquired call options. So, for example, they might have gone out and paid a dollar for a call option. When they paid a dollar for that call option, the market's expectation of the payout, the expected payout for that call option, is a dollar. And you can see that if people expected that the payout for that call option would be $5, then they would be willing to pay more than a dollar for that option, and if the expected payout from that call option was 20 cents, nobody would be willing to pay a dollar for it. 867 So in the same way that when you enter into forward contracts or swaps over the long run, the expected value, the expected profit on those transactions is zero. When I buy a call option for a dollar, my expected profit on that call option is zero over the long run. The expectation is that I will generate a dollar payout from that option. 868 So these option premiums, I think the description of them as program costs are incorrect. Over the long run, whatever you pay for an option premium should come back to you in terms of a payout on the option. Now, when these options were acquired, the dealers who sold these options to Enbridge would have been looking for a small margin for themselves similar to a brokerage fee, except they're taking some principal risk here. And that is where my estimate comes in that the dealers would have been charging approximately 1 cent per gJ in terms of their implicit dealer margin. 869 MR. SHEPHERD: Okay, I wonder if I could get an undertaking to get all of your transaction costs for the last couple of years. 870 MR. SIMARD: And I should note that that transaction cost is an estimate, because when you enter into a derivative contract, it's not broken out what the dealer is making on the contract. He'll show you a price of a dollar for an option and he's not saying that option is worth 99 cents plus I'm charging you a penny in transaction costs. 871 MR. SHEPHERD: So you're telling me that when the people running the risk-management program at Enbridge go to their dealer and do a transaction, they don't know how much is going to the dealer and how much is their expected profit on the transaction? 872 MR. SIMARD: That is correct. And when you're dealing with one or two counterparties in an illiquid market, that represents a potential real cost to the program. When you're able to solicit five to ten competitive companies in the marketplace who all know that they are competing against each other to do a transaction with a great client like Enbridge, those margins contract in a hurry. 873 MR. SHEPHERD: Mr. Pleckaitis -- 874 MR. SIMARD: And I can speak from personal experience to that. 875 MR. SHEPHERD: Mr. Pleckaitis, how can you run a program if you don't know your costs of the program? 876 MR. PLECKAITIS: We do know the costs of the program. What Mr. Simard is saying is really we're looking inside now the actual vendor of the derivatives to us, and what are their -- what are their transaction costs of them doing business, what profit are they taking over what the actual cost of the derivative is in the marketplace. And Mr. Simard has said, based on his experience, that typically these dealers are profiting to the degree of 1 cent per gJ. But we don't look into the actual operations of the individual brokers that are out there and dealers to find out how much profit any particular one is doing. What we do is go into the market and we basically tender for volume of gas or derivative and we get bids back. 877 MR. SHEPHERD: What I heard Mr. Simard saying, Mr. Pleckaitis, and correct me if I'm wrong, that the true option cost in an efficient market should end up being zero because what you pay in the option, the true component you get back but the transaction cost component is a real cost. That's what I heard him saying. Isn't that right, Mr. Simard? 878 MR. SIMARD: Yes, and I also said that that real cost is a very small cost. 879 MR. SHEPHERD: That's fine. And so, Mr. Pleckaitis, that transaction cost is a real cost to you, and I heard Mr. Simard say that you don't know what that cost is; isn't that right? 880 MR. PLECKAITIS: No. 881 MR. SHEPHERD: You can guess but you don't know. 882 MR. PLECKAITIS: I don't know precisely what it is. But what I -- what we've done is we did an estimate as to -- in terms of what is the cost of us operating the program to customers, and the cost of operating the program, incremental costs, if you want to say, of operating the risk-management program is made up of two components. It's made up of the operating O&M costs of the staff that's directly involved with this, which is in the hundreds of thousands of dollars per year, and then there's the actual transaction costs that are in the marketplace themselves, the actual costs that the people and organizations that provide these services, what they are -- what they are charging as their own profit margin, and that's an estimate in the order of 1 cent per gJ. 883 MR. SHEPHERD: So I wonder if I can get an undertaking of the total transaction costs for 2003 and 2003, let's say. 884 MR. PLECKAITIS: We will do that, just as long as you realize, as Mr. Simard said, that we're only going to be able to estimate the actual transaction -- unit transaction cost. We can do that and will provide that estimate. 885 MR. SHEPHERD: Include whatever qualifications you wish in your answer. 886 MR. PLECKAITIS: Okay. 887 MR. SCHUCH: Mr. Chair, that will be Undertaking J.2.3. 888 MR. BETTS: Can we have a description of that? 889 MR. SHEPHERD: I will. 2002 and 2003 estimate of transaction costs for risk management. 890 MR. BETTS: Thank you. 891 UNDERTAKING NO. J.2.3: TO PROVIDE 2002 AND 2003 ESTIMATE OF TRANSACTION COSTS FOR RISK MANAGEMENT 892 MR. SHEPHERD: I'm sorry I went longer than expected, Mr. Chair, because I just sort of got into it. 893 MR. BETTS: That's fine. There was no deadline associated with that, so go ahead. 894 MR. SHEPHERD: My last area is a question relating to the purpose of the risk-management program, and I guess, and maybe this is going back to basic principles, but I guess I don't understand why, if you just want to reduce volatility, you don't protect the ratepayers by taking price increases and spreading them out over time in a deferral account or something like that. Wouldn't that accomplish the same result? 895 MR. BRENNAN: Basically what that gets down to, Mr. Shepherd, is that what you're doing is, I guess, prior to us having a QRAM or anything like that, all those dollars would be thrown into the PGVA and that PGVA could get very, very, very large. And so I think that what we're trying to do here with risk management, as well as in part, I guess, the QRAM, is to try and mitigate those large balances in the PGVA. 896 MR. SHEPHERD: Well, if Mr. Simard is correct and the market is efficient, then the net cost of the gas should end up being the same no matter what you do; right? 897 MR. SIMARD: But there are experiences in other jurisdictions where the existing -- existence of deferral accounts combined with short-term steep run-ups in price have led to huge deferral account balances where concerns about whether that deferral account could be cleared or not ended up in situations where the credit-worthiness of the underlying utility was put into question. If those utilities had been practising some form of risk management in conjunction with those deferral accounts, both acting as methods to smooth the ratepayer exposure, then those sorts of instances where the ratepayer is exposed to sudden demands for higher rates as a result of a need to clear dramatic balances in the PGVA account or a deferral account, those instances disappear, or -- 898 MR. SHEPHERD: The other problem with that is it's sort of contrary to the current philosophy of your -- sorry. Sorry, this was actually for you, Mr. Brennan. 899 MR. BRENNAN: Oh, I'm sorry. 900 MR. SHEPHERD: The other problem is that this would be sort of -- that approach would be sort of contrary to your current philosophy at the QRAM which is to send price signals; right? 901 MR. BRENNAN: Which -- are you talking about the idea of -- 902 MR. SHEPHERD: The idea of the deferral account, yes. 903 MR. BRENNAN: -- of taking everything and having one big deferral account? 904 MR. SHEPHERD: Yes. 905 MR. BRENNAN: Yes. I think there are two parts of that QRAM. One is not only to look at whether or not prices need to be changed on a quarterly basis, but also whether or not the PGVA should be cleared on a quarterly basis as well. 906 MR. SHEPHERD: Of course, if spreading volatility out over time using a deferral account damps the price signals, so does your risk-management program; right? 907 MR. BRENNAN: Dampens the? 908 MR. SHEPHERD: The price signals to the consumers. 909 MR. BRENNAN: Yes. I think we acknowledged that. 910 MR. SHEPHERD: Thank you. Those are all my questions. 911 MR. BETTS: Thank you, Mr. Shepherd. 912 We will break now, and let us aim for just an hour and five minutes and we will return at 2:00 p.m. to reconvene and continue with cross-examination. Thank you. 913 --- Luncheon recess taken at 12:55 p.m. 914 --- On resuming at 2:05 p.m. 915 MR. BETTS: Thank you, everybody. Please be seated. 916 I hope everybody had an enjoyable break and we're back at the cross-examination of this witness panel, and based on what I heard earlier, it should be Mr. Dingwall, Ms. Street, and I think Ms. Girvan also indicated she had some questions. Is that still the case? 917 Before we get into that, are there any preliminary matters to deal with? 918 PRELIMINARY MATTERS: 919 MR. O'LEARY: There is one, Mr. Chair. I am pleased to advise that the intervenors have reached a complete settlement in respect of the EnVision issue and I have copies of the settlement proposal language for your consideration and I will pass that around to intervenors as well. 920 MR. BETTS: Thank you. 921 MR. O'LEARY: There is just one qualification to that, and that is that we have received confirmation from all of the participating parties in this settlement. We do not anticipate hearing from anyone else, but our suggestion is, Mr. Chair, that perhaps the Board could consider the language of this - I'll walk you through it very briefly in a second - but could consider the language of it this evening and tomorrow and perhaps deal with it, if it's to your satisfaction, tomorrow. If there is there is any further response from the several parties that we don't expect to hear from, we will advise you tomorrow. 922 MR. BETTS: Very well, and perhaps -- you've given me a partial picture of how you expect us to handle this after-the-settlement settlement. You would like -- you're going to walk us through it now, that's the plan? 923 MR. O'LEARY: Very briefly, yes. 924 MR. BETTS: Okay. And the intent is that the Board panel will review it and at some point issue our decision on its acceptability. 925 MR. O'LEARY: We would request that at your earliest opportunity, perhaps tomorrow, that you would issue a decision accepting the terms of the settlement proposal in respect of the EnVision issue. There is one change then to an earlier issue, you will recall at issue 7.1 which deals with rate base, the number that was included there excluded the EnVision component and now that number has been added back in. So in fact, we would be looking at an amendment to the settlement proposal as it stands, to add in these two now -- the revised complete settlement and now a complete settlement rather than a no-settlement in respect of issue 8.1. 926 MR. BETTS: You suggested tomorrow yet you said at our earliest convenience, is there any sort of urgency in this decision? If it were Monday, for example or ... 927 MR. O'LEARY: The urgency relates to the fact that we were obviously having to prepare for the EnVision panels and I'm sure intervenors were similarly preparing for same. I understand that Mr. Warren may be here tomorrow and tomorrow would afford him an opportunity, if he was so inclined, to speak to the settlement proposal as well. But obviously we're in your hands, sir. 928 MR. BETTS: Thank you. We'll receive it at this point and I'm just wondering if Mr. Warren is going to be here tomorrow, if he is party to this as well, would it be worth while to delay your presentation of it until -- 929 MR. O'LEARY: I would be happy to do that, sir, certainly. 930 MR. BETTS: Yes, we'll receive this at this point and ask that the presentation of it -- it will, first of all, give us an opportunity to review it a little bit today and perhaps tomorrow, you, the applicant, can give us your overview of it and any of the parties that are present will be able to hear that and also add their comments, if necessary and then we'll try to issue a decision as soon as possible. 931 MR. O'LEARY: Thank you, Mr. Chair. 932 MR. BETTS: We'll do that, perhaps, first thing in the morning prior to the decision on the motion. 933 MR. O'LEARY: Thank you. I do have one other matter and that is a response to Undertaking J.2.1, if I may pass that out now. 934 MR. BETTS: Thank you. 935 Thank you, Mr. O'Leary, is there anything else? 936 MR. O'LEARY: No, sir. 937 MR. BETTS: Does anyone else have anything in the nature of preliminary matters? Mr. Dingwall, please proceed with your cross-examination. 938 MR. DINGWALL: Thank you, sir. 939 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RISK MANAGEMENT - PLECKAITIS, RUBINO, SIMARD, BRENNAN: 940 A.PLECKAITIS; Previously Sworn. 941 F.RUBINO; Previously Sworn. 942 T.SIMARD; Previously Sworn. 943 F.BRENNAN; Previously Sworn. 944 CROSS-EXAMINATION BY MR. DINGWALL: 945 MR. DINGWALL: Just for clarity's purposes, I'm going to try to address a number of my questions to specific witnesses. What we have here with this panel is, on the one hand, an individual who has been qualified in risk management who has provided a report, and on the other hand, the company's three witnesses who I see being in a position to respond as to the company's response to the report and the potential implementation and its implications. 946 So to begin with, I'd like to begin with some specific questions to Mr. Simard. I certainly have no problem with your education. 947 MR. SIMARD: Thank you. 948 MR. DINGWALL: With respect to the scope of your testimony, though, am I to understand correctly that your background is principally in commodity-risk management? 949 MR. SIMARD: Yes. 950 MR. DINGWALL: And that does not extend to the principles of cost allocation for utilities and their customers. 951 MR. SIMARD: That is correct. 952 MR. DINGWALL: And similarly, that doesn't extend to the implications of utility risk-management programs on competitive markets, does it? 953 MR. SIMARD: We have not worked on any mandates where we have been asked to review the impact of risk-management programs on competitive markets. Having said that, our understanding of how risk-management programs work probably result in a willingness to opine on those issues if asked, but we have not done any work specifically on that area in the past. 954 MR. DINGWALL: And in the context of your regulatory experience, which is summarized in the last paragraph of the curriculum vitae provided, I take it that those appearances were on behalf of regulated entities seeking to put forward or amend risk-management programs. 955 MR. SIMARD: That is correct. 956 MR. DINGWALL: So your relationship with private companies or with public companies who are not regulated would really be with respect to the consulting and advisory portion of your practice. 957 MR. SIMARD: The relationship that we have with all our clients is strictly a consulting and advisory role. 958 MR. DINGWALL: Let me clarify that then, you've not appeared in cases like this for competitive market entrants? 959 MR. SIMARD: No, I have not. 960 MR. DINGWALL: Or customer groups? 961 MR. SIMARD: That is correct, I have not. 962 MR. DINGWALL: Now, in looking at the review that you undertook of the risk-management program objectives, which is summarized beginning on page 11 of your report, in the second paragraph there's a line that says: 963 "The intent of the market-based price portion of this objective is not to lower long-run costs but to provide ratepayers with price transparency." 964 Would it not have made sense to add price transparency to the language rather than removing the language that you suggested be removed? 965 MR. SIMARD: Well, I would -- I would argue that the risk-management program's objective is not to create price transparency. The risk-management program is overlaid on a portfolio that is tied to market index prices, so the risk-management activity per se tends to move away, move the Enbridge ratepayer exposure away from a base portfolio of index prices to something else. And that something else is done to mitigate ratepayer -- mitigate some of that exposure to market index pricing. 966 So I don't see the risk-management program itself having an objective to exhibit market prices to the ratepayer. There may be an underlying gas-supply objective and a rate objective to have that exposure for the ratepayer, but specifically when you're looking at the -- when you're looking at the objective of the risk-management program, the overlay on top of that index exposure, I see the objective as it is -- as the revised definition suggests, specifically focussing on the issue of mitigation of risk. 967 MR. DINGWALL: In reviewing the objectives, did you conduct any discussions with any stakeholders or customer groups? 968 MR. SIMARD: We did not. 969 MR. DINGWALL: Did you conduct any discussions with the company? 970 MR. SIMARD: We did have discussions with the company and the company referenced an historical survey that had been done that led to the establishment of a tolerance amount and the perception that the customers were desirous of some degree of price stability. 971 MR. DINGWALL: Moving away from Mr. Simard for a moment, that way, can the company provide some details with respect to the timing, the focus, the size of sample for the survey that Mr. Simard has just referenced? 972 MR. BRENNAN: We don't have that information with us. 973 MR. DINGWALL: Do you recall generally, just so we can keep this dialogue going and entertaining, how long ago this survey took place? 974 MR. RUBINO: There would have been two surveys; one was conducted in and around 1995 which established the price tolerance amount at $25, and then about a year later there was another set of surveys that established the price at $35, so the 1995/1996 time frame. 975 MR. DINGWALL: And have these documents long been relegated to the recyclable portion of the DSM program, or did they exist somewhat? 976 MR. RUBINO: I don't know. Just a moment, please. 977 I don't know where the documents are but we could undertake to look into it. 978 MR. DINGWALL: Thank you. If I could have that undertaking for the transcript, then, please. 979 MR. SCHUCH: Yes, Mr. Chair, that would be Undertaking J.2.3. And perhaps, Mr. Chair, I could have Mr. Dingwall characterize the undertaking. 980 MR. DINGWALL: For the company to provide a best-efforts undertaking to search for and, if found, produce copies of the 1995 and 1996 customer surveys which were used to establish the $25 and $35 tolerance levels. 981 MR. O'LEARY: Sorry to interrupt, Mr. Chair, but I believe Undertaking J.2.3 has already been assigned. I think we're at four. 982 MR. SCHUCH: Thank you, Mr. Chair, it's J.2.4. 983 MR. BETTS: Thank you. 984 UNDERTAKING NO. J.2.4: TO PROVIDE A BEST-EFFORTS UNDERTAKING TO SEARCH FOR AND, IF FOUND, PRODUCE COPIES OF THE 1995 AND 1996 CUSTOMER SURVEYS WHICH WERE USED TO ESTABLISH THE $25 AND $35 TOLERANCE LEVELS; TO INDICATE THE SURVEY SAMPLE SIZE AND HOW THE SURVEY WAS CONDUCTED IN EACH CASE 985 MR. DINGWALL: Before we move away from the -- 986 MR. BETTS: I was just wondering who's got the hammer. I think we're waiting on you, Mr. Dingwall. 987 MR. DINGWALL: Okay. I admit, sir, I find it confusing as well when there's a discussion taking place offline. 988 Before we move away -- 989 MR. BETTS: I would just suggest that you ask your question, and if they're not listening, we'll try to point out who should be responding. But please proceed. 990 MR. DINGWALL: Okay. 991 Before we move away from the last undertaking, I wonder if we can add on to that, because I believe I had asked about the survey size and the survey method. So if in addition to producing copies of the surveys, you could also undertake to expend your best efforts to indicate the survey sample size and how the survey was conducted in each case, that would be much appreciated as well. 992 MR. BETTS: To what end are you heading with that, Mr. Dingwall? What are you -- I'm just trying to determine where you're going with that information. 993 MR. DINGWALL: Well, I think, sir, it would be most helpful. When we look at the company's evidence as it remains - I say "as it remains" because a number of schedules of evidence as a result of a motion in this case and prior to a motion in this case have been withdrawn - falls back to statements within the risk-management evidence on there being some desire to understand the tolerance of customers. So I'm trying to understand the precept upon which that tolerance was originally based. 994 I'm not suggesting, sir, that the panel be brought back upon the production of the documents for further examination. I'm comfortable that I can cover that with argument. 995 MR. BETTS: Very well. Is that a separate undertaking, or is it included in two parts? 996 MR. PLECKAITIS: Mr. Chairman, I believe that we can address both of them in the same undertaking if we just add those qualifiers. 997 MR. BETTS: Thank you. 998 MR. O'LEARY: Perhaps, Mr. Chair, while we're qualifying statements, I just wanted to point out that the company has not withdrawn any evidence in respect of the risk-management evidence that has been filed on behalf of the company. 999 MR. BETTS: Mr. Dingwall. 1000 MR. DINGWALL: I've not made that suggestion. Let's move on. 1001 Now, Mr. Simard, in making the recommendations that you've made with respect to the modifications of the program, I take it reducing the customer impact of volatility was certainly one of your goals in those recommendations; was it not? 1002 MR. SIMARD: Well, I think we accepted the underlying objective that the program was there to mitigate gas-cost volatility, so our recommendations flowed out of that acceptance of that objective. 1003 MR. DINGWALL: In the consideration of what the effectiveness of that objective would be, did you gain any understanding of what other means might be open to a utility to reduce volatility or sticker shock to individual customers? 1004 MR. SIMARD: Yes. And our previous experience in other jurisdictions makes us familiar with the existence of deferral accounts and manners in which those deferral accounts are cleared. So I think we are aware of a number of different methodologies that can be used to mitigate customer price shocks. 1005 MR. DINGWALL: Are you familiar with something called an equal billing plan? 1006 MR. SIMARD: I am familiar with the concept of the equal billing plan, yes. 1007 MR. DINGWALL: And that would that -- why don't you tell me what you're familiar with and then I'll see what I can develop in terms of that question. 1008 MR. SIMARD: As I understand it, the equal billing plan is an attempt by the company to estimate the annual payments that will likely be made by an individual customer and will spread those costs out evenly over a 12-month period, for example, so that if there are some seasonal price differentials or volume differentials from month to month those end up being smoothed out over a 12-month period. 1009 MR. DINGWALL: Now, perhaps moving down to the other end of the table, either Mr. Brennan, Mr. Pleckaitis or the other gentleman -- 1010 MR. RUBINO: Mr. Rubino. 1011 MR. DINGWALL: Mr. Rubino, my apologies, sir. 1012 MR. RUBINO: No problem. 1013 MR. DINGWALL: -- have an understanding of how the equal billing plan works with respect to the clearance of large deferral account balances. 1014 MR. BRENNAN: No, I'm afraid not. Certainly I don't. I can't speak for the other two gentlemen, but I don't know how those deferral account balances are disposed of. 1015 MR. DINGWALL: Okay. Back to Mr. Simard. How can a risk-management program be measured objectively for effectiveness? 1016 MR. SIMARD: If the risk-management program's objective is to reduce gas-cost volatility, then some kind of measurement of the reduction in gas-cost volatility achieved by the hedging program would be my recommended suggestion. 1017 MR. RUBINO: If I might add, we have an interrogatory response that speaks somewhat to that. It's at Exhibit I, tab 1, schedule 18, Board Staff Interrogatory No. 18. And that, for each of the years 2001, 2002, and 2003, shows the percentage reduction in volatility. And it averages between 65 and 70 percent. 1018 MR. DINGWALL: Thank you. Going back to Mr. Simard, your preference for the assessment of the effectiveness of a risk-management program would be to review its impact on the volatility, would that mean measuring the program as against volatility in the marketplace? 1019 MR. SIMARD: It would be measuring the program versus a non-hedged program, so if the company was simply buying on the basis of market index prices, you'd examine the volatility that the ratepayer would have been exposed to based on that series of monthly index prices and compare that to the volatility of the rates that the customer was exposed to inclusive of the hedging activity. 1020 MR. DINGWALL: Now, from your answers this morning to Mr. Shepherd, I take it that you would not expect at the end of the day there to be a significant difference in the results cumulatively achieved between the two programs; is that correct? 1021 MR. SIMARD: I would expect there to be a reduction in volatility between the two programs. I would not expect there to be a significant cost differential. If one looks at the average cost of gas over an extended period, I would not expect to see a significant difference in cost between the two streams, but I would definitely expect to see that the hedge scenario results in a lower volatility around those costs. 1022 MR. DINGWALL: One of the things that seems to result from this study is that it seems to be addressing solely system supply; is that correct? 1023 MR. SIMARD: I think that is correct, yes. 1024 MR. DINGWALL: So for the purposes of your study, did you make any presumptions about what level of movement to and from system supply there might be? 1025 MR. SIMARD: Well, I think that goes back to the determination of the calculation of the hedgeable volumes and given that there is, as I understand it, some uncertainty about the volume of gas that will be part of the system supply pool, a conservative method of calculating the hedgeable volumes would account for some degree of potential reduction in forecast load associated with movement away from the system. And as I understand it, that is included in the proposed methodology going forward for the determination of hedgeable volumes. 1026 MR. DINGWALL: One thing I've been puzzled in reading through both the study and the response is that if the cap of 10 percent is removed, what, then, is the cap? 1027 MR. SIMARD: The cap would be hedgeable volumes. 1028 MR. DINGWALL: And -- 1029 MR. RUBINO: We addressed that. In the black-lined version of the manual, it's Exhibit A3, tab 3, schedule 2, appendix 1, and then it's page 14. You'll note we've deleted the approximately 10 percent to as much of the remaining volumes identified as hedgeable in the physical system gas-supply portfolio as is required to maintain the gas-supply commodity portfolio within the tolerance spread. 1030 MR. DINGWALL: So there's not a percent number coming out of that? 1031 MR. BRENNAN: No, there isn't. It could vary from time to time, let's say. 1032 MR. DINGWALL: What's the magnitude by which it could vary, 1 percent, 100 percent? 1033 MR. BRENNAN: It could vary from the 10 percent. 1034 MR. DINGWALL: Could vary as related to the proportion of system supply. How much of system supply could be hedged? 1035 MR. BRENNAN: At any one time? 1036 MR. DINGWALL: Yes. 1037 MR. BRENNAN: In theory, it could be 100 percent. 1038 MR. SIMARD: That's 100 percent of the hedgeable volumes, but the hedgeable volume number will be less than 100 percent of total system supply. 1039 MR. RUBINO: Much lower. 1040 MR. DINGWALL: What's the limit on what the hedgeable volume could be as a percent of system supply? 1041 MR. RUBINO: The answer to that is in an interrogatory -- well, we can't answer it as a percentage. There's a method of calculation. It's the lowest number of degree days in the last 10 years times the current use per degree day, times the number of customers and then -- so that's total throughput, and then that number is multiplied by the lower of the system gas participation in the last 10 years or our estimate of system gas participation. We responded to that to a Direct Energy -- 1042 MR. DINGWALL: So with respect to the number of your estimate -- 1043 MR. RUBINO: So it's much lower than system gas. 1044 MR. DINGWALL: But one of the variables becomes the qualitative one which is your estimate of system gas. 1045 MR. RUBINO: No, it's the lower of the system gas participation in the last 10 years. I'll take you to the interrogatory response. It's at Exhibit I, tab 8, schedule 39. And it's page 3. And so in reference to the system gas portion, it reads: 1046 "The lower of A, the lowest level of participation in system gas in the last ten years; or the company's view of system gas participation in the forecast period." 1047 So it's the lower of those two. 1048 MR. SIMARD: I think just so everybody is clear, in a warm year, in a warm year where there has been migration away from the system, the hedgeable volumes number will be very close to 100 percent of system supply. 1049 In a cold year where there's been no migration away from system and potentially new customers coming on, then the hedgeable volumes will be a much smaller component of overall system supply. The idea is to create the hedgeable volume that at a number that could potentially be very close to 100 percent of system supply but never exceed 100 percent. And that's the case with a 10 percent restriction and without a 10 percent restriction. The 10 percent restriction just controls the pace at which hedges are established, but even under the 10 percent restriction, one can theoretically reach a point where you have very close to 100 percent of your hedgeable volumes hedged. The relaxation or the removal of the 10 percent restriction just allows you to get to that limit faster and more efficiently. 1050 MR. DINGWALL: So the effective change, and I'm looking at this based on warmest year, is that you move from having the ability to hedge 10 percent of your volumes to having the ability to hedge 100 percent of your volumes. 1051 MR. SIMARD: You are always -- the company had the ability to hedge close to 100 percent of its volumes in the past; it's just it couldn't do it all at once. It would have to execute one tranche of 10 percent, and then after that tranche had been executed and there may be, call it, a five- to ten-day window administratively for that first tranche to be executed, and then once that first tranche was executed, the company could come back and execute a second tranche representing 10 percent of the remaining hedgeable volumes. 1052 So you can see theoretically you never quite get to 100 percent because you can only hedge 10 percent of the remaining. But you can get pretty darn close to 100 percent if the hedge signal model is continually telling you that you need to be hedging more. It's just that under the old methodology, it might take a month or two or three to get to that fully hedged position, whereas we're looking to relax that assumption now and say, If the exposure is identified and that's an unacceptable exposure, that we can move immediately to hedge away that exposure. 1053 MR. DINGWALL: So in effect, rather than having 100 days in which to reach 100 percent, you would have 10 days in which to reach 100 percent. 1054 MR. SIMARD: Conceptually you're going in the right direction, but it might not necessarily have taken 100 days in the past, and this could all be done potentially in one day. Now, realistically, that's probably not going to happen. But if there is a hedge signal given, and the market liquidity conditions are such that the company believes it can execute those conditions without adversely impacting the market, then theoretically that whole block could be hedged in one day. 1055 MR. DINGWALL: And then if the price moved in the other direction significantly, that would put you, then, in another hedgeable situation, would it not? 1056 MR. SIMARD: Once you've reached 100 percent of hedgeable volumes, unless there's some change to a warm-year forecast or different views on system departure that cause you to change that underlying hedgeable volumes number, there would be no incremental hedges applied for that particular period. 1057 As you roll through time, it could be down the road because in a rolling 12-month program, there might be a new three months on the end of exposure period to hedge; there could be incremental volumes at that time. But for the period that you're hedging, once you've reached the hedgeable volumes maximum, there's nothing more to be done. 1058 MR. DINGWALL: Would this program at its most fulsome, as proposed, effectively reduce volatility from the retail customer perspectives to a very, very narrow band? 1059 MR. SIMARD: Yes, that possibility exists. 1060 MR. DINGWALL: And the method by which it would be doing this would be to be deferring any of the price implications of hedging or price changes to subsequent time periods for rolling recovery; is that correct? 1061 MR. SIMARD: I might have you ask that question again. 1062 MR. BRENNAN: It's no different than what we do today in terms of when we come forward to try and clear the PGVA on a quarterly basis. So over that three-month period, if there is volatility, then it would get picked up and then those dollars would be captured in the PGVA, and then depending on whether or not the trigger is met, it would be cleared at that point in time. 1063 MR. SIMARD: I might also add that the removal of the 10 percent restriction resulting in a narrow band around rate volatility, the ability to get to a narrow band around rate volatility exists with the current policy; it's just it takes longer to get there. So once again, with the current policy, it is possible to get close to 100 percent hedge of hedgeable volumes, and in a warm-year scenario, that's going to result in a situation where there's very little volatility around rates. 1064 All that we're suggesting is if that kind of volatility reduction is deemed necessary based on the tolerance amount, that the company be allowed to move into that position quickly as opposed to having to wait for a deferred period to enter into that position. 1065 MR. DINGWALL: If the company were to wait for a deferred period, effectively what would be happening would be for the company to not be putting all its eggs in one basket; would that not be correct? 1066 MR. SIMARD: The company would not be establishing a hedge price based on a single day, and what could, in fact, happen by deferring the decision is that it's forced to enter into hedge transactions at even higher prices and the execution of those hedges at higher prices could result, easily result in a situation where the company is unable to defend the tolerance amount; whereas if the ability exists to hedge all of the hedgeable volumes, once a signal comes out that those volumes need to be hedged, if you hedge them today and you can ensure that that tolerance amount isn't violated, that is the -- one of the core points of the program. 1067 MR. DINGWALL: One of the questions that always comes up in the context of these programs is what's called intergenerational cost allocation. For the purposes of my next few questions, I'll just tell you what I mean by that term so that we're clear. 1068 If costs are incurred at one point in time, for one specific group of customers to whom it would be presumed those customers would then be bearing the burden, and then the time frames were somehow altered or the groups of customers were some how altered where there was a significant difference between those customers for whom the costs were incurred versus those customers who would be paying the costs, that's what's called an intergenerational issue. 1069 If there's a significant shift from system supply to direct purchase, then does not the change in time over which the hedge program would be applied, the rolling volumes, et cetera, from the annual clearing, does not that change run the significant risk of putting these hedge costs on to customers for whom they were not specifically incurred? 1070 MR. BRENNAN: I don't think that's any different than it is today. I mean we have the whole concept of the QRAM where we, if you like, defer those costs over a three-month period. And during that period, there could be movement between system-gas customers and direct-purchase customers. So again, I don't see what we're suggesting here is any different than what is actually done today. 1071 MR. DINGWALL: Well, Mr. Brennan, are you not proposing, rather than clearing accounts on an annual basis, rolling the accounts over so that they continue to roll over for ongoing periods? 1072 MR. BRENNAN: You're talking here where we have the 12-month rolling period? 1073 MR. DINGWALL: That's correct. 1074 MR. BRENNAN: Yes. Yes. I mean to the extent that today, in the last quarter, where we only have three months left, then those customers are going to pick up those costs; whereas if it's extended, say, another nine months and something happens in between, yeah, I mean there is that potential, but again I don't see it as -- I mean that happens today. 1075 MR. RUBINO: If I may, that's no different because currently, if we hedge for the next year and then clear a quarter from now, then those customers that weren't on are on in four months' hence would be picking up or not picking up the hedges from the first three months. We're able to hedge a full 15 months in advance currently throughout the -- for the fiscal year. 1076 MR. DINGWALL: But is not the potential of the rolling hedge that that cost-allocation period becomes a significantly longer time? 1077 MR. BRENNAN: I don't see it's any different, because if you look at the beginning of the fiscal year, you have 12 months. All we're saying is that you always -- every quarter you always have 12 months. I don't see that being any different than it is today. 1078 MR. DINGWALL: This morning, there was some discussion of index-based offerings and that marketers might take that as an alternative to what Enbridge proposes that it, through this hedge program, is. Have you taken the opportunity, Mr. Simard, to take a look at what the restrictions are on natural- gas marketers in what they can offer and what they can't? 1079 MR. SIMARD: In Ontario? 1080 MR. DINGWALL: Yes. 1081 MR. SIMARD: No, I have not. 1082 MR. DINGWALL: So it might surprise you to know there's evidence on the record that index-based offerings and floating offerings are not actually permitted by marketers. 1083 MR. SIMARD: I wasn't aware of that. 1084 MR. DINGWALL: Okay. 1085 MR. BRENNAN: They are or are not, Mr. Dingwall, I didn't catch that. 1086 MR. DINGWALL: Are not. 1087 There was also some discussion this morning on the company possibly intending to do two surveys, one with respect to tolerance and one with respect to financial tools. Did I hear that correctly? 1088 MR. BRENNAN: Yes, that's correct. That's part of table 2, those recommendations we're looking to bring forward in the 2006 rate case. 1089 MR. DINGWALL: And these surveys would be done, of course, subject to the Board's approval of what you're proposing in this case in 2005? 1090 MR. BRENNAN: Well, the first survey which has to do with updating, if you like, customers' tolerance level, that, depending on if the Board gives us approval to go ahead with that, would be conducted towards the end of -- likely towards the end of this fiscal year depending on when we get a decision. The next survey would be conducted sometime in 2005, I believe, or early 2006. 1091 MR. DINGWALL: And would that be the survey that addresses what kind of financial -- 1092 MR. BRENNAN: Well, we call it customer preferences, correct. 1093 MR. DINGWALL: Can you maybe give me a bit more information on exactly what you're intending to cover in that survey and what its purpose might be? 1094 MR. BRENNAN: You're referring to the latter? 1095 MR. DINGWALL: The latter, yes, please. 1096 MR. BRENNAN: Ideally, what we'd like to be able to do is, for example, and this is only an example, try to get a sense from customers, for example, if gas prices are between a certain range, if they're in that range then they would prefer that we do a swap, for example. If they're in a different price range, then their preference is that we do a collar/call-up. If there in another price range, then they prefer that we do a cap. Instead of relying on the hedge mix model to determine that for us, it would be based on what customers' preferences would be instead. 1097 MR. SIMARD: If I can add, and I think this comes out of some of the suggestions and conversations that RiskAdvisory has had with Enbridge, the underlying concept here is that at different points in the pricing cycle, a typical ratepayer may have a different perception of his risk profile and a different amount of utility associated with the retention of downside participation in prices. 1098 So, for example, if gas prices for the next year, if the forward market prices go to $2 a gJ, for example, the ratepayers may see limited utility associated with the retention of any further downside participation below $2 a gJ recognizing, still, that the price could fall below $2 but the amount of utility that they retain from that participation is limited, whereas, the utility they would retain from protection against any rise above $2 would be substantial. 1099 So in that kind of environment, that would dictate to Enbridge, who is acting on the ratepayers' behalf, to execute swap transactions which lock in a fixed price and take away the downside participation from the customer but lock in, at that point, the lowest price you can lock in using forward-market instruments. 1100 Conversely, if the forward-market price for next year is at $10, at that point, one could perceivably see a situation where ratepayers, while they still want upside protection because they don't want to be paying $12 or $14 for their gas, there's lot of utility at that point associated with retention of participation in a price fall down from $10 back to $6 or $4 a gJ. 1101 So in that kind of environment, the ratepayer may prefer that a cap-type structure or the purchase of a call option be conducted which still provides the upside price protection but allows the ratepayer to participate more in the down side. 1102 So at various points in the pricing cycle, I think the survey would be an attempt to define whether there are different customer risk preferences based on where we might be from a pricing perspective. 1103 MR. DINGWALL: Are these surveys intended on being broad in nature or representative or anecdotal? 1104 MR. BRENNAN: Well, I believe it will be done. Our first guess would be to try and deal with the stakeholders, at the stakeholder level as opposed to trying to conduct individual meetings with customers directly. The only reason we say that is that in order to get to the customer level, I think it would require a fair amount of education and discussion with those customers in order to get them up to a level where they could comprehend, I guess, or understand the concept that we're trying to put forward. 1105 MR. DINGWALL: It sounds like what you're trying to put forward is mechanisms by which you might get feedback on what the top tolerance and bottom tolerance might be for the pricing of system gas supply; is that kind of where you're going? 1106 MR. BRENNAN: I don't know about that. I think as Mr. Simard said, it's just getting an understanding of under certain pricing conditions, what customers' preference are in terms of whether we lock in a price at a certain point or whether we put a cap or call on and let -- so you protect it slightly on the upside but allow you to participate in the down side. 1107 MR. DINGWALL: Well where would this all go at the end of the day? Would you be reacting to customers' preferences and managing system supply on that basis? Would you be using this as information in which to suggest what system supply might look like at some point in time? 1108 MR. BRENNAN: Not system supply, but how we would do risk management. It has nothing to do with system supply per se. It's how we would -- instead of relying on the model which tells us, okay, at a certain point if we are in a hedgeable position we should be doing so many swaps, so many collars, so many caps, we would rely on -- once we know we're in a hedgeable position we would rely on these customer preferences based on where forward market is saying prices were likely to go. 1109 MR. DINGWALL: Is it then the intention of the company to execute transactions on the basis of the response to these customer surveys provided you get the approvals that you're seeking here. 1110 MR. BRENNAN: Well, again, this is a whole issue for 2006, but we would come forward in 2006 and propose that to the Board and if it was accepted by the Board that's what we would do. 1111 MR. DINGWALL: So for 2005, the survey that you're proposing for that time is to gain an understanding of what the tolerance levels for the individual customers might be; is that correct? 1112 MR. BRENNAN: The survey that's referred to in table 1 for 2005 is to get the tolerance amount, that's correct. 1113 MR. DINGWALL: Now you mentioned that you thought there might be a significant education component required in order to go to the 2006 survey, do you foresee that same requirement in order to gain an understanding of the tolerance comprehension that customers might have for the purposes of your 2005 survey? 1114 MR. BRENNAN: To a lesser extent, because from my recollection, I guess, how the surveys were conducted last time, I believe there were some focus groups with customers, and I think it's probably an easier proposition to put to them, I guess, as to: "When you look at your gas bill, your annual gas bill, how much do you want to see that vary over the year?" 1115 And we would -- our plan is to conduct the same type of survey this time around. But I think at the same time, in doing that, I think we may want to put in context with those customers where we were back in 1995 in terms of where pricing was at that point in time given where prices may be today and see if -- and let them decide whether or not their tolerance to movement in prices has changed over that period of time. 1116 MR. DINGWALL: So is your proposition that you perform the surveys in the same fashion as they were being performed in 1995 and 1996? 1117 MR. BRENNAN: That's what we're proposing, yes. 1118 MR. DINGWALL: Which, I guess, takes me back to some of my earlier questions. Do you recall the sample group sizes or -- 1119 MR. BRENNAN: For the proposed -- 1120 MR. DINGWALL: For the old ones. 1121 MR. BRENNAN: No, we don't. We mentioned that. 1122 MR. PLECKAITIS: If I could, Mr. Dingwall, if I could just qualify Mr. Brennan's answer. I think that conceptually what Mr. Brennan is saying is that the survey question we are asking or trying -- the information we're trying to glean from the customer in terms of the tolerance is the same as what we asked for the 1995 program. But I think the methodology that we may use for the survey, the number of customers, the types of focus groups we might use, I think, would be one that we would take into consideration; new information that we might have available, what other people have done in other jurisdictions to try to glean similar information. 1123 So I don't want to leave the impression with the Board that just because we did this in 1995, that we're going to do exactly the same survey, dust off and do the same thing for 2005. 1124 MR. DINGWALL: Let's take a look at some of the possible results of such a survey. In the event that you get a fairly high tolerance for risk from individual customers, presumably that might significantly limit the activities you might undertake within your risk-management program; is that correct? 1125 MR. BRENNAN: Yes, it would probably establish a point where -- whether or not we're in a hedgeable position, it may say that we may be in a hedgeable position less frequently, let's say. 1126 MR. DINGWALL: And on the converse side of things, in the event that the survey elicits a significant lack of tolerance for risk, it's conceivable that the result of that perambulation might be that the risk-management program is quite fulsome, active and involving a lot of dollars; is that correct? 1127 MR. BRENNAN: If you're saying if that tolerance amount becomes less than what it is today, it certainly could be that we would be in a hedge position much more often and would be actively hedging. 1128 MR. DINGWALL: Can you give me any indication of the potential variation in terms of the size of dollars involved between, say, 50 percent of today's tolerance level versus three times today's tolerance level? 1129 MR. BRENNAN: As to? 1130 MR. DINGWALL: As to the size of the transactions and global increase in exposure that there may be from one scenario to the other. 1131 MR. BRENNAN: I don't think we can because it's going to depend on the market at the time and the prices at the time. 1132 MR. DINGWALL: Would you agree with me that if the survey is conducted in isolation, that from a public perspective, there's very little visibility into how the company might determine or go about conducting the survey or very little scrutiny in what the resulting, then, size of your hedge program might be? 1133 MR. BRENNAN: I'm not sure I understand what you mean by "isolation." 1134 MR. DINGWALL: From what I understand, there's a significant variability in the hedge program that you propose in that it's all dependent on a survey that has not been done, the boundaries of which are not known, the results of which are certainly not known at this point, but which is going to be based on individual customer reaction through some unknown method. 1135 MR. BRENNAN: Well -- 1136 MR. DINGWALL: It kind of creates an unknown scenario for what the magnitude of this program might be. 1137 MR. BRENNAN: Well, I'd have to say that means -- I don't think it's going to be that different from the type of survey that we did last time. I mean there may be some things that we update in terms of maybe number of customers simply because we've grown over that time frame. But you know, whatever of those customers come back and say as to what their tolerance level is is what we expect to use in terms of establishing whether or not we're in a hedgeable position. 1138 MR. SIMARD: If I could interject for a moment. The maximum volumes that could be involved will be the hedgeable volumes. And even in a situation where the tolerance amount expands dramatically because there is a sense from the customers that they have more tolerance for risk than they had before, a lot more tolerance for risk, there still is a potential situation where 100 percent of those hedgeable volumes could be hedged. In a situation where there is limited appetite for risk, the maximum hedge you're going to see is 100 percent of hedgeable volumes. 1139 So in terms of looking at what the maximum size of the hedge position might be, it's the same regardless of what the tolerance amount might be. The only thing that changes is the probability of reaching that 100 percent hedgeable volumes position. And clearly, in the situation where customers have expressed limited tolerance for risk, there will be a higher probability that you're in the upper end of the percentile -- upper percentile region with respect to having those hedgeable volumes hedged and a lower probability in a situation where the ratepayers come back and suggest that they have a greater tolerance for risk. 1140 MR. DINGWALL: Well, Mr. Simard, would you agree with me that every time -- moving away from volumes for a minute. Every time a price moves significantly, that's what affects whether or not you reach the tolerance for the price risk; correct? 1141 MR. SIMARD: It's a combination of the price moving significantly and the market's perception of volatility increasing. So, in fact, you could be in a situation where the price doesn't move at all but the expectation of volatility increases substantially; that could result in a signal to begin hedging volumes. So it's an interplay of both price and volatility that leads to the hedge signal. 1142 MR. DINGWALL: Right, with price being a key component of that. 1143 MR. SIMARD: Definitely price is a key component, yes. 1144 MR. DINGWALL: It's conceivable that, under this program, you could be entering into far more transactions, depending on what the tolerance level might be in the future. 1145 MR. SIMARD: The volume of transactions that you will enter into will not exceed hedgeable volumes -- 1146 MR. DINGWALL: I'm talking about transactions, I'm not talking about hedgeable volumes. The number of transactions related to insulating from price impacts. 1147 MR. SIMARD: Well, I think in terms of the magnitude of the program, the important number here is overall volumes hedged. Whether that happens in one transaction or ten transactions, I'm not sure I see the -- I don't see any significance there. To me, it still comes down to the fact that in both scenarios, or in any scenario, the maximum volume that will be hedged is the hedgeable volume. 1148 MR. DINGWALL: Those are my questions. 1149 MR. BETTS: Thank you very much. 1150 Ms. Street. 1151 MS. STREET: Thank you, Mr. Chair. 1152 CROSS-EXAMINATION BY MS. STREET: 1153 MS. STREET: I just have some questions about the administration of the program, and in particular in the -- starting with CME's interrogatory, which is Exhibit I, tab 6 -- I'm sorry, 21, Exhibit I, tab 6, schedule 21. 1154 There was a question asked about the agency fee payable by EGDI with the service provider, and the answer given sets out some information but says that the final negotiated agency fee would be submitted. 1155 Now, I may have missed it, but has that final negotiated agency fee, in fact, been provided? 1156 MR. BRENNAN: Yes, it has. 1157 MS. STREET: And where would I find that? 1158 MR. BRENNAN: That's a good question. 1159 MR. BETTS: Ms. Street, could you just repeat that reference number for me? Did he say it twice? Ms. Street, could you repeat that reference number for me? 1160 MS. STREET: I'm sorry, it's Exhibit I, tab 6, schedule 21. 1161 MR. BETTS: Thank you. 1162 MR. BRENNAN: We're just checking but we believe it's probably in Exhibit A6, tab 5, schedule 2, but just give us a minute, we'll confirm that. 1163 MS. STREET: Thank you. 1164 MR. BRENNAN: Yes, it's at Exhibit A6, tab 5, schedule 2, page 1 of 1. That was filed on, looks like January 29th. 1165 MS. STREET: Thank you. Now, with respect to the service provider, I believe that RiskAdvisory recommended that at the very least, the hedge mix component be moved to Toronto from EGS; correct? 1166 MR. BRENNAN: Yes, that's correct. 1167 MS. STREET: And in your response to CME's Interrogatory No. 13, which is Exhibit I, tab 6, schedule 13, you've indicated that -- if I could summarize, you've indicated that the company generally agrees with that recommendation and that EGD could run both components of the model in Toronto. So my question is: What steps have been taken to make that happen at this point in time? 1168 MR. BRENNAN: Could you just give us a minute, please? 1169 To answer your question, there are no steps taking place to do that, but having said that, in response to CME Interrogatory No. 16, we've listed some of the benefits of continuing to have that portion of the risk-management program being conducted by Enbridge Gas Services. 1170 MS. STREET: I'm sorry, are you saying that you think that the hedge mix component should stay with Enbridge Gas Services? 1171 MR. BRENNAN: Yes, that's what we've indicated in CME Interrogatory No. 16. 1172 MS. STREET: So that, as I understand it, was not RiskAdvisory's suggestion as a way of improving the program, so I take it you don't agree with that recommendation, then? 1173 MR. BRENNAN: Well, we see, as listed here, certain benefits of leaving it in Calgary and so based on that, it was our determination that we would continue to do that. 1174 MS. STREET: But you do say in your answer to Interrogatory No. 13, this is in the second paragraph, the second sentence, you say: 1175 "There is no requirement for the operator of the hedge mix component to have risk-management expertise or make subjective or discretionary decisions around the outputs." 1176 And that, as I understand your answer to No. 16, is the part you want to leave in Calgary. Why would you not move the other part of it to Toronto? 1177 MR. RUBINO: CME No. 13 was addressed to RiskAdvisory. 1178 MS. STREET: Would you speak up a little bit? 1179 MR. RUBINO: CME No. 13 was addressed to RiskAdvisory, so that's RiskAdvisory's response, not the company's response. 1180 MS. STREET: So you don't agree with that response? 1181 MR. BRENNAN: Well, I think our response is to CME Interrogatory No. 16 where we say -- we've listed the three benefits of leaving the risk-management program in terms of the hedge mix component with Enbridge Gas Services. 1182 MS. STREET: If I could ask you to turn to Interrogatory No. 20, which is in that same exhibit, schedule 20. As I understood the evidence earlier today, it's been suggested that over time, the net gains and losses of hedging should come out to zero and what I don't understand in the answer to this interrogatory, if we look at the figures, the gain/loss figures for four years, 2000 through to 2003, and we just add them up, we see a net gain to ratepayers of about $23.5 million. So how is that consistent with the suggestion that over a number of years, it will come out to zero? Are these all transactional and operation costs? 1183 MR. BRENNAN: I'll let Mr. Simard, since he made that statement, answer that. 1184 MR. SIMARD: I think just, first of all, to clear the information on this schedule, this schedule does not include transaction and administrative costs, this just details the gains or losses that were generated on the hedge positions in isolation in each year and the main issue is that four years in the financial markets is not a long run. 1185 MS. STREET: How many years is the long run? 1186 MR. SIMARD: 15 to 20. 1187 MS. STREET: So you're saying that it will take 15 to 20 years before we see a net position of zero? 1188 MR. SIMARD: That's correct. And -- well, in fact, it could be as of next year, you see a position of zero, but that the year after it will move away from zero again to the long-run trend, the important thing to recognize is that when these positions are first established, the expected value of the position, ignoring the marginal transaction costs, is zero. So if I enter into a swap transaction today, I could end up losing $10 million on that swap transaction or making $10 million on that transaction, but when I execute that transaction today, the expected value of that advance action transaction is zero. 1189 So, yes, you will make money some years and you will lose money some years, but over the long run as you enter into transactions that have an expected value of zero, your long run gain or loss on the program will approximate zero. 1190 MS. STREET: So I understand then from your answer, Mr. Simard, that the four years that we see detailed in this response is not indicative of the trend that we would expect to see over 15 to 20 years; is that what you're saying? 1191 MR. SIMARD: That's correct. 1192 MS. STREET: And can you give any explanation as to why, over the past four years, we've seen a net gain of more than $23 million? 1193 MR. SIMARD: Because in any given year, or any given four-year period, you are likely to see instances where the market has moved relative to the initial entry point. When you enter into the transaction, once again, the expected value is zero, and if Enbridge enters into a new transaction today, the expected value of that transaction is zero. Will the actual gain or loss on that transaction be zero? With minute probability, yes. But the likelihood is that there will either be some form of gain or loss on that transaction. 1194 MS. STREET: And that 23.5 million is a gain that has been borne by ratepayers over the past four years? 1195 MR. BRENNAN: It has benefited ratepayers. 1196 MS. STREET: Pardon me? 1197 MR. BRENNAN: That $23.5 million has benefited ratepayers. 1198 MS. STREET: Pardon me. Excuse me, that's what I meant to say. 1199 MR. SIMARD: And just the qualification that the risk management fellow will always add is that that in my mind is a corollary benefit of the program. The objective of the program was not to create a $23.5 million gain to the ratepayers. The objective of the program was to smooth out the ratepayers' exposure to gas-cost volatility over that four-year period. 1200 MS. STREET: Yes, I understand that. 1201 Thank you, Mr. Chair, those are my questions. 1202 MR. BETTS: Thank you very much. 1203 And Ms. Girvan. 1204 MS. GIRVAN: Thank you. 1205 CROSS-EXAMINATION BY MS. GIRVAN: 1206 MS. GIRVAN: Mr. Simard, just for your purposes, my name is Julie Girvan and I represent the Consumers' Association of Canada and Consumers Counsel of Canada. I'm without my counsel today so I'll do my best. I'm not trained in cross-examination. 1207 In terms of your analysis and your evidence, you did say you did a survey of policies with another jurisdiction and you did cite some of the utilities that you looked at. Did you analyze Union Gas's policy? 1208 MR. SIMARD: We did not. 1209 MS. GIRVAN: So you're not familiar with it at all? 1210 MR. SIMARD: I'm not very familiar with Union Gas's policy, no. 1211 MS. GIRVAN: At Okay. So you can't answer -- you didn't review it or... 1212 MR. SIMARD: I have not reviewed Union's policy, and I have done very little work around the Union policy in their last rate case. 1213 MS. GIRVAN: Okay. 1214 Mr. Brennan, are you familiar with Union Gas's policy? 1215 MR. BRENNAN: Not that closely, but I do know, for example, some of the things I do know is that they're -- my understanding is that they're allowed to hedge out at least five years anyway. That's one thing that stuck in my mind. 1216 MS. GIRVAN: Okay. Well, really, in the context of Union's policy I have two questions, and maybe you can't answer that, and if you can't, that's fine. But one is looking at the two changes, the most significant changes that you're putting forward today, which is the ability to hedge more than 10 percent of the hedgeable volumes, and the second one about the ability to hedge on a 12-month rolling basis. Do you know if Union's permitted under its policy to undertake both of those initiatives? 1217 MR. RUBINO: They can hedge up to five years for the second one. 1218 MS. GIRVAN: Okay. You don't know about the -- 1219 MR. RUBINO: The first one, no. 1220 MS. GIRVAN: -- the hedgeable volumes. Okay, thank you. 1221 Mr. Brennan, just to sort of clarify the -- we've had a fair bit of discussion about the customer focus surveys, and I'm just trying to understand and clarify what specifically you're asking the Board to approve in this case. My understanding is there's two surveys that you have planned. The first one is on the customer tolerance level. 1222 MR. BRENNAN: Yes, that's correct. 1223 MS. GIRVAN: And what is -- you said the proposed timing is sometime in 2004. 1224 MR. BRENNAN: Well, our hope is that if the Board approves our recommendation, or the recommendations for the evidence that we've filed here, that we will go forward with those recommendations, but -- and one of those recommendations, of course, has to deal with -- deals with whether or not we can hedge more than 10 percent at any one particular time. And our view is that prior to doing that, we would be best to go out and resurvey our customers to make sure that we know what that tolerance amount is such that if it is a higher number, then we can factor that in and determine how much we will have to hedge at any one particular time. 1225 But that part is planned, of course, based on the Board approving our requests in this proceeding, and the cost of that is around $80,000 to do that survey. 1226 MS. GIRVAN: Okay. So just to be clear, you're seeking approval from the Board in this case to undertake that particular survey, and you're proposing a cost of $80,000 for that survey? 1227 MR. BRENNAN: Yes, that's correct. 1228 MS. GIRVAN: Okay. And how do you propose to recover those costs? Are they budgeted in this case? 1229 MR. BRENNAN: Excuse me a minute. Our understanding, subject to check, is that it would be recovered in the regulatory deferral account. 1230 MS. GIRVAN: Okay. Subject to check. Do you want to undertake to confirm whether that's your proposal so that -- 1231 MR. BRENNAN: Yes, we can. 1232 MS. GIRVAN: And can you explain to me in that answer what the justification of proposing it in -- proposing to recover the cost through the regulatory rate hearing deferral account. It seems to me -- and just to clarify, it seems to me that that account is to recover the costs associated with the hearing process and not costs associated with pursuing surveys within the company's activities. 1233 MR. PLECKAITIS: Perhaps I can just give you my best understanding of that, subject to check. We have not factored in the cost of that survey in our O&M costs for 2005. The hope was that we would -- for 2005. 1234 Our hope was that, through the ADR process, that we would get settlement on this issue, including the cost of doing the survey and whatever other activity. That didn't happen. And so the costs were not reflected and never anticipated to be built into the O&M costs. Therefore, should the Board approve us going forward with this, we would want to recover the costs, and the account that we felt would be most appropriate to recover those would be the regulatory deferral costs -- or account. 1235 MS. GIRVAN: Did you want -- is that your, sort of, final answer, or did you want to go back and, in terms of an undertaking, clarify that that's your proposal? 1236 MR. PLECKAITIS: We'll confirm that in an undertaking. 1237 MR. SCHUCH: Mr. Chair, that would be Undertaking J.2.5, and it would be entitled, "The cost of --" sorry, "The survey cost recorded in the regulatory affairs deferral account." 1238 MS. GIRVAN: No, it's actually what's the company's proposal with respect to the costs associated with the first customer survey proposed, that's how I would characterize the question. 1239 UNDERTAKING NO. J.2.5: TO PROVIDE THE COMPANY'S PROPOSAL WITH RESPECT TO RECOVERY OF COSTS ASSOCIATED WITH THE FIRST CUSTOMER SURVEY 1240 MR. BRENNAN: The recovery of those costs. 1241 MS. GIRVAN: Yes. 1242 And so just to be clear again, you're seeking approval from the Board to do the survey and to recover the costs of that survey, and you're going to get back to me in terms of, through the undertaking, how you propose those costs be recovered; is that right? 1243 MR. BRENNAN: That's correct. 1244 MS. GIRVAN: Okay. Now, with respect to the second survey, what's the proposed timing of that and what's the proposed recovery of those costs? 1245 MR. BRENNAN: As far as the timing of that, we're looking towards the fall of 2005, so that would get captured in 2006. 1246 MS. GIRVAN: So you propose to undertake the survey in fiscal 2006? 1247 MR. BRENNAN: At the early part -- start of 2006, correct. 1248 MS. GIRVAN: Okay. 1249 MR. BRENNAN: And that's what we've said in table 2. These are the recommendations which we're looking to address in fiscal 2006. 1250 MS. GIRVAN: Okay. This is a question for either Mr. Pleckaitis or Mr. Brennan, but how many system customers are in EGD's equal billing plan? Do you know percentage-wise of system-gas customers? 1251 MR. PLECKAITIS: Subject to check, approximately 30 percent of our customers would be on the equal billing plan. 1252 MS. GIRVAN: How many of your system-gas customers was the question. 1253 MR. PLECKAITIS: Don't know. We'd have to take an undertaking. 1254 MS. GIRVAN: Okay. Could I have that, please. 1255 MR. SCHUCH: Mr. Chair, that would be Undertaking J.2.6. 1256 UNDERTAKING NO. J.2.6: TO PROVIDE THE NUMBER OF SYSTEM-GAS CUSTOMERS ON Enbridge GAS DISTRIBUTION'S EQUAL BILLING PLAN 1257 MS. GIRVAN: Just to follow up on that point, Mr. Pleckaitis, in your view, how does this equal billing plan impact pricing volatility -- volatility tolerance for your customers? 1258 MR. PLECKAITIS: I think they are related, but they address different issues to some degree. The total annual bill, in a particular year, gas prices can rise through that year, and the equal billing plan tries to level, basically, the payments, let's say, the 12 payments that a customer would make equally over that 12-month period. The equal billing plan does not do anything, though, to address the total payment that the customer would make. The risk-management program addresses that. It addresses the total amount that the customer would pay over that year by reducing, attempting to reduce the volatility that would be faced by the customer. 1259 MS. GIRVAN: Okay, thank you. 1260 This is for the two of you, again. You've indicated that you want to make the proposed changes now versus awaiting the outcome of the Natural Gas Policy Review, and it's my understanding that the primary reason that you want to go forward with these changes right now is in order to mitigate price volatility for your system-gas customers; is that right? 1261 MR. PLECKAITIS: That's correct. 1262 MS. GIRVAN: Is that the sole reason, or are there any other reasons within the context of the company why you feel it's important to go ahead now versus waiting when there's a decision from the Natural Gas Policy Review. 1263 MR. PLECKAITIS: That is absolutely the total reason, and if I could, let me explain that, because I was one of the ones that felt it was very strong that we pursue this as opposed to dropping this as an issue for this hearing. 1264 The way I see it today, at least under today's regime, customers have a choice: They can choose to be system gas customers or they can choose to go to the direct purchase market. For whatever reason, some customers have chosen to stay with system gas. They believe that that is the alternative that they wish to address. 1265 This Board has approved that Enbridge does have a responsibility to manage system gas, the system-gas program. It has approved in the past that volatility is an issue that customers hold to be important. 1266 My view of it is, and I think as you've heard from the panel today, the volatility that we've experienced over the last three or four years is unprecedented, it was not anything that was anticipated when we originally started this program in 1995, so I feel very strongly that it is our responsibility to address this issue. Our customers believe that it is our responsibility to address this issue today, not to wait for sometime in the future. 1267 And again, we're very willing to accept that the Board in its judgment a year from now or two years from now, may say it is no longer appropriate to do what the company's proposing at this particular time. But I see no reason and, in fact, I think we would be wrong from a customer perspective if we did not act now on an issue that we are experiencing now. 1268 MS. GIRVAN: Do you see any serious implications from a company perspective to move forward with these changes formally now or when you get the Board decision and then following the Natural Gas Policy Review changing that decision or having to change the decision or, you know, potentially the scenario that we talked about earlier, which was going back to the status quo or in some other direction? Are there any downside implications of that? 1269 MR. PLECKAITIS: I see no implications that are any different than already exist with us today with the program that we have in place. The implications, the changes would be the same. 1270 MS. GIRVAN: Okay. Mr. Brennan, with respect to the current $35 tolerance level, I'm trying to sort of get at this from a customer perspective. Can you just clarify exactly what this means, actually means in practical terms from the customer's perspective? Is it the customer's will -- can tolerate overall bill increases over the course of a year of up to $35, is that -- or -- anyway, you go ahead and explain to me what your perspective is on that? 1271 MR. BRENNAN: My perspective, what it is if you were to ask customers, if you look at their commodity portion of their bill, and let's say for argument's sake that's $600 a year, what would they like -- what would their preference in terms of the variability in that $600 be over the year? And from their perspective, they are saying, Well, I'm prepared to accept it going to $635 and also dropping to whatever the difference, I guess $565 over the year. So, you know, as long as their bill is within that range they feel comfortable. 1272 MS. GIRVAN: Wouldn't you agree that really from the customer's perspective what's most important is the overall bill impact? 1273 MR. BRENNAN: Well, I mean, certainly that's also an important component as well, but I think from the surveys that we've conducted is that the reduced volatility is of greater importance than the absolute price. 1274 MS. GIRVAN: Okay. Thank you. With respect to this second survey, just quickly to clarify because it sounds to me like you're not seeking approval to go ahead with this now and you're not seeking any recovery of costs in 2005; is that right? 1275 MR. PLECKAITIS: We will not act on any of the changes that we have proposed until we get a Board decision -- sorry, 2006? I'm sorry. 1276 MS. GIRVAN: Yeah, it's the second survey. It seems to me the second survey in the context of this proceeding is really irrelevant, you're not seeking approval from the Board to pursue it and you're not seeking any cost recovery; is that right? 1277 MR. BRENNAN: That's correct. 1278 MR. RUBINO: If I may, the reason that it was put there is if someone was to look at the RiskAdvisory recommendations -- there's 10 or -- I think the number is 12 in total, so if they looked at table 1 only or the ones they wanted to implement in 2005, they would not that some are missing and the natural question would be: Well, where are they? That's the reason for the division of the two tables. 1279 MS. GIRVAN: Okay. The relief that you're seeking in this case. 1280 And just one final question, Mr. Simard, and it relates to the proposal to hedge more than 10 percent of hedgeable volumes. Just to clarify, and it's what I've taken from the discussion today, are you really saying that at the end of the day, you may well -- the company may well end up in the same position with respect to how much volume is hedged, under today's proposal and under the new proposal, it's just really the flexibility that the new proposal gives the company in terms of getting there? 1281 MR. SIMARD: With respect to the 10 percent constraint, that is correct, yes. 1282 MS. GIRVAN: So overall volumes hedged under the current proposal and the proposed proposal could very well be the same? 1283 MR. SIMARD: Correct. 1284 MS. GIRVAN: Okay. Thank you very much. 1285 MR. BETTS: Am I correct in my understanding that those are all the questions from intervenors on this issue of this panel? 1286 MR. THOMPSON: Yes, I have no questions, Mr. Chairman. Thank you. 1287 MR. BETTS: Thank you. Questions from Board Staff. 1288 CROSS-EXAMINATION BY MR. WIGHTMAN: 1289 MR. WIGHTMAN: Thank you, Mr. Chair, we will be very brief. Mainly just a reconciliation of some numbers we're looking for. 1290 Good afternoon, panel. 1291 I'm looking at Exhibit I, tab 6, schedule 18, page 2 of 5, which is the CME interrogatory. 1292 MR. RUBINO: Yes, we have it. 1293 MR. WIGHTMAN: In the far right-hand column under "difference Canadian dollars," right at the bottom, correct me if I am wrong or straighten me out on this, there is a net loss or net hedge loss of 40.173 million. 1294 MR. RUBINO: That's correct. 1295 MR. WIGHTMAN: And that's not the total cost because it doesn't include transaction costs of whatever; is that correct? 1296 MR. RUBINO: That's correct. 1297 MR. WIGHTMAN: Okay. Because it varies from the number on CME Interrogatory tab 6, schedule 20, page 1, which we have 40.8 million. 1298 MR. RUBINO: That's correct. The difference isn't with the transaction costs necessarily. The two schedules were prepared by two different people and we looked at that a few days ago, we believe there's an difference in the exchange rate that was used and we can -- 1299 MR. WIGHTMAN: Okay. Because then -- and by the way, the 40.8 also appears in the Board Staff Interrogatory, you needn't turn it up, it's 17. 1300 MR. RUBINO: 17, which we corrected it this morning. 1301 MR. WIGHTMAN: Well, you corrected which year it was, but the 40.8 is under fiscal 2002 like it would be there. 1302 MR. SIMARD: Excuse me, if I could interject for a moment. In fact, that $40 million number does include transaction costs that when you look at the hedge price paid column, that hedge price paid is the average of the prices shown to Enbridge by the dealers at which they execute it and those prices shown by the dealers incorporate their transaction costs. So this is inclusive of the transaction costs, it's just that it's a more difficult process to breakout exactly how much of this 40.1 million is transaction costs, but it's a very small component of that 40.1 million. 1303 MR. WIGHTMAN: Thank you for that. I just wondered if I could then take you to one other document which is a Direct Energy interrogatory, it's tab 8 and schedule 11. Is there any relationship between this number for fiscal 2002 option costs and the other two numbers we've got, the 40.1 million and the 40.8 million? 1304 MR. SIMARD: Well, they would factor into the equation. I'm assuming that when that 40.1 million is calculated, they'll look at the gains or losses on a swap contract and then they'll also, for any options in the portfolio, they'll look at what premium was paid for the option, which is what the schedule you've just referenced talks about, and compare that to the eventual pay-out on that option. So if they spent in 2001, if they spent $690,000 on options, it's possible that those options all expired worthless and so there would have been a net cost of $690,000 that would have fed into the 40.1 million. It's possible that that $690,000 investment in options ended up generating a pay-out of $2 million, but both the pay-out and the cost would factor into that $40.1 million number. 1305 MR. WIGHTMAN: So they don't link up directly, they're -- 1306 MR. SIMARD: They're part of the equation but -- 1307 MR. WIGHTMAN: Good point, thank you. 1308 Just before we leave this schedule then, am I correct if I just look -- sorry, Exhibit I, tab 6, schedule 18, page 2, so the first one I referenced, I apologize for that. I just want to look at one row, two items in it and just ask if you can give me some idea. 1309 Just at the November '01 will do, the AECO CGPR index price was 335 and the hedge price paid was 439. That wouldn't have been anything like a call option, I assume. What kind of a thing would that have been? It's just one example I just want to... 1310 MR. RUBINO: Just give us a moment, please. 1311 MR. BRENNAN: Yeah, just to answer your question, it's difficult to say. It could be almost anything because it's the collection of all the hedges that were done for that month. 1312 MR. WIGHTMAN: Yeah. 1313 MR. RUBINO: In the previous month. 1314 MR. WIGHTMAN: Okay. Thank you for that. 1315 In the discussion we've been having this afternoon, you've used the word "forwards" a lot but you haven't used the word "futures" a lot, have you sort of been interchangeably been using those two words? 1316 MR. SIMARD: There shouldn't be much talk about futures at this point unless I'm talking about the market generically because Enbridge uses exclusively forward contracts or swaps, callers, and caps, but there's no component of futures trading in their portfolio, largely driven by the fact that the futures contract, the liquid futures contract, is based on a pricing index that does not correlate perfectly with the index prices in the regions that Enbridge is buying its gas, and the over-the-counter markets allow Enbridge to hedge directly access those prices. 1317 MR. WIGHTMAN: I guess the only reason I asked was that I wasn't sure, and I understand that there are different costs and counterparty risks associated with futures and forward markets. 1318 MR. SIMARD: That's fair. The pricing of a futures contract and the forward contract, the mechanics and how arbitrage opportunities work are quite similar, but there are definitely some differences in the two types of contracts. 1319 MR. WIGHTMAN: Okay. And I think just one last question, Mr. Simard. I believe when you were -- Mr. Dingwall was asking about the effectiveness of a risk-management program, you've stated a number of times that it's reduction in volatility. Presumably, though, when you're looking at how much you can reduce volatility, you also look at the costs and risks in doing that; does that factor into your -- 1320 MR. SIMARD: Yes, that is fair. Yes, it does. And once again the costs I would like at would be restricted to the transaction costs and the administrative costs. 1321 MR. WIGHTMAN: I guess what I was thinking of you could, for example, have zero volatility on your hedged volumes if you just bought them all forward, your whole supply, but that reduction in volatility to zero might be at too high of a cost in some sense. 1322 MR. SIMARD: Well, if you had zero transaction costs and zero administrative costs to do that and you were able to reduce your volatility to zero, I would say that that's a very effective hedging program. If you've got marginal transaction costs and marginal administrative costs and you managed to reduce your volatility to zero, and that was your aim, I would still -- that's still a very effective program. It's only when those transaction costs and administrative costs balloon relative to the amount of volatility reduction that you're achieving that I would start to question the efficacy of the program. 1323 MR. WIGHTMAN: Okay. And that sort of forecasted my next question. 1324 MR. SIMARD: And I will add that, given the marginal transaction costs of somewhere in the neighbourhood of 1 cent per gJ and low estimates on the administrative costs, I don't think there is a big cost associated with the execution of this hedging program. 1325 MR. WIGHTMAN: Okay. Then could there be, though, if you started hedging larger and larger volumes or you had greater and greater volatility? 1326 MR. SIMARD: I don't see that. The -- as you increase -- as you increase the percentage of volumes that you're hedging relative to the maximum hedgeable volumes, there will be a marginal increase in costs based on the fact that you're -- there are larger transaction costs. But there is no expectation that those added volumes will require additional administrative costs. And if we go back to looking at the 10 percent restriction -- the relaxation of the 10 percent restriction, we can once again talk about the fact that, in the end, the volumes may be similar; it's just a question of how quickly you get to those volumes. 1327 MR. WIGHTMAN: Okay, then, sorry, I guess what I called my last was my penultimate question. This is my last question: Why wouldn't you recommend, then, as long as transaction costs are low and this, that they just hedge everything they can? 1328 MR. SIMARD: I think the rationale for not hedging everything they can is that there is some expression -- there is a perception of an expression of interest from customers that they're willing to tolerate some increase in price in return for some degree of downside participation. And as long as they're willing to accept that band, then it makes sense to leave some open exposure until you get to the point where the perception is that the ratepayer can't tolerate any further increase, and at that point you'll end up at 100 percent of hedgeable volumes. 1329 MR. WIGHTMAN: Thank you, panel. 1330 Mr. Chair, those are my questions. 1331 MR. BETTS: Thank you. 1332 Mr. O'Leary, any questions in redirect? 1333 RE-EXAMINATION BY MR. O'LEARY: 1334 MR. O'LEARY: I just have one or two questions, probably for Mr. Pleckaitis to respond to, and they arise out of the questions relating to the anticipated Natural Gas Policy Forum. 1335 I'm wondering if you could advise whether the company has any information about a proposed date by which time any submissions might be filed in respect of that policy review? 1336 MR. PLECKAITIS: I'm not aware of any. 1337 MR. O'LEARY: Aware of any proposed date for the actual conducting of that policy review? 1338 MR. PLECKAITIS: I'm not aware of a date. 1339 MR. O'LEARY: Any sense of whether or not there will be complete funding for that to allow those parties that are interested in the risk-management issue to participate in that review? 1340 MR. PLECKAITIS: I don't believe anything formal has been announced on that. 1341 MR. O'LEARY: Do you have any sense of when you might expect a decision that might have an impact on the company's risk-management program? 1342 MR. PLECKAITIS: No, I do not. 1343 MR. O'LEARY: Those are all of my questions. 1344 [The Board confers] 1345 MR. BETTS: Ms. Nowina. 1346 QUESTIONS FROM THE BOARD: 1347 MS. NOWINA: Gentlemen, you may be getting tired about talking about this, but for my benefit, and I don't care who responds, can you give me a little bit further explanation of the benefits to your overall portfolio or the effectiveness of the portfolio in the scenarios of having the fixed period as opposed to the rolling 12 months; and if you could use a hypothetical example to make it a little bit more concrete for me, that might be helpful. 1348 MR. SIMARD: I'll try to jump in and answer this. 1349 Let's imagine a scenario where calendar 2004 is hedged according to the plan, and from October through June -- October fiscal 2004 would be October 2003 to September 2004 -- 1350 MR. RUBINO: Right. 1351 MR. SIMARD: From October 2003 through September 2004, we see a continuous rise in gas prices over that nine-month period or 12-month period. Under the current situation, there is no hedging that can be done for the 2005 fiscal year until approximately June or July of October -- sorry, June or July of 2004. And so by the time we get to June or July 2004, prices may have risen substantially and there's been no opportunity along the way to leg into some positions out in the subsequent fiscal year to manage that escalation in costs, which could result in a very substantial increase in gas costs year over year. And by allowing for a rolling strategy, you mitigate some of that year-over-year volatility. 1352 MS. NOWINA: Thank you. That helps. 1353 MR. BETTS: I have one question as well, and it is probably Mr. Pleckaitis that would be best to answer it, because he started off by helping us understand exactly the issues we were dealing with or at least the questions that the company was hoping to get answered. And they related to receiving direction from the Board regarding some requested changes to policies and procedures and changes to the service level agreements, I believe were the two that you mentioned. 1354 There was a great deal of discussion, I think surrounding the merits of risk-management programs in general and I benefited from that, but is there any question about whether the risk-management program is to go ahead, or continue is a better way... 1355 MR. PLECKAITIS: No there is not. We have every intention to continue the current risk-management program until directed otherwise by the Board. 1356 MR. BETTS: Thank you and that was my understanding as well. Can you -- there wasn't very much discussion from my recollection regarding the service-level agreement changes. Just for my benefit, without spending a lot of time on that, could you briefly describe the most important changes that were involved, or any one of the panel? 1357 MR. PLECKAITIS: If I could, they are relatively administrative in nature. They talk about things like separation of responsibilities between the person actually doing the trade, doing trades for us and doing trades for other parts of the organization there's those types of things. They do not get into mechanics of what was the subject of virtually all of the discussion that we had today which was basically what it is we're proposing to do in terms of changing our risk-management program. 1358 MR. BRENNAN: Maybe another one I could add as well. It has to do with a 10-day period whereby a hedge request has been approved, the trader has 10 days to transact that hedge request or put on the hedge. That time frame has been shortened to two days if it's done at AECO and I believe three days if it's done at Chicago, so that was the other thing that could change. 1359 MR. BETTS: Thank you. 1360 MR. SOMMERVILLE: There is one question, Mr. Pleckaitis, you indicated in one response that the -- or perhaps it was you, Mr. Brennan, that the company did not study the interplay between the rolling 12-month proposal and the QRAM and how that was going to operationally be accommodated. That surprised me a little and I'm wondering what kind of an obstacle have you seen in that accommodation? 1361 MR. BRENNAN: It's a very difficult problem, I guess, if you like. I shouldn't say it's a problem, but it's a difficult situation in how we're going to deal with this because in terms of how the reference price is set each quarter and what does that mean going forward as to what that tolerance amount should be. Because if you look at over a 12-month period, the way we do it today, you have a situation where we're saying that when we start in October, if you're looking to trying to manage that total gas bill within $35, and then we get to the first QRAM in January and we reset the reference price. Well, if we reset the reference price, then what do you do with what you've done in terms of the impact in that first quarter to the customer's bill and then what are you hedging towards for the next nine months, is it three-quarters of the $35 or is it still $35? 1362 So one of the things that -- why we were thinking about going with a 12-month rolling average every quarter would be that we'd always be in that 12-month period and so we would always be trying to meet that $35 on an annual basis over a 12-month period, but these are the sort of complications that we have to really consider before we... 1363 MR. SOMMERVILLE: Thank you. 1364 MR. BETTS: I believe that's all the questions from the panel, Mr. O'Leary. Did that give rise to a need to reexamine your witnesses at all? 1365 MR. O'LEARY: No, it did not, sir. 1366 MR. BETTS: Thank you. Then that will conclude our need for this witness panel. Thank you very much for your participation. You have helped us. 1367 And it looks as though we'll be able to draw a conclusion to this hearing day a little bit early and that's great. I will make one announcement and by way of I guess procedural information, I tried to hold any procedural announcements for first thing in the morning and at the end of the day so that they would generally appear in those places on the transcripts. 1368 The only matter I would like to bring to your attention is that on July 2nd, which is the Friday following Canada Day, just because of various parties taking holidays at various times, it's our plan at this point not to convene the hearing on July 2nd, assuming that we continue that long and we haven't concluded, but if, for some reason, there was a necessity to do so as a result of something happening within the hearing process, we would consider it but at this point, it would be our intent not to sit on July 2nd unless anything forces us to. 1369 So that was the only announcement to make at this point. I think if there are no questions, we will conclude today's hearing and reconvene tomorrow morning, and tomorrow morning we will have the presentation of a settlement on one of the remaining issues and we will also hear submissions regarding an earlier-filed motion. 1370 So thank you all very much for today and we will reconvene tomorrow at 9:30. 1371 --- Whereupon the hearing was adjourned at 3:50 p.m.