Rep: OEB Doc: 12YPK Rev: 0 ONTARIO ENERGY BOARD Volume: 4 21 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 Monday, 21 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 21 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 DECISION ON ENBRIDGE MOTION: [18] PRELIMINARY MATTERS: [40] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: [71] EXAMINATION BY MR. CASS: [78] CROSS-EXAMINATION BY MS. AITKEN: [104] CROSS-EXAMINATION BY MR. JANIGAN: [410] CROSS-EXAMINATION BY MR. SHEPHERD: [602] CROSS-EXAMINATION BY MR. THOMPSON: [933] PRELIMINARY MATTERS: [1102] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: [1109] CROSS-EXAMINATION BY MR. THOMPSON: [1114] CROSS-EXAMINATION BY MR. DINGWALL: [1393] 10 EXHIBITS 11 EXHIBIT NO. K.4.1: ASSIGNMENT AND NOVATION AGREEMENT DATED OCTOBER 1, 2002, BETWEEN ENBRIDGE INC., ENBRIDGE GAS SERVICES INC., AND ENBRIDGE GAS DISTRIBUTION INC. WITH ATTACHMENT [234] EXHIBIT NO. K.4.2: VECC TEMPLATE FOR TRANSACTIONAL SERVICES CALCULATIONS [458] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.4.1: TO COMPLETE THE REQUESTED CALCULATIONS ON THE VECC TEMPLATE FOR TRANSACTIONAL SERVICES CALCULATIONS [467] UNDERTAKING NO. J.4.2: TO COMPLETE EXHIBIT K.4.2 FOR A FORECAST THAT IS MADE WITH THE ASSUMPTION THAT COMMODITY-BASED TRANSACTIONAL SERVICES ARE EXCLUDED [548] UNDERTAKING NO. J.4.3: TO PROVIDE INFORMATION REGARDING HOW MUCH WAS THE LINE OF CREDIT AT ANY GIVEN POINT IN TIME DURING THE 2003 TEST YEAR [705] UNDERTAKING NO. J.4.4: TO DETERMINE THE MAXIMUM THAT EGS COULD DRAW ON THE GUARANTEES IF THEY WERE ALL DRAWN AT ONCE [726] UNDERTAKING NO. J.4.5: TO PROVIDE THE 2001 NUMBERS TO UNDERTAKING J.4.1 [835] UNDERTAKING NO. J.4.6: TO PROVIDE REVENUE NUMBERS FROM EVERY YEAR SINCE TS HAS BEEN OFFERED; 1998, 1999, 2000 [841] UNDERTAKING NO. J.4.7: TO FILE FORECASTS FOR 2001, 2002, 2003, 2004, IF ANY [858] 14 --- Upon commencing at 9:35 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. Today is day 4 of the hearing of application RP-2003-0203. It's also, I understand, the first full day of summer, so that will make us all feel pretty good, I think. Can you hear me at the back there? Is the volume okay? Good. Thank you. 17 We're scheduled to commence the examination of issues 4.1 and 4.2 which are associated with transactional services. On Friday, the Board received submissions from parties on the company's motion respecting their plans to change the fiscal year-ends contained in issues 13.1 and 13.2. We will be issuing an oral decision on that motion as the first item of business today. In fact, I will do that right now. The staff are handing out a written copy of that. 18 DECISION ON ENBRIDGE MOTION: 19 MR. BETTS: The Panel's decision is as follows: 20 On June 11, 2004, Enbridge Gas Distribution Inc. filed a motion with respect to Issues 13.1 and 13.2, both relating to their proposed change in fiscal year-end dates from September 30 to December 31. 21 The Motion is denied with the exception that the Board directs the applicant to file the material comprising Appendix E of the Motion materials. 22 Issues 13.1 and 13.2 will be considered by the Board in the course of this hearing, toward the end if necessary, at which time corporate witnesses will be present to provide evidence in-chief and to be available for cross-examination on the matters. 23 We want to emphasize at this time that in making this Decision we make no finding with regard to the independence or appropriateness of Mr. Todd's evidence. In making our Decision, we did not need to make findings on this subject. 24 Reasons for this Decision can be provided at the request of any party. 25 Parties who wish to make written submissions with respect to costs may do so. 26 The Board expects the Applicant to submit a revised hearing schedule, including Issues 13.1 and 13.2, as soon as practicable. 27 Are there any questions that arise from that? 28 MR. CASS: I have one question, Mr. Chair, if the Board doesn't mind. 29 MR. BETTS: Mr. Cass. 30 MR. CASS: Does the reference to corporate witnesses include or exclude Mr. Gruending? 31 MR. BETTS: Exclude. 32 Are there any preliminary matters that should be considered by the Panel at this time? Is the applicant prepared to call their first witness panel? 33 MR. CASS: I'm sorry, Mr. Chair, I was just having a conversation with Ms. Hare and I apologize. Might I just ask another clarification question? 34 MR. BETTS: Yes. 35 MR. CASS: In relation to Mr. Gruending, then, even without the proposed filing of prefiled evidence, it's the Board's expectation that he not be on the panel; is that ... 36 [The Board confers] 37 MR. BETTS: For clarification, Mr. Cass, the Board has simply rejected the request to file additional prefiled evidence through Mr. Gruending. Mr. Gruending can still appear as a witness for the applicant. 38 MR. CASS: Thank you, sir. And then, sorry, sir, for having fallen a little behind, there was one small preliminary matter as well. 39 MR. BETTS: That's fine. 40 PRELIMINARY MATTERS: 41 MR. CASS: All it is is to advise the Board that a proposed hearing schedule has been circulated to parties and provided to Board Staff. Now, of course, a change will be needed -- will need to be made to the schedule to reflect the Decision just delivered by the Board. 42 MS. LEA: Mr. Cass, I did have one question on that. You received confirmation from Energy Probe that they intend to call a panel on Issue 5.5? 43 MR. CASS: The answer, through you, Mr. Chair, is no. 44 MR. BETTS: Thank you, Mr. Cass. And if you can put your mind to including issues 13.1 and 13.2 on this schedule, I assume -- I'll leave it to you as to when you feel it's most appropriate to deal with. 45 MR. CASS: Yes, Mr. Chair. I think the company's expectation would be that that proceed on July 5th. 46 [The Board confers] 47 MR. BETTS: Mr. Cass, just for the benefit of your scheduling, we'll have to start somewhat early on July 5th -- somewhat later on July 5th, no earlier than 11 a.m. 48 MR. CASS: Thank you, sir. 49 MR. BETTS: That could change, and I'll try to advise you as we get closer to that date. 50 So we'll take that as your preliminary expectation of the scheduling change, and if you could just redo the schedule and provide it to the parties again, that would be useful. 51 Mr. Cass, are we ready now to receive the first witness panel? 52 MR. THOMPSON: Mr. Chairman, I had one preliminary matter that I'd just like to put on the record now. 53 MR. BETTS: Yes, Mr. Thompson. 54 MR. THOMPSON: I think on the day that we were here discussing the settlement proposal, this issue of confidentiality with respect to deferred tax documents came up and you directed me to identify the specific areas of concern. I can do that now quickly, if you wouldn't mind. 55 In the settlement proposal, at page 10, that's Exhibit N.1, tab 1, schedule 1, page 10, there is a reference to a company letter of April 26, 2004. It's said to be filed in the record in these proceedings. If it is, I don't know what the exhibit number 1. But I just thought that -- I don't think we need to turn it up at the moment, but at the last page of that document, there is a summary of the request for confidentiality with respect to documents pertaining to deferred taxes, and the company's position there is set out and it's with respect to three documents, School Energy Interrogatory No. 1, School Energy Interrogatory No. 155, and then documents that were produced in response to a letter of February 10 from IGUA to Enbridge. And the company is maintaining its position that the excerpts from documents set out in that summary of table of requests should remain confidential and IGUA takes the position all of the information in all of those documents should be on the record. So that's the issue on the document-specific basis. 56 There's one further document that's not in the record, and I'll just give you the details of it and, with your leave, file it later, so if you could, in effect, add to this list of three documents reference to a fourth document, which is a letter dated November 11, 2002 from the then director finance of Enbridge Gas Distribution Inc., a person by the name of Trish O'Connor, CA, to me, and it contains some calculations that are appended thereto with respect to crossover. The company, as I understand it, has no objection to this letter being filed, but they do wish to maintain its confidentiality. And I take the position it should be on the public record. So that's the fourth item that should be added to the list. Thank you very much. 57 MR. BETTS: Thank you, Mr. Thompson. The Panel will consider that request and will establish, as soon as possible, our expectation on how we will handle that or proceed with that request. 58 MR. THOMPSON: Thank you, sir. 59 MR. BETTS: Just with respect to that, Mr. Cass, can I assume that the company's position remains unchanged with respect to those four items? 60 MR. CASS: Yes, that's correct. 61 MR. BETTS: Thank you. 62 MR. CASS: Mr. Chair, just for clarity, I perhaps should add, you asked whether the company's position remained unchanged with respect to the four items. The the first three items identified by Mr. Thompson are ones that were the subject of the letter of April 26th, and that letter set out the company's position. The fourth item is a new one, so to speak, in the sense that it was not referred to in the letter of April 26th. That, to my understanding, was a document that was provided in the course of a confidential discussion in the manner of a negotiation between the company and intervenors. Just so that the Board can understand the company's position in respect of that fourth document, perhaps I should add that clarification. 63 MR. BETTS: Thank you very much. We will be seeking further input before the Board determines this matter, so don't feel as though that's necessarily the last word that you will have the opportunity to provide us with. 64 Any further procedural matters? We appear to have taken care of that. Mr. Cass, please, if you can introduce the panel. I recognize at least two faces of witnesses that have been here before, maybe more. Can you please introduce the new witnesses and Ms. Nowina will swear those people in. 65 MR. CASS: Yes. First, before the witnesses are sworn, maybe I will introduce them in the order starting with the gentlemen closest to the Board Panel. 66 Sitting closest to the Board Panel is Mr. John Whelen. He is Vice-President and Treasurer of Enbridge Inc. He is also Treasurer of Enbridge Gas Distribution. 67 Beside him is Mr. Guy Jarvis, who is Vice-President, Gas Services of Enbridge Inc. 68 The next two witnesses have already been sworn, but for the record I'll identify them. Sitting beside Mr. Jarvis is Mr. Frank Brennan, and he is Director Energy Policy and Analysis for Enbridge Gas Distribution. 69 The last witness is Mr. David Charleson, who is Manager, Energy Strategy. 70 Having said that, if Mr. Whelen and Mr. Jarvis could please go forward to be sworn. 71 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: 72 J.WHELEN; Sworn. 73 G.JARVIS; Sworn. 74 F.BRENNAN; Previously Sworn. 75 D.CHARLESON; Previously Sworn 76 MR. BETTS: Thank you, Mr. Cass. The witnesses are sworn in. Please proceed. 77 MR. CASS: Thank you. I have only a few questions in examination-in-chief, Mr. Chair. 78 EXAMINATION BY MR. CASS: 79 MR. CASS: Mr. Brennan, can I start with you, please, to have you confirm that the companies evidence on transactional services, including interrogatory responses, was prepared by you or under your direction and control? 80 MR. BRENNAN: Yes, it was. 81 MR. CASS: Are there any corrections that should be made to the evidence? 82 MR. BRENNAN: Yes, I have one correction. If I could direct parties to the response to Board Staff Interrogatory No. 11 found at Exhibit I, tab 1, schedule 11. In that response, partway down the page in the first bullet, the last line, maybe I'll just read the full sentence, it says: 83 "At times no counterparty could be found to monetize available service offerings, or if one could be found, the margin expectations of the counterparty were such that fair value could," I insert the word "not be captured by Enbridge Gas Distribution." 84 So I am inserting the word "not" after the word "could." 85 MR. BETTS: Thank you. 86 MR. CASS: Mr. Brennan, can you confirm as well that the company's evidence on transactional services is accurate, to the best of your information or belief? 87 MR. BRENNAN: Yes, it is. 88 MR. CASS: All right. I'll come back to you with another question, Mr. Brennan. But in the meantime, I'd like to ask a question of each Mr. Jarvis and Mr. Whelen, just to introduce them to the Board. 89 Starting with you, Mr. Jarvis, could you explain to the Board, please, what your role is in relation to transactional services activities by Enbridge Gas Distribution. 90 MR. JARVIS: Yes, as vice-president of gas services, I manage the group within Enbridge that is responsible for providing services under the agency agreement to Enbridge Gas Distribution, including the transactional services. 91 MR. CASS: Thank you. And similarly, Mr. Whelen, could you explain your role in relation to transactional services activities. 92 MR. WHELEN: Well, as treasurer, I am responsible for the funding of Enbridge Gas Inc. and its subsidiaries, and as treasurer of Consumers Gas, of Consumers Gas, including financing and allocation of capital to the various businesses in the group. I have also under my direction the risk control function which involves establishing policies, procedures and systems for the oversight of various businesses, including the transactional services business which Mr. Jarvis looks after. 93 MR. CASS: Thank you. And then back to you, Mr. Brennan. Can you summarize, please, the relief that the company is requesting in this proceeding. 94 MR. BRENNAN: Yes, certainly I can. The evidence is found at A2, tab 5, schedule 1, and the company is requesting changes to the transactional services business. These changes include allowing Enbridge Gas Services to conduct commodity transactions in the name of Enbridge Gas Distribution; also allowing Enbridge Gas Distribution to deduct all credit costs from the gross margin prior to sharing. It is expected that these credit costs incurred by EGD will be relatively small. EGD is proposing that the current sharing mechanism remain the same; that is, the first $8 million is guaranteed to ratepayers, the next $2.7 million goes to the shareholder, and the remaining revenues are to be captured in the transactional services deferral account for future disbursement, that being 75 percent to ratepayers, 25 percent to shareholder; all O&M costs would be borne by the shareholder. 95 Now, if the Board does not allow Enbridge Gas Distribution to conduct commodity transactions in its own name, then EGD would request that EGS be allowed to continue to conduct commodity transactions in its own name and charge back to Enbridge Gas Distribution any associated credit costs. EGD would then deduct these credit costs from the gross margin prior to any sharing, and the sharing mechanism would be the same as I described earlier. 96 Now, if the Board, on the other hand, does not allow Enbridge Gas Distribution to conduct commodity transactions in its own name, or not allow the sharing of credit costs between ratepayers and shareholder, that being the 75/25, then EGD requests that the Board approve a new sharing mechanism. This new sharing mechanism would have the first $4.5 million being guaranteed to ratepayers, the next $1.3 million going to the shareholder, and the balance being captured in the transactional services deferral account for, again, future disbursement in the ratio of 75 percent to ratepayers, 25 percent to shareholders. Again, all O&M costs would be borne by the shareholder. 97 MR. CASS: Thank you, Mr. Chair. That's the examination-in-chief of the panel. 98 MR. BETTS: Thank you very much, Mr. Cass. 99 May I have an indication from parties as to who would like to cross-examine this witness panel. 100 MS. AITKEN: I'm going to go first here. I apologize. I will have to leave early to get to a flight somewhere. 101 MR. BETTS: That's fine. And others? Just a show of hand is fine. Have parties organized an order beyond Ms. Aitken? Mr. Janigan appears to be after Ms. Aitken. 102 Ms. Aitken, I'd ask you to proceed at this point. 103 MS. AITKEN: Thank you, Mr. Chair. 104 CROSS-EXAMINATION BY MS. AITKEN: 105 MS. AITKEN: I'll start with Mr. Brennan, but if someone else feels it's more appropriate for them to answer, please feel free to jump in. I'm going to start fairly simply just to confirm that I have the understanding before I move on. 106 EGD has arrangements in place to release certain short-term assets when they are not required so as to create additional value; is that right? 107 MR. BRENNAN: Yes, that's correct. 108 MS. AITKEN: And we're calling those TS assets for short. 109 MR. BRENNAN: Transactional services, that's correct. 110 MS. AITKEN: And those assets have been fully paid for by ratepayers at that point. 111 MR. BRENNAN: Those assets were used to provide services to ratepayers. 112 MS. AITKEN: But they are not being required by the regular commitments of EGD and therefore are able to be released for sale to increase additional value; is that right? 113 MR. BRENNAN: They are not being used at that particular time, yes. 114 MS. AITKEN: And when EGS tells those TS assets, it's doing so as an agent for EGD; is that right? 115 MR. BRENNAN: That's correct. 116 MS. AITKEN: And all of the margin would go to the TS deferral account; correct? 117 MR. BRENNAN: All of the revenues would go back to EGD, then it gets captured in the sharing mechanism whereby the first $8 million, as I said, is guaranteed to ratepayers, and then the next 2.7 go to shareholder, and anything above that goes to the transactional services deferral account. 118 MS. AITKEN: I misspoke, then. It's the revenues that in total, then, go back to EGD; is that right? 119 MR. BRENNAN: Correct. 120 MS. AITKEN: And TS assets don't include the commodity, do they? 121 MR. BRENNAN: Not at this stage. This is what we're requesting at this point. 122 MS. AITKEN: So are you actually asking for the commodity to be characterized as a TS asset? 123 MR. BRENNAN: What we're requesting is that the Board allow Enbridge Gas Services on behalf of Enbridge Gas Distribution to be able to conduct commodity transactions in conjunction with the other services. This is the point I want to emphasize. This is not Enbridge going out and buying/selling commodity just for the sake of buying/selling commodity. It is always linked with one of the other services, whether that be storage or transportation. 124 MS. AITKEN: So you're not actually looking, though, for an amendment to somehow define the commodity of the TS asset? 125 MR. BRENNAN: Well, if you look at our evidence at A2, tab 5, schedule 1, we have listed there the current services that are being offered by Enbridge Gas Distribution in terms of transactional services, and what we would like to be able to do is to include commodity as part of this basket of services that we can provide our customers. And, again, it would be matched up or linked with one of these existing services, whether, again, it be one of the storage services or one of the transportation or exchange services. 126 MS. AITKEN: So currently EGD has authority from the Board to sell off these TS assets, which at the moment do not include the commodity; is that right? 127 MR. BRENNAN: That's correct. 128 MS. AITKEN: And in contrast, EGD currently has no authority to sell the commodity as a TS asset or otherwise; is that right? 129 MR. BRENNAN: That's correct. 130 MS. AITKEN: And so when you describe in Exhibit A2, tab 5, schedule 1, the manner in which EGS has been bundling the commodity with TS assets, that's not actually authorized by the agency agreement in place between EGD and EGS, is it? 131 MR. BRENNAN: I'm sorry, I didn't catch the first part of your question there. 132 MS. AITKEN: Fair enough. It was a long question. I understand that EGS has been already bundling commodity sales with TS assets; is that right? 133 MR. BRENNAN: EGS has? Yes, they have. 134 MS. AITKEN: And EGS's activity in that regard is not expressly authorized by the agency agreement, is it? 135 MR. BRENNAN: Well, I guess the agency agreement, of course, has -- part of its purpose is to allow Enbridge Gas Services to optimize the use of the company's assets, so to that extent I would say that you can argue whether or not they can or cannot. 136 MS. AITKEN: It's not expressly listed. You took me to a list of TS assets like peak storage, off-peak storage, et cetera, that's at page 2 of Exhibit A2, tab 5, schedule 1, and commodity isn't listed among those, nor is it expressly contemplated in the agency agreement, is it? 137 MR. BRENNAN: Well, the evidence that you just referred to is from Enbridge Gas Distribution's perspective, not Enbridge Gas Services. 138 MS. AITKEN: Perhaps I should ask Mr. Jarvis whether you would disagree with that characterization of the TS assets under the agreement you have with EGD. 139 MR. JARVIS: I'm sorry, what was your question? 140 MS. AITKEN: If I could ask you to turn up page 2 of Exhibit A2, tab 5, schedule 1, at page 2 there is an expression by EGD of what they consider to be a brief description of each of the TS services provided for under the agency agreement, and in paragraphs 6 through 11 there are a number of services identified. And I just wanted to know, do you take issue with EGD's characterization of the TS assets or services provided for under the agency agreement? 141 MR. JARVIS: No, I don't take any issue with that. 142 MS. AITKEN: Thank you. Currently EGS sells the TS assets as an agent for EGD; is that right? 143 MR. BRENNAN: Yes, that's correct. 144 MS. AITKEN: And in the case of a commodity that EGS is currently selling, and forgive me if I'm asking the wrong person, so please just jump in, but as far as EGS is selling the commodity bundled with those TS assets, is that EGS-purchased gas? 145 MR. BRENNAN: It is EGS-purchased gas, correct. 146 MS. AITKEN: So in selling this bundled product, including partly TS assets and partly commodity, is this a fair way to say what's happening: On the one hand, EGS is selling something it sells as an agent, namely, the TS asset; is that right? 147 MR. BRENNAN: Yes. 148 MS. AITKEN: And it's selling something else, that commodity as the principal; is that right? 149 MR. BRENNAN: It is selling the commodity -- 150 MR. JARVIS: I believe contractually we're the principal, yes, in the bundled transaction. 151 MS. AITKEN: Those were two different answers so let me just make sure I understand it. The first part is you're selling the commodity as the principal, you, EGS; is that right? 152 MR. JARVIS: Well, in most of these circumstances where commodity is bundled with one of the services, the transaction is not structured as a sale of the commodity necessarily. There's a commodity component to it. So sometimes there's a straight purchase or sale of commodity; sometimes it's embedded -- the service is embedded in the deal. 153 MS. AITKEN: That's interesting. Who has title to the commodity, then? 154 MR. JARVIS: Gas Services. 155 MS. AITKEN: And who has title to the TS asset? 156 MR. JARVIS: EGDI. 157 MR. BRENNAN: Enbridge Gas Distribution. Well, it depends on the typical transaction. I mean, if there is a case where Enbridge Gas Services want to bid on an asset and they are the successful bidder, they would be the owner of the asset at that point in time but -- 158 MS. AITKEN: That's just if they play a different role in the transaction. 159 MR. BRENNAN: By and large, the majority of them are going to be in the name of Enbridge Gas Distribution. 160 MS. AITKEN: Because the thing that EGS is entitled to do under the agency agreement vis-a-vis TS assets is act as agent to EGD to sell it to somebody; right? 161 MR. BRENNAN: That's correct. 162 MS. AITKEN: So, Mr. Jarvis, when you said sometimes it's embedded, how exactly does that work? 163 MR. JARVIS: You take an example like a storage service where there is a purchase of gas occurring in one period and a sale of gas occurring in another period, the value that's being attributed to the storage asset for that period is embedded in the transaction costs that are, I guess, entered into on both ends of the deal. 164 MS. AITKEN: Okay, so it's a bundled price, is really what you're saying? 165 MR. JARVIS: Correct. 166 MS. AITKEN: Just so I understand it, when EGS bundles its own purchased gas into one of these transactions, it recovers the cost of the gas but then the balance of the revenues, or the margin, gets contributed to the deferral account; is that right? 167 MR. BRENNAN: The balance, if you like, the margin, goes to Enbridge Gas Distribution. 168 MS. AITKEN: Okay. So moving just from how we are today doing this to what the proposal is, what does selling -- or, rather, buying the commodity as an agent for EGD mean? Does that mean that EGD would be taking title and EGS would be simply acting as agent? 169 MR. BRENNAN: It would be Enbridge Gas Services buying the gas in the name of Enbridge Gas Distribution. 170 MS. AITKEN: So EGD would have title to that gas? 171 MR. BRENNAN: That's correct. 172 MS. AITKEN: And presumably the proposal is that whatever gas was purchased by EGS in EGD's name would be limited to that amount that was required for bundling under these bundled transactions, including TS assets? 173 MR. BRENNAN: Yes. 174 MS. AITKEN: Now, is it not right that the amount of available TS assets fluctuates on a fairly frequent basis? 175 MR. BRENNAN: Yes. We've made that point many times. 176 MS. AITKEN: How -- could you describe how frequently. I mean, could you put a measure around that? 177 MR. BRENNAN: How frequently they change or how frequently I've mentioned it? 178 MS. AITKEN: Fair enough. How frequently they change, please. 179 MR. BRENNAN: Well, as the evidence indicates, the whole business is very volatile, gas prices are very volatile. So depending on where those four prices are will determine what type of transactional services offering you can make, whether it be a storage or a loan or an exchange. The other issue has to do with, first of all, what is the utility's requirements for those assets, and of course that's the first thing that has to be addressed is making sure that any of these assets are not used at the expense of the ratepayers. And so depending on, for example, weather, how much gas we have in storage or whatever, how much transportation we may need or may not need, it would depend. So it's, I would say certainly from year to year, if not even more frequently than that in terms of the actual pricing. 180 MS. AITKEN: So under this proposal, would EGS only be purchasing commodity to bundle with TS assets after it had definitively identified TS assets that would be available for sale? 181 MR. BRENNAN: Yes. I think your question was, first of all, the first step is are these in excess of what our requirements are, and then, only then, would Enbridge Gas Services go out and purchase the commodity on behalf of the utility's name and then offer -- bundle it up with one of the other services and offer it to a marketer. 182 MS. AITKEN: So under the agency agreement in place between EGD and EGS, EGS acts as EGD's agent for the purposes of providing a number of services to EGD; is that right? 183 MR. BRENNAN: Yes, that's correct. 184 MS. AITKEN: And that includes gas-supply planning? 185 MR. BRENNAN: Yes. 186 MS. AITKEN: Gas acquisition? 187 MR. BRENNAN: Yes. 188 MS. AITKEN: Risk management? 189 MR. BRENNAN: Yes. 190 MS. AITKEN: Contract management? 191 MR. BRENNAN: Yes, yes. 192 MS. AITKEN: Transactional services? 193 MR. BRENNAN: Yes. 194 MS. AITKEN: And regulatory support services; is that right? 195 MR. BRENNAN: That's correct. 196 MS. AITKEN: In the context of providing these services, EGS has the authority to make decisions and approve or disapprove of actions, does it not? 197 MR. BRENNAN: Yes. I believe if you're referring to -- 198 MS. AITKEN: Paragraph 4. I don't need to -- 199 MR. BRENNAN: -- paragraph 4 of the agency agreement. 200 MS. AITKEN: Yes, that's right. You would agree with that? 201 MR. BRENNAN: Within limits. You have to look at the qualifier there in that what that paragraph means within -- EGS is allowed to enter into contracts, negotiate for contracts, where these contracts are for less than one year and less than $50 million. 202 MS. AITKEN: Right. So in the context obviously of the other requirements within the agency agreement, EGS has this kind of authority; is that right? 203 MR. BRENNAN: Yes, that's correct. 204 MS. AITKEN: And just to finish it off, they can also endorse, approve and enter into contracts for and on behalf of EGD, again within the confines of the agency agreement terms generally? 205 MR. BRENNAN: Yes, that's correct. 206 MS. AITKEN: And so really it's EGS that controls that activity, subject, of course, to doing so in accordance with the terms of the agency agreement? 207 MR. BRENNAN: What do you mean by control? 208 MR. BRENNAN: Well, they are the ones who are acting as agent and making those kinds of decisions and entering into those kinds of contracts; is that not right? 209 MR. BRENNAN: They are acting as our agent and they are making those decisions. 210 MS. AITKEN: And they do so with autonomy; is that right? 211 MR. BRENNAN: Under the restrictions we have in terms of dollar value, yes. 212 MS. AITKEN: Yes, all of which are set out in the agency agreement; right? 213 MR. BRENNAN: Yes. 214 MS. AITKEN: And in the course of performing this service for EGD, EGS may access confidential information about EGD; isn't that right? 215 MR. BRENNAN: EGS may become aware of confidential information? Would it be possible for you to clarify what you mean by confidential information in this context? 216 MS. AITKEN: Sure. I can just direct you to paragraph 20 of the agency agreement. 217 MR. BRENNAN: Of the agency agreement? 218 MR. BETTS: Can we have the reference for that agency agreement. 219 MS. AITKEN: Oh, I'm sorry. 220 MS. DeMARCO: I actually have copies for the Panel that might be of assistance. 221 MS. AITKEN: It is filed at Exhibit I, tab 1, schedule 71, attachment 4. 222 MR. BRENNAN: That's a different proceeding, just so you're clear on that. 223 MS. AITKEN: You're quite right. I apologize. Perhaps, would it be possible to take advantage of Ms. DeMarco's kind offer and hand those up to the Board. 224 MS. LEA: So we have three copies of a document provided to the Panel. Are there any other copies available? Perhaps not at this time. 225 MS. DeMARCO: I do have one extra copy. 226 MS. LEA: Okay. Is this a document that's already in the record somewhere? 227 MS. DeMARCO: This is a document filed into evidence in RP-2002-0133 at Exhibit I, tab 1, schedule 71, attachment 4. 228 MS. LEA: Okay. Do you wish this document marked as an exhibit in this proceeding? It probably would be good to do so for identification. So I will need additional copies, then, not at this moment necessarily, but five copies for us and then however many intervenors may need them. 229 MS. AITKEN: Yes, thank you, we will do so. 230 MS. LEA: So that will be Exhibit K.4.1 . And what should be the title of this exhibit? 231 MS. AITKEN: The Assignment and Novation Agreement dated October 1, 2002, between Enbridge Inc., Enbridge Gas Services Inc., and Enbridge Gas Distribution Inc. 232 MS. LEA: Okay, I didn't catch the second word? 233 MS. AITKEN: Assignment and Novation Agreement. 234 EXHIBIT NO. K.4.1: ASSIGNMENT AND NOVATION AGREEMENT DATED OCTOBER 1, 2002, BETWEEN ENBRIDGE INC., ENBRIDGE GAS SERVICES INC., AND ENBRIDGE GAS DISTRIBUTION INC. WITH ATTACHMENT 235 MS. DeMARCO: Could I also ask that the title also reflect the attachment of the agency agreement between EI and the Consumers Gas Company, and I do have an extra copy of that. 236 MS. LEA: Perhaps it might be best to give it to the reporter at this juncture, who is going to need it more than anybody else in all likelihood. 237 MR. BETTS: I'm sorry, I'm a little confused here. First of all, the exhibit, which is the Assignment and Novation Agreement, was Exhibit No. 4.1. 238 MS. LEA: We assigned it Exhibit K.4.1 in this proceeding. Apparently it was filed in last year's case; am I right? 239 MR. CASS: The 2003 case. 240 MR. BETTS: And now there's a reference to another -- 241 MS. LEA: I think it's attached, I think it's the agency agreement attached. If you're going to be referring to the agreement, is there a copy available to the court reporter? Yes, if you could pass that up, please, thank you. 242 MR. BETTS: I'll ask at this point, are any parties that feel inconvenienced by not having that available to them right now? If we can get by, how soon could we get those copies generated? 243 MR. JANIGAN: I was going to say, Mr. Chairman, we were going to be referring to Exhibit A3, tab 4, schedule 1, that's already filed in this proceeding being the schedule to the agency agreement, the services schedule, so we wouldn't be referring to that particular exhibit. I expect that probably that would be the exhibit that we'd mostly be referring to in this context. 244 MS. AITKEN: I've just gone back to the parent document that doesn't delineate the schedule Mr. Janigan is referring to, and I apologize for the inconvenience to the Board because I had figured it was in evidence in this particular proceeding, so thank you for bearing with me and accommodating us. 245 MR. BETTS: Thank you. That's fine. I think we understand now and I think we're ready to proceed. 246 One question from Ms. Sommerville. 247 MR. SOMMERVILLE: Ms. DeMarco, there are annotations in the document on page 2 of the actual agency agreement. Mr. Cass, are you familiar with these annotations? 248 MR. CASS: I am not, sir, and it would be of concern to me if an annotated copy has been handed around. 249 MS. DeMARCO: I'm sorry, Mr. Sommerville, that's my fault in not having crossed out my chicken scratch. 250 MR. SOMMERVILLE: It hadn't influenced me at all yet. 251 MS. AITKEN: Why don't we do this -- is it actually on page 7 of the agreement. 252 MR. SOMMERVILLE: It's actually on page 2 of the actual agency agreement. 253 MS. AITKEN: If we could just turn to page 7, exclusively of the agency agreement and I'll recover after this very short questioning, and then we will undertake to make sure everybody has a copy of the exhibit as soon as possible. 254 MR. BETTS: Thank you. I think we're ready now. 255 MS. AITKEN: Thank you, Mr. Brennan. Sorry about this. Thanks for your patience. 256 If you could look at paragraph 20, then, of the agency agreement in answer to your question essentially of what I was referring to with respect to confidential information. 257 MR. BRENNAN: Yes. This section, it's maybe splitting hairs here, but it's talking about not necessarily confidential information but it's keeping that information confidential within, and then there are certain exceptions. 258 MS. AITKEN: And then one of those exceptions is in paragraph 20(a)(ii) where it says: 259 "As may be necessary or appropriate to be disclosed in connection with provision of the services hereunder." Is that a fair reading? 260 MR. BRENNAN: Yes. 261 MS. AITKEN: And so according to that, it would appear that it's in EGS's discretion as to whether it is necessary or appropriate to disclose to a party with whom it is contracting as agent under this agreement any such information that may be confidential that it may have received from EGD; is that right? 262 MR. BRENNAN: To answer your question, in my view, it's incumbent on both parties here that the information that would be disclosed would be only under those circumstances, I guess, where it was necessary for the service provider to have that information in order to conduct business under the agency agreement. 263 MS. AITKEN: I'm not sure that answers my question, and to be fair it was a long question. What I want to understand is whether I'm correct in reading this, and whether it's consistent with your understanding, that to the extent EGS is in possession of confidential information by virtue of its role under this agency agreement, it is in EGS's judgment to determine when it may be necessary or appropriate to disclose such information in connection with the provision of its services under the agreement. 264 MR. CASS: Excuse me, Mr. Chair, if I may interrupt. Ms. Aitken prefaced her question by words to the effect that she was asking about her understanding of what is said in the agency agreement. I don't think Mr. Brennan can be asked to sit on the witness stand and give an interpretation or a legal view about what this document states. I hadn't objected when this line of inquiry started because I thought Ms. Aitken was just asking Mr. Brennan for his general understanding of how things work as opposed to interpreting the document. It seems apparent that, really, she's gone as far as she can with Mr. Brennan about his general understanding, and she's really at the point now of asking for a legal interpretation which I submit is a matter of argument. 265 MS. AITKEN: In response, I was quite clear in the preface to my question to say both that was it consistent with Mr. Brennan's understanding of how these proceedings worked, was that EGS did not require any other approval other than exercising its own judgment as to when it might be necessary or appropriate to share information that it may have received that is confidential under the agency agreement. And all I'm looking for, I'm not looking for Mr. Brennan's interpretation of a legal document, all I want to know is whether I'm correct in expressing that EGS makes an independent decision, under paragraph 20(a)(ii) as to whether it may be necessary or appropriate to disclose confidential information in the exercise of its obligations under the agency agreement simply as a matter of practice, not as a matter of law. Surely Mr. Brennan would be aware of whether EGS was required and did, for example, come back to EGD to seek authorization when it felt it was necessary or appropriate to share such confidential information in the performance of its obligations under the agreement. So I think it's a fair question from that perspective, is my submission. 266 MR. CASS: I have no difficulty, Mr. Chair, with the question about the practice. 267 MS. AITKEN: Okay, I'm happy to restrict it to that. Mr. Brennan. 268 MR. BRENNAN: Thank you. I can tell you that Enbridge Gas Services has not come to the utility asking for relief, I guess, to disclose confidential information simply because I don't think there's a need to. Why would they want to give a third party information, confidential information that they may have on the utility? 269 MS. AITKEN: I'm curious. It's in the agreement, but in any event ... 270 MR. BRENNAN: Well, I think this has to do with the information coming from Enbridge Gas Distribution to Enbridge Gas Services. I mean, we want to make sure that the information that Enbridge Gas Distribution gives Enbridge Gas Services is information that would not identify, say, a specific customer, so that our customers are protected under this confidentiality -- 271 MS. AITKEN: It's all very interesting. I guess it's a matter of argument that it's not, in paragraph 20(a) a one-way obligation. 272 In any event, it's clear in the agency agreement, I don't think you need to turn up a particular, you can tell me if you'd like a reference, but it's generally clear that EGS remains free, in addition to performing these services for EGD, to continue to conduct buying and selling of the commodity and other associated transactions on its own behalf; is that right? 273 MR. BRENNAN: If you go to paragraph 5. 274 MS. AITKEN: I was just trying to avoid doing that for the Board and the annotations but, yes, it's paragraph 5 on the page where I was. 275 MR. BRENNAN: It's on page 2. 276 MS. AITKEN: As a general proposition, you have no dispute that there's no issue that EGS has reserved its right under this agreement to continue to do business on its own account; correct? 277 MR. BRENNAN: Yes, for those ones that are listed in the agreement. 278 MS. AITKEN: Right. And just to be clear, that would include engaging in the businesses of gas acquisitions, gas sales, gas-supply management, and gas storage; is that fair? 279 MR. BRENNAN: Yes. 280 MS. AITKEN: Now, currently when EGS carries on that business on its own account and sells commodity -- 281 MR. BETTS: Ms. Aitken, I want to interrupt. I'm a little uncomfortable to have documents in front of us that we shouldn't be looking at. 282 MS. AITKEN: We don't need that, I don't think, anymore. 283 MR. BETTS: I would like to, in order that the record be complete, get clean copies of these provided with the exhibit number that was established. 284 MS. AITKEN: We have undertaken to and absolutely will do that at our earliest opportunity. 285 MR. BETTS: Thank you very much. 286 MS. AITKEN: So currently when EGS is doing business on its own account and selling the commodity, any margin that's recovered through that activity is for EGS's own enjoyment and account; is that fair? 287 MR. BRENNAN: That would be my understanding, yes. 288 MS. AITKEN: And if and when the proposal is accepted by the Board and EGS buys commodity in EGD's name and then bundles it with a TS asset, in connection with that commodity, EGS does not retain the margin and only is able to share in the upside pursuant to the sharing agreement of the deferral account; is that right? 289 MR. BRENNAN: That's correct. 290 MS. AITKEN: So to the extent that EGS is trading in commodity, it does better when it is doing so entirely on its own behalf; is that right? 291 MR. BRENNAN: I'll have to ask Mr. Jarvis to answer that question. 292 MS. AITKEN: Okay. Please. 293 MR. JARVIS: Well, EGS derives no benefit from conducting the commodity activity around the transactional services business. So to the extent that there's any benefit derived from transacting in our own name, you are correct. 294 MS. AITKEN: Okay, and fairly put. 295 MR. BETTS: Mr. Jarvis, when you're speaking, you're going to have to speak more at the mic, unfortunately, than Ms. Aitken in order to get your voice -- 296 MR. JARVIS: Okay. I apologize. 297 MS. AITKEN: Mr. Brennan, perhaps back to you then. In the case of EGD, the benefit is derived from the sale of the commodity only when it is bundled with the TS asset; is that right? 298 MR. BRENNAN: That's the only service that we would be offering under a bundled service, yes. 299 MS. AITKEN: So I think your evidence was earlier that you would only buy, under this proposal, additional commodity in EGD's name after you'd identified TS assets that required this bundling service to make them attractive in the market; is that right? 300 MR. BRENNAN: After we assured ourselves that those assets were not required to meet our customers' needs. 301 MS. AITKEN: And you would only bundle with that TS asset commodity purchased in EGD's name; is that right? 302 MR. BRENNAN: Yes, we would only purchase a commodity bundled with one of those other services. 303 MS. AITKEN: And you would only bundle with the TS asset purchased in EGD's name, or would you continue to bundle with the TS asset commodity purchased in EGS's name on occasion? 304 MR. BRENNAN: You may want to try that one more time. You lost me there. 305 MS. AITKEN: Okay. Are you saying that if this proposal to allow EGS to purchase commodity in EGD's name were accepted, that EGS might still bundle EGS-purchased commodity in its own name with TS assets? 306 MR. BRENNAN: No, that wouldn't be our proposal. 307 MS. AITKEN: And have you done any predicting as to the amount of commodity that EGS would be buying in the name of EGD versus the amount of commodity that EGS would be buying and selling in its own name? 308 MR. BRENNAN: I'm not sure the volume would necessarily change whether EGS was buying the gas or EGDI was buying the gas, if that's what your question is. 309 MS. AITKEN: I'm just trying to get a feel for EGS's purchasing activity. How much of it would be devoted to doing so in EGD's name when it came to the commodity versus its own name? 310 MR. BRENNAN: I can only tell you what it purchases on behalf of Enbridge Gas Distribution. What it buys on its own behalf, I couldn't tell you. 311 MS. AITKEN: Fair enough. Perhaps we could just ask your colleague up there to give us a feel, or if you don't share that information, that would be helpful to know. 312 MR. JARVIS: I don't believe at this time I have an accurate enough answer to be putting it on the record. 313 MS. AITKEN: Any kind of a rough estimate would be fine. 314 MR. JARVIS: The struggle that I have is on -- there will be certain points in time during the year when the commodity activity that's conducted around the transactional services would substantially be above the activity that's conducted in the balance of our gas-services business. And at other times during the year, I would suggest the activity around the non-agency, non-transactional services activity would be larger. 315 MS. AITKEN: So does it basically kind of balance off somewhere in the range of 50/50, 60/40? 316 MR. JARVIS: Again, I really couldn't say for sure. 317 MS. AITKEN: Could you say that either was the majority or either was not the majority? 318 MR. JARVIS: I really can't make an answer for that. The struggle that I have is different gas price -- again, volume-wise, dollar-wise, I don't have an accurate enough answer for you. 319 MS. AITKEN: If it helps, I was referring to volume. 320 MR. JARVIS: Based solely on volume, I would suggest in the 60 percent range for Gas Services non-agency activity and 40 percent for agency. 321 MS. AITKEN: I appreciate your efforts to help me out there. 322 So today, what credit costs are EGS incurring? 323 MR. WHELEN: Perhaps I could answer that. Out-of-pocket credit costs that EGS has to pay are some -- a letter of credit that it has to provide to NGX, which is an over-the-counter natural gas exchange, and I believe the amounts have been filed in evidence already. Enbridge Gas Services, in order to conduct this business, requires full guarantees from Enbridge Inc., the parent company. And while Enbridge Inc. doesn't incur any out-of-pocket costs for that, it must set aside some capital to manage the credit exposure associated with dealing with counterparties for this business. 324 MS. AITKEN: So going forward, if EGS was entitled to acquire this commodity in EGD's name, EGS wouldn't incur any credit costs at all because they would be deducted from the gross margin, according to the proposal; is that right? 325 MR. WHELEN: That's correct. 326 MS. AITKEN: And indeed, Mr. Brennan, when I heard you speak of your first alternative proposal this morning which would not allow EGS to purchase in EGD's name but would allow recovery of credit costs, the outcome would be the same; namely, EGS would not incur any credit costs at the end of the day in connection with commodity purchased for these bundled transactions; is that right? 327 MR. BRENNAN: You're referring to our initial proposal -- our proposal whereby the commodity is conducted in the name of Enbridge Gas Distribution? 328 MS. AITKEN: Sorry, I must not have been clear. I had understood you this morning to say that your first proposal is that EGS be allowed to buy in EGD's name and all costs be recovered from the gross margin; right? That's the proposal? 329 MR. BRENNAN: That's correct. 330 MS. AITKEN: I thought I understood, and perhaps I misunderstood, and I apologize if I did, that you had an alternative proposal that if EGS was not allowed to buy the commodity in EGD's name, you still wanted EGS to be able to recover the credit costs. 331 MR. BRENNAN: Yes. That proposal considered EGS continuing to buy the gas in their own name and, if you like, those credit costs would come back to EGD and be taken off the gross margin prior to any sharing. 332 MS. AITKEN: Right. So in that second scenario, it is equally the case that EGS would not incur any credit costs in connection with the purchase of commodity for these bundled transactions; right? 333 MR. BRENNAN: I'm not sure you could say that, when you say EGS would not incur any credit costs? 334 MS. AITKEN: Well, at the end of the day you're proposing that they would be recovered from the gross margin, are you not? 335 MR. BRENNAN: Right, but... 336 There's two things there. When I say shared 75/25, then you could argue whether or not the shareholder is picking up 25 percent of those credit costs, and under that scenario the only costs that EGS would be exposed to would be any bad debt exposure, because if they are going to be charging us back for those credit costs, they would be taking on the risk of any bad debt. 337 MS. AITKEN: So that's the difference between alternative one and alternative two; is that right? 338 MR. BRENNAN: Yes. 339 MS. AITKEN: And in not incurring any credit costs in association with this acquisition of the commodity, either in EGD's name or in terms of recovering them as you've just described, that would be a different position than a direct marketer would be in in terms of credit costs. They can't recover them from anyone else, presumably; is that fair? 340 MR. BRENNAN: I don't know I'm not a marketer, so I can't tell you. 341 MS. AITKEN: But your understanding of this marketplace, Mr. Brennan, would certainly allow you make a conclusion in that regard? 342 MR. BRENNAN: If that's what you say. 343 MS. AITKEN: So you honestly don't know -- 344 MR. BRENNAN: No. 345 MS. AITKEN: -- whether there is a mechanism for direct marketers to recover from ratepayers the cost of credit? 346 MR. BRENNAN: From ratepayers. Yeah. No, that's right. 347 MS. AITKEN: They can't; right? 348 MR. BRENNAN: They can't. 349 MS. AITKEN: Now, when you sell this bundled -- and I'm not sure if this might be better to Mr. Jarvis, but when you make these bundled sales, are you able to break down the amount that is recovered for the commodity and the amount that is recovered for the TS asset? 350 MR. JARVIS: We have not taken a position of determining the breakdown between commodity and the underlying TS service because our position has been that all revenue resulting from that transaction is going to EGDI. 351 MS. AITKEN: So when you're actually out there offering this bundled product for sale, is it not broken down, the difference between what you're charging for the commodity and what you're charging for the TS asset, or is it simply just offered as a bundled price? 352 MR. JARVIS: It's generally offered as a bundled price. I can't think of a circumstance where there's a so-called commodity fee or commodity charge that would flow to the bottom line of what the margin -- resulting margin is. 353 MS. AITKEN: So it wouldn't be transparent, then, to the purchaser. 354 MR. JARVIS: Correct. 355 MS. AITKEN: And I just have a couple last areas I wanted to touch on. If I could ask you, probably Mr. Brennan but I'm not sure, to turn up your Exhibit A2, tab 5, schedule 1, and if you could turn to paragraph 18. And this is the paragraph that provides for what's happened already in fiscal 2003 in connection with the company allowing EGS to bundle TS assets with commodity. And it indicates there that it was entitled -- EGS was entitled to do that provided that, A, there was no opportunity to sell a transactional services alone for similar value, and, B, 100 percent of the gross margin would accrue to the company's TS account. 356 My question is with respect to A -- 357 MR. BRENNAN: Excuse me, Ms. Aitken. Are you looking at the updated evidence? I believe this evidence was updated, and my paragraph 18, I think, may be different than your paragraph 18. 358 MS. AITKEN: Oh, dear. I don't think it changes anything, it's just paragraph 19. 359 MR. BRENNAN: Paragraph 19. 360 MS. AITKEN: Thank you for bringing that to our attention. 361 MR. BRENNAN: Okay. 362 MS. AITKEN: My question is with respect to A. What do you mean by selling a transactional services alone for similar value? Similar to what? 363 MR. BRENNAN: Similar to what we could get if we were selling with the commodity. 364 MS. AITKEN: So you do this ex-ante calculation of what we could sell it for now that it's available and clearly not needed for somebody else if we sold it alone, and what could we get if we bundled it with commodity? 365 MR. BRENNAN: Correct. 366 MS. AITKEN: And then if I could then ask you to turn up CEED Interrogatory No. 2. And in your response there, and correct me if I'm wrong, but I think you're just expressing the same thought another way, that you will -- that EGD will only enter commodity transactions when it can do so in conjunction with another transactional service thereby increasing the value of the transaction. Is that the same idea? 367 MR. BRENNAN: Yes, it is. 368 MS. AITKEN: And so EGD, through EGS, under your proposal, is increasing the value of the overall transaction by selling the commodity together with the TS asset into the competitive market; is that right? 369 MR. BRENNAN: Yes, that's correct. And if you look at the revenues that have been generated over the past 2003, just going from memory, I guess, because we're able to enter into these commodity transactions, ratepayers have seen in the order of $13 million for 2003, and our projections are that they will see that amount again in 2004, if not greater. 370 MS. AITKEN: Is it your view, then, that bundling the TS asset together with the commodity enhances the value of the TS asset? 371 MR. BRENNAN: I don't know that it necessarily enhances the value of the TS asset. I think it increases the value of the product, I guess, or the total bundled service. 372 MS. AITKEN: So would your answer be the same with respect to the bundling enhancing the value of the commodity? 373 MR. BRENNAN: No, I don't think it does. I think you need the two together to capture the full value. 374 MS. AITKEN: Okay. So just briefly back to the agency agreement. It's the service that EGS provides under that agency agreement that provides it in the position to gauge whether there are excess TS assets to sell out in the marketplace; is that right? 375 MR. BRENNAN: It's EGS's responsibility to identify whether or not there are assets that are in excess of our needs, correct. 376 MS. AITKEN: Okay. And if EGS determines that there aren't any, there just simply aren't any offered for sale; is that right? 377 MR. BRENNAN: That's correct. 378 MS. AITKEN: And no one else has the ability to sell these TS assets; is that right? 379 MR. BRENNAN: No. 380 MS. AITKEN: And really it's a judgment call on EGS's part to figure out how to, I think these were your words earlier, to get the most value for those assets; is that fair? 381 MR. BRENNAN: It's EGS's responsibility. But again, keeping in mind, as stated in the services schedule, under certain restrictions, we have to make sure we go through a process where we are comfortable that giving up these assets is not at the detriment to our customers. 382 MS. AITKEN: Naturally. Naturally. I'm starting from the point where you've determined in good faith that there are excess assets. Then what you try to do is secure the best value that you can for them; right? 383 MR. BRENNAN: For the benefit of both ratepayers and shareholder. 384 MS. AITKEN: And so if you saw an opportunity in the short-term future to sell a TS asset for more than you could sell it today, you might make the determination, EGS might make the determination not to sell that TS asset until that future time; is that fair? 385 MR. JARVIS: I believe the answer to that would be yes. And the issue surrounds the fact that at times there is asset available for potential offer of services but the value that the marketplace would ascribe to that would make it not worth the while of the transaction being entered into because the value is so diminimus. 386 MS. AITKEN: But it wouldn't only be in diminimus situations that EGS might exercise its good judgment to say we can get more for this TS asset in three days' time rather than selling it today, surely. 387 MR. JARVIS: Well, the nature of the TS assets, is that -- and the way the marketplace has evolved more recently in the last number of years, is the substantial amount of value of transactions being conducted are very short term in nature. Three days from now, this asset may not be available; three days from now certainly the pricing will have changed. However, one of the fundamental tenents of the risk-management policy under which we operate is that we're not allowed to speculate on that type of position, nor take positions. 388 MS. AITKEN: Fair enough. And I may have used the wrong metric in the sense of using three days as perhaps three minutes or three hours would have been more appropriate. But the principle remains the same, does it not? Namely, that EGS has the discretion and is being paid under the agency agreement to exercise its good judgment as to when sale of the TS asset will generate the most prudently achievable value. 389 MR. JARVIS: Correct. 390 MS. AITKEN: And so I think it's been clear from the evidence that EGS also -- rather, in addition to purchasing and selling commodity in this bundled fashion, also does so to a significant extent, maybe 60 percent or thereabouts in volume, on its own account in an annual basis; is that right? 391 MR. JARVIS: Correct. 392 MS. AITKEN: So EGS does a few things, among others. One thing that it does is it sells TS assets as the only one allowed to sell those TS assets; is that right? 393 MR. BRENNAN: Yes, that's correct. 394 MS. AITKEN: And another thing it does is, on its own account out there in the marketplace, it buys and sells commodity, again fully on its own account; is that right? 395 MR. JARVIS: Correct. 396 MS. AITKEN: And now, according to the evidence, EGS does something else. In selling those TS assets, which is the only one who is allowed to sell them, it may bundle those TS assets with a commodity and assign a price to that bundle; is that right? 397 MR. JARVIS: Yes, that's correct. 398 MS. AITKEN: And that price that's assigned to that bundle isn't prescribed by anyone, it's just simply set by EGS; is that right? 399 MR. JARVIS: No, the marketplace would determine the pricing and value. 400 MS. AITKEN: Okay. But there's no -- other than being in a competitive environment with this bundled asset which nobody else has to sell, other than that, there is no one else prescribing the price that must be charged; correct? 401 MR. JARVIS: That's correct. 402 MS. AITKEN: And because both of those elements, as you said, are not broken down as to what is charged to each one, there's no way of knowing what's being charged for the commodity versus the TS asset. There's simply one price? 403 MR. JARVIS: That's correct. 404 MS. AITKEN: Thank you very much. 405 MR. BETTS: Thank you, Ms. Aitken. 406 Mr. Janigan, you can proceed at this point. I think if you could just watch the clock and find an appropriate break, I'd like to break at about 11:15. 407 MR. JANIGAN: If you'd like to break now, Mr. Chair, that's convenient as well. Or do you want to proceed? 408 MR. BETTS: If it doesn't disturb your cross-examination, I'd like to extend it a little bit so that we don't leave our afternoon session too long. 409 MR. JANIGAN: No problem. 410 CROSS-EXAMINATION BY MR. JANIGAN: 411 MR. JANIGAN: Panel, first to clarify, we're dealing with two issues here, issue 4.1 and issue 4.2, and as I understand it, issue 4.1 deals with the sharing of transactional services revenues between the ratepayer and the shareholder, and issue 4.2 deals with the inclusion of commodity transactions that are bundled with EGD assets and a number of other issues that arise from that, who should undertake such bundled transactions, the conditions that should apply, including credit costs; am I correct on that? 412 MR. BRENNAN: I don't have the settlement agreement in front of me, but I'll accept that subject to... 413 MR. JANIGAN: Let me deal first with issue 4.1 and that's the company's revenue sharing proposal, and I believe it's dealt with in your updated evidence in paragraph 29. That's A2, tab 5, schedule 1, page 7. 414 MR. BRENNAN: Yes, I have that. 415 MR. JANIGAN: It's indicated there that the company is not proposing any changes to the current sharing mechanism. Now, I'm confused a little bit by your statements in chief this morning, examination-in-chief in morning, wherein you outlined that under certain circumstances, the company would be proposing an alternate sharing mechanism. Could you elaborate on that. 416 MR. BRENNAN: Yes. I mean, the evidence was written with the perspective that our proposal was accepted, where the utility is allowed to conduct the commodity in its own name. And I believe if you were to look at CME Interrogatory No. 27, at Exhibit I, tab 6, schedule 27, in the response to CME, in the second paragraph there it says: 417 "Enbridge Gas Distribution sees no need to change the amount guaranteed to ratepayers, unless the proposal is not accepted, in which case Enbridge Gas Distribution would be looking to reduce the guaranteed amount." 418 MR. JANIGAN: Now, as I understood your evidence in chief, that reduction would go from 8 million to 4.5 million for the ratepayers. 419 MR. BRENNAN: That's correct. 420 MR. JANIGAN: And the next 1.3 million would go to the shareholder. 421 MR. BRENNAN: That's correct. 422 MR. JANIGAN: Now, what's the basis for that reduction? Is it that there will be no commodity transactions taking place? 423 MR. BRENNAN: Yes, that's correct. There would be no commodity transactions and so this new sharing mechanism would reflect that aspect. 424 MR. JANIGAN: Okay. And in that scenario, I believe you have projected an estimate of 16 million for the gross margin of transactional services in the event that your proposal was accepted. In that -- 425 MR. BRENNAN: I'm sorry, could you provide a reference, because I'm not aware of the $16 million. 426 MR. JANIGAN: Okay. Well, let me just try to deal with what the difference would be in terms of the gross margin that you would project under the scenario that you're asking to be approved and the scenario wherein you would not do any commodity. 427 MR. BETTS: Can I interrupt just for one moment. The Panel is having some difficulty identifying where that proposed change exists. Can you help us there? 428 MR. JANIGAN: The CME Interrogatory No. 27 lays the basis for it, but I don't believe there was any -- this is the first time, I believe, we've heard the numerical elaboration of that. 429 MR. BRENNAN: That's correct. 430 MR. JANIGAN: Okay. 431 MR. BETTS: Thank you. 432 MR. JANIGAN: So the elaboration about the actual amounts are seen the first time this morning. 433 MR. BETTS: Thank you. 434 MR. JANIGAN: Just returning to my question, can you indicate what kind of difference that change of not doing commodity transactions will take place in relation to the gross margin? 435 MR. BRENNAN: Right. If the proposal is approved by the Board whereby the utility is able to conduct commodity transactions in its own name, we would expect that the gross margin could be in the range of around $15 million. 436 MR. JANIGAN: Okay. 437 MR. BRENNAN: If the Board does not approve the commodity transactions in the utility's name and we are no longer doing those transactions, our expectation would be that the gross margin would be in the range of $8 million. 438 MR. JANIGAN: Okay. Now, I wonder if you could turn up Board Staff Interrogatory No. 11, and that's Exhibit I, tab 1, schedule 11. When did EGS start conducting bundled transactional services commodity transactions in its own name? 439 MR. BRENNAN: It was in November of 2002, at the beginning of our fiscal 2003. 440 MR. JANIGAN: Okay. So for fiscal 2003 and for this 2004, EGS has conducted those transactions and conducted the asset portion as agent for EGDI? 441 MR. BRENNAN: Gas Services has bought the commodity in its own name and matched it up with the transactional services, that's correct. 442 MR. JANIGAN: Now, the second part of your answer to this question indicates that there is a substantial revenue opportunity arising as a result of the bundling of commodity with the other transactional services. 443 MR. BRENNAN: Yes, that's correct. 444 MR. JANIGAN: And to the extent that we can extrapolate from the information that you previously gave us, it's probably in the neighbourhood of about $7 million additional gross margin that that generates. 445 MR. BRENNAN: That's correct. 446 MR. JANIGAN: Okay. I wonder if it's possible as well to get a comparison of the transactional services revenue for 2002, which I take it in fiscal year 2002 you didn't bundle commodity, and then 2003 and then year-to-date 2004. 447 MR. BRENNAN: And what would you be looking for precisely? 448 MR. JANIGAN: Actually, it might be a convenient time to turn up this document that -- and maybe have that marked as an exhibit. It's termed VECC Template for Transactional Services Calculation. If we can give it an exhibit number, there's a number of undertakings that we think may flow out of that particular exhibit. 449 MR. BETTS: Could we have that? 450 MR. JANIGAN: Does the Panel have a copy? 451 MR. BRENNAN: I have a copy. It doesn't have an exhibit number yet. 452 MR. JANIGAN: Does the Board have a copy? 453 MR. BETTS: I think the answer is no to that. I'm going to assume the answer is no. 454 MR. CASS: We have some extras, Mr. Chair. 455 MS. LEA: So, Mr. Janigan, this hasn't been filed before then? 456 MR. JANIGAN: That's correct. 457 MS. LEA: All right. It needs to be an exhibit in this proceeding, then. Exhibit K.4.2, and it's the VECC Template for Transactional Services Calculations. Just one moment, please. 458 EXHIBIT NO. K.4.2: VECC TEMPLATE FOR TRANSACTIONAL SERVICES CALCULATIONS 459 MR. BETTS: Yes, please proceed. 460 MR. JANIGAN: What we're looking to have completed is the figures for years 2002 and 2004 year-to-date, and as we proceed along, we're obviously looking for a forecast as well in the scenario that you wish to be approved. 461 MR. BRENNAN: So for 2005 forecast, the assumption -- underlying assumption there is that the Board approves our proposal? 462 MR. JANIGAN: That's correct. Is it possible for you to undertake that? 463 MR. BRENNAN: Yes, we can do that. 464 MR. JANIGAN: Okay. 465 MS. LEA: Thank you. That will be Undertaking J.4.1, and it is to complete the requested calculations on the VECC template, would that be an accurate characterization? 466 MR. JANIGAN: That's correct. 467 UNDERTAKING NO. J.4.1: TO COMPLETE THE REQUESTED CALCULATIONS ON THE VECC TEMPLATE FOR TRANSACTIONAL SERVICES CALCULATIONS 468 MS. LEA: Thank you. 469 MR. BETTS: Thank you. 470 MR. JANIGAN: Now, I would like to deal with the issue of credit costs that you outline at paragraph 25 of your updated evidence. And there were two options to deal with, credit costs. One was for EGS to continue to do commodity transactions in its own name but to increase the agency fee to reflect credit costs incurred by EI on behalf of EGS. Is that the same as what I heard you deal with earlier in terms of passing on the credit costs of EI to -- as a deduction to the gross margin? 471 MR. BRENNAN: No, they are different, I have to admit. 472 MR. JANIGAN: Okay. 473 MR. BRENNAN: I think if you look at the -- if we were to increase the agency agreement, then one could suggest that 100 percent of that cost would go to ratepayers, and what we're suggesting is that those costs should be shared 75/25 in the same proportion as the revenues are shared 75/25 between ratepayers and shareholders. 474 MR. JANIGAN: And that would be -- that would mean -- that would not be an increase in the agency fee, it would simply be a passing on of the credit costs of the 75/25 mechanism; is that correct? 475 MR. BRENNAN: Yes. I would see it that those costs would be treated similar to the way any direct costs that we have -- maybe I'll just try and explain. You have gross revenues and from gross revenues you take off direct costs and add any avoided costs. Direct costs could be things like if there's additional fuel that's incurred, you would have to add those costs in, or if you saved some fuel, then there would be avoided costs. And so then once you're left with that you're left with what's called gross margin. So I would see these credit costs being included as part of direct costs which would be taken right off the top as a cost of doing the business as well. 476 MR. JANIGAN: And these credit costs, do they show up in the balance sheet of EI currently? 477 MR. WHELEN: Perhaps I can try and answer that. There are direct costs that are incurred, and the one that's referenced in the previously-filed evidence is the letter of credit charge that we have to pay to a third party financial institution in order for Enbridge Gas Services to transaction on the NGX gas exchange. There also is a need to make sure there is sufficient capital on the balance sheet to absorb any unexpected losses related -- or bad debts, if you will, related to a program like this. 478 MR. JANIGAN: And how is that accounted for in the balance sheet? 479 MR. WHELEN: It's not accounted for directly other than the fact that we must maintain sufficient equity on our balance sheet to manage the risks of the business, and one of the risks we take on in undertaking the commodity transactions on behalf of Enbridge Gas Distribution are the credit-related risks associated with dealing with those counterparties. 480 MR. JANIGAN: And approximately how much capital do you have to maintain in order to deal with all of the risks associated with EGDI? 481 MR. WHELEN: With the transactional services program? 482 MR. JANIGAN: No, with the entire operation of EGDI in general terms. 483 MR. WHELEN: Well, EGDI, of course, maintains its capital on its own balance sheet. To manage those risks, we would have to maintain capital on our balance sheet for risks or undertaking for Enbridge Inc. or for Enbridge Gas Services, in this particular circumstance, on behalf of Enbridge Gas Distribution under this arrangement. 484 MR. JANIGAN: Okay. And what is the amount of the capital that you have to set aside? 485 MR. WHELEN: Well, I should preface this in that we're doing a lot of work internally at Enbridge Inc. to determine capital required to support all of the businesses that Enbridge Inc. owns. The work we've done with respect to transactional services on a preliminary basis indicates a relatively small amount, probably about $10 million of equity capital is needed to support a program of the size contemplated here. 486 MR. JANIGAN: And then how does that compare in relation to the total amount that you need to support all of the activities which EI is -- supports? 487 MR. WHELEN: Are you asking how much equity EI has on its balance sheet or ... 488 MR. JANIGAN: How much of that 10 million represents the amount that you have to set aside to support services that -- 489 MR. WHELEN: Well, again, to put it in the context of Enbridge Gas Distribution and its risk, it has currently about $2 billion of equity on its balance sheet, so $10 million represents a very small incremental proportion. 490 MR. JANIGAN: Okay. And presumably when you started to bundle commodity with transactional services in November 2002, you had knowledge of the fact that you would have to set aside this kind of capital in order to support this level of service. 491 MR. WHELEN: We did. That is correct. But, again, the amount relative to the overall size of the both the gas distribution utility and certainly of Enbridge Inc. is relatively small. So if you're asking did we go out and raise specifically $10 million worth of equity, we certainly wouldn't do that for that case. If these businesses were to grow in size and scope, that's something that we would focus on in more detail. 492 MR. JANIGAN: But currently -- but in November of 2002 and currently, what we're looking at is approximately $10 million? 493 MR. WHELEN: I emphasize that's a preliminary estimate in terms of the economic capital we feel we would need to support a program of this size. 494 MR. JANIGAN: What's the cost of that capital? 495 MR. WHELEN: Well, I guess that's a very good theoretical question. I'm sure the academics would debate that. But for a typical marketing and transacting business, my understanding is that they look for rates of return in the range of 15 to 20 percent. It's not unlike what a financial institution would try to earn on their marketing and transaction-related businesses. 496 MR. JANIGAN: So it could be up to $2 million? 497 MR. WHELEN: That would be our estimate for the internal use of our capital for this type of program, that's correct. 498 MR. JANIGAN: Okay. Would that estimate be the same for both EI and for EGDI? 499 MR. WHELEN: Yes, it would. It's the same exposure. 500 MR. JANIGAN: I guess my question is: This issue was not unknown to EGDI prior to entering into ADR agreements for both the 2003 and 2004 rate years. Why is it an issue now? 501 MR. WHELEN: I perhaps can start, and my colleagues might want to add in. I know this was a program they wanted to determine whether or not there was value that could be added by adding the commodity portion and bundling it with the fee-based transactional services. From Enbridge Inc.'s perspective, clearly we, on an ongoing basis, assess the risks of the businesses that we own and the assets that are on our balance sheet, and increasingly we've been focused on ensuring that these risks earn out an appropriate return and on an appropriate capital base. Part of that exercise would be to go around to all the businesses, including transactional services, and determine whether that was the case or not. So partly through evolution and evolving policy and closer scrutiny of business, a lot of which has been prompted by collapse of the energy merchant sector and so on which was described, I think, in some of the prefiled testimony, we have given very close consideration to all of these things and are being more precise about how we allocate capital and risk around the company. 502 MR. JANIGAN: Well, is it fair to say that there was a recent review to see whether or not more money could be generated from different services? 503 MR. WHELEN: I'll answer that initially from a treasury perspective. That wasn't the focus at all. I think it was more a risk adjusted rate-of-return analysis, and was it logical for the Gas Services business to continue to take the exposure to the commodity when the preponderance of the return was going to the utility and its customers through the sharing mechanism. 504 MR. JANIGAN: The bottom line here is there's more money from ratepayers though; would you not agree? 505 MR. BRENNAN: More money from ratepayers? 506 MR. JANIGAN: Yes. 507 MR. BRENNAN: Well, I think it's a question of, prior to our proposal here, those costs were being absorbed by EGS or, you can argue, EI, I guess, and now we're saying that those costs should be -- should be recovered by those parties that are receiving the benefits of those services. 508 MR. JANIGAN: Mr. Chairman, I think this would be a good time to take our morning break. 509 MR. BETTS: Thank you. That timing was very good, Mr. Janigan. 510 Let's break now and we will return at 11:30. Thank you. 511 --- Recess taken at 11:10 a.m. 512 --- On resuming at 11:32 a.m. 513 MR. BETTS: Thank you, everybody. Please be seated. 514 During our break, were there any preliminary matters that arose? 515 MS. DeMARCO: Mr. Chair, I do have clean copies of the agreement in questions that Ms. Aitken referred to. I think I have enough for the crowd, but I definitely have enough to be passed up. 516 MR. BETTS: Thank you, Ms. DeMarco. 517 MS. DeMARCO: I'm sorry, Mr. Chair. It appears as though the Board's copy is missing page 12, but Mr. Ladanyi, as I understand it, is making copies that include page 12 of the agreement. 518 MR. BETTS: Thank you. We'll wait until it's all packaged. But thanks for your effort. 519 MS. DeMARCO: Can't win for losing on this one. 520 MR. BETTS: Is there anything else that arose during the break period? 521 Mr. Janigan, please continue with your cross. 522 MR. JANIGAN: Thank you, Mr. Chair. 523 Panel, I just want to return to one issue that arose before the break and that was the cost of the equity capital, the $10 million of equity capital that was attributed to this program and would be either paid by EI or EGDI depending upon whichever version of your proposal was approved by the Board. I was wondering where the figure of 15 to 20 percent had originated? 524 MR. WHELEN: I was the one who gave the answer, and the figure originated in my head based on my experience of what third-party financial institutions would expect to raise as a rate of return, or credit providers generally, assurance providers, would expect to receive in terms of pricing the products that they provide. 525 MR. JANIGAN: What was EI's rate of return last year? 526 MR. WHELEN: I don't have that off the top of my head. I could find it for you. 527 MR. JANIGAN: Was it more or less than that? 528 MR. WHELEN: It was less than that. It was less than that, which represents a blended average of a number of different aspects of its business. 529 MR. JANIGAN: And EGDI's return was quite a bit less than that as well. 530 MR. WHELEN: That's correct, yes. But it is -- its primary business, of course, is a different business than this business. 531 MR. JANIGAN: Well, in this circumstance, if we're looking at transactional services that basically are conducted with rate-base assets that have been paid for by ratepayers, wouldn't it be appropriate to apply a rate of return that's applicable to the rate base in general for EGDI? 532 MR. WHELEN: My view is that the rate of return that should be applied should be appropriate for the risks of the business undertaken. The lower the risk, obviously, the lower the rate of return. 533 MR. JANIGAN: Well, in this circumstance, they could go out and borrow $10 million at considerably less than 15 to 20 percent if they wanted to set aside $10 million, surely. 534 MR. WHELEN: In order to go out and borrow $10 million, however, a party would have to have sufficient equity on their books to capitalise that equity with additional debt, so you can't forget that part. 535 MR. JANIGAN: So we go round and round. Let me move on. I wonder, just returning to Exhibit K.4.2 again, I wonder if it would be possible for the company to update or to complete this schedule with a scenario that provides that commodity would be excluded from transactional services calculations. In other words, what I want are the numbers associated with your forecast that would effectively mean an elimination of $7 million. 536 MR. BRENNAN: Yes, we can undertake to do that. 537 MR. JANIGAN: Thank you. 538 MS. LEA: That would be Undertaking J.4.2, please. 539 MR. BETTS: There was a previous undertaking at 4.1. Shall we have a separate one, or can it be incorporated with that? 540 MR. BRENNAN: The -- okay, sorry. 541 MR. JANIGAN: I'm in your hands, Mr. Chair. If it's simpler to do it in one undertaking, that's fine. If it's two undertakings... We have one exhibit. 542 MR. BETTS: I'm satisfied with the two separate ones. If you could restate it for me, Ms. Lea. 543 MS. LEA: Yes. Could you restate the undertaking, please. 544 MR. JANIGAN: It would be to complete Exhibit K.4.2 for a forecast that is made with the assumption that commodity-based transactional services are excluded. 545 MS. LEA: Excluding commodity. 546 MR. JANIGAN: Yes. 547 MS. LEA: Thank you. 548 UNDERTAKING NO. J.4.2: TO COMPLETE EXHIBIT K.4.2 FOR A FORECAST THAT IS MADE WITH THE ASSUMPTION THAT COMMODITY-BASED TRANSACTIONAL SERVICES ARE EXCLUDED 549 MR. BETTS: Thank you. 550 MR. JANIGAN: I wonder if you could turn up the schedule to the agency agreement, which is marked as Exhibit A3, tab 4, schedule 1. 551 MR. BRENNAN: I have that. 552 MR. JANIGAN: Okay. And I take it that this schedule is part of Exhibit K.4.1, or does it differ in any way? 553 MR. BRENNAN: K.4.1 being the agency agreement? 554 MR. JANIGAN: Yes. 555 MR. BRENNAN: Yes, it is. 556 MR. JANIGAN: Okay. 557 At the top of that particular exhibit, it has an effective date of December the 16th, 2003. Would there be any differences arising from that term effective day December 16th, 2003, with the agency agreement, which as I understand it is dated 2001? 558 MR. BRENNAN: Yes. The one dated December 16th has been updated from the one that was originally attached to the agency agreement. 559 MR. JANIGAN: Okay. In terms of looking at the services schedule, this particular exhibit would be the appropriate one to look at? 560 MR. BRENNAN: Yes, I believe it would be. 561 MR. JANIGAN: Thanks. Now, I wonder if we can go to section 6, and that is transactional services. Is there any mention in this section of EGS performing commodity transactional services in EGI's name? 562 MR. BRENNAN: In EGI's name? 563 MR. JANIGAN: In EGDI's name. 564 MR. BRENNAN: No, there wouldn't be. 565 MR. JANIGAN: And if we can look at section 6.15, my understanding that this provision requires EGDI to authorize EGS to execute contracts for transactional services as prescribed by one or more resolutions of the service recipient's board of directors; am I correct on that? 566 MR. BRENNAN: Yes. 567 MR. JANIGAN: Now, has the board of EGDI authorized EGS to conduct commodity trading or bundled asset commodity transactions in EGDI's name? 568 MR. BRENNAN: No, it has not. I think this paragraph here, 6.15, refers to, as I mentioned earlier, gives Enbridge Gas Services the authority to enter into contracts for terms less than one year and for amounts less than, I believe it is, $50 million as provided by this resolution. 569 MR. JANIGAN: Okay. How would they be authorized, then? 570 MR. BRENNAN: I'm sorry? 571 MR. JANIGAN: How would they be authorized? 572 MR. BRENNAN: How would what be authorized? I'm not sure I understand what you're asking. 573 MR. JANIGAN: In order to -- in order to transact in EGDI's name, how would EGS be authorized? 574 MR. BRENNAN: Well, currently EGS is not purchasing gas for transactional services on behalf of EGDI. Our proposal is that would be -- we're proposing to change that where, in fact, they would be allowed to conduct commodity transactions in the name of EGDI. 575 MR. JANIGAN: Okay. And would that be authorized by the board of directors of EGDI? 576 MR. BRENNAN: I'm not sure of the process. It may or may not be. I can't say at the moment. It would really depend on whether or not, I guess, there was -- it was sufficient increased risk, I guess, that the board of directors would need to know about. 577 MR. JANIGAN: Well, if there was increased risk, wouldn't you expect that this is something that the board of directors would be interested in? 578 MR. BRENNAN: I think it would depend on the level. 579 MR. JANIGAN: At this level of risk, it may not be something that you would take to the board of directors? 580 MR. BRENNAN: I can't say one way or the other. 581 MR. JANIGAN: Okay. Finally, I just want to go to Board Staff Interrogatory No. 11, and that's Exhibit I, tab 1, schedule 11. It indicates there: 582 "From Enbridge Gas Distribution's perspective, conducting transactional services commodity transactions is neither a new service nor a scope expansion of existing transactional services business." 583 And you would agree with that? 584 MR. BRENNAN: Yes. My intention of using these words are that currently we're not trying to expand an existing service, and nor is it a service that we offer today. 585 MR. JANIGAN: And would that same understanding prevailed at the time that you entered into the agency agreement with EI? 586 MR. BRENNAN: I think that's fair to say, yes. 587 MR. JANIGAN: Thank you, Mr. Chairman. Those are all my questions. 588 MR. BETTS: Thank you, Mr. Janigan. 589 Who will be next? If there's no order selected, maybe I'll just -- perhaps it was going to be Mr. Thompson. Mr. Shepherd, are you ready to proceed? 590 MR. SHEPHERD: Yes, I guess. 591 MR. BETTS: Is there some other volunteer that's ready to proceed? 592 MR. SHEPHERD: That's okay. I'm fine. 593 MR. BETTS: Okay. 594 MR. CASS: Mr. Chair, if I might interrupt before Mr. Shepherd starts, I wonder if it would be possible just for the cross-examiners to just identify when they start which intervenor they represent for the two witnesses who are new to this process. Thank you, sir. 595 MR. BETTS: Mr. Janigan, would you like to do that somewhat belated? 596 MR. JANIGAN: Yes. I represent the Vulnerable Energy Consumers Coalition. 597 MR. WHELEN: Thank you. 598 MR. JANIGAN: I hope your answers are the same. 599 MR. BETTS: Mr. Shepherd, I see Mr. Thompson has returned. Are you still willing to proceed at this point, or Mr. Thompson -- 600 MR. SHEPHERD: I'll leave it in Mr. Thompson's hands, if he wants to proceed. He doesn't. 601 MR. BETTS: Okay, Mr. Shepherd. 602 CROSS-EXAMINATION BY MR. SHEPHERD: 603 MR. SHEPHERD: Witnesses, my name is Jay Shepherd, and I represent the School Energy Coalition. 604 Let me start by trying to understand the difference between the non-commodity transactions and the commodity transactions. We've been talking about them as if they are some theoretical idea, but they are practical transactions, right? So in the classic transactions, the non-commodity transactions that we used to call transactional services, if I, as a customer, had some gas at point A and I wanted it at point B, I could come to you, if you had the transportation between those two places, and basically rent your space to move my gas from point A to point B; right? 605 MR. JARVIS: Correct. 606 MR. SHEPHERD: And if the market price differential of the gas between point A and point B were, say, a dollar, then as long as you charge me less than a dollar, it's in my interest to move my own gas; right? 607 MR. JARVIS: Correct. 608 MR. SHEPHERD: But if you charge me a dollar or more, I might as well just sell it at point A and buy it at point B. 609 MR. JARVIS: Yes. 610 MR. SHEPHERD: And that's typically what happens in the market, right? People look at those factors. 611 MR. JARVIS: Yes. 612 MR. SHEPHERD: And similarly, if I have gas on September 30th and don't need it until December 31st, I can come to you and say, Can you store it for me, and the same differential price applies; true? 613 MR. JARVIS: Correct. 614 MR. SHEPHERD: So if the price is a dollar more per gigaJoule on December 31st, then as long as you charge me less than a dollar, I might as well have you store it. 615 MR. JARVIS: Correct. 616 MR. SHEPHERD: So that's the classic transactions, and those are basically conceptually the two types of transactions you did, right, transportation and storage? 617 MR. JARVIS: Yes. 618 MR. SHEPHERD: And in every case. There was somebody out there that had some gas that they needed you to do something with; move it or hold onto it. 619 MR. JARVIS: Correct. 620 MR. SHEPHERD: Okay. Now, the new type of transactions you started doing in November 2002 are a conceptually different type of transaction; right? They're more arbitraging price differentials in the market; isn't that true? 621 MR. JARVIS: Fundamentally, it's the same price differential that you alluded to in your illustration of having gas at one point and gas at another point being one dollar higher. That same fundamental principle applies to how much value is available from point A to point B. 622 MR. SHEPHERD: And so you're just trying to tap that value in the market without having a customer out there that is looking for the service. 623 MR. JARVIS: Well, there's a number of different angles to, you know, when we would elect to use the commodity versus to sell the service. In a circumstance where the service that we have available is out into the future and is in a period of time when we have more time, we will go through a screening process, as we kind of alluded to earlier, where the service will be offered up and we'll be making a determination as to whether what counterparties will pay us represents fair value based on market prices that we're seeing at the time. So in that circumstance, there's a very real comparison of the two alternatives going on for what reflects best value coming back to EGDI for the sharing mechanism. 624 There are a number of circumstances, however, over the last few years with the extreme volatility that's gone on in the marketplace, that significant value that's being generated in this TS business now is being generated day by day by day by day. We know assets available today, there's an opportunity to generate money today, and we do that. Many, many, many times it is not practical or, in certain circumstances, possible to go out within the time lines with which the business is transacting to find a counterparty who will buy your service and then they will go out and arrange the commodity on both ends. 625 So the ability to transact the commodity in this short-term arena allows us to execute with far more speed, allows us to ensure that when value is there you can capture it, as opposed to the time lag. And it doesn't seem like a lot of time, but we're talking minutes and minutes and minutes here where value comes and goes. 626 MR. SHEPHERD: I was actually going somewhere else, but since you've raised that, let's deal with that right now. 627 If I have an apartment building, I can rent it out to people, to third parties, on a long-term basis; right? And it takes some time to get the right tenants and there's sort of a way of doing that from a time-line point of view that makes it efficient. If there's a lot of people wanting it for just a short period of time, then I can operate it as a hotel; right? 628 MR. JARVIS: Right. 629 MR. SHEPHERD: Is that the sort of difference you're talking about here? 630 MR. JARVIS: No. I think the difference, it rests in two areas. Number one is -- and they're related. The primary driver for the available asset that we have on an ongoing basis is weather and the system demands of the franchise. So day by day by day, particularly in the winter, the available asset can increase or decrease dramatically. Layering on top of that, then, is the volatility in the market, which is tending to follow the weather as well. So what we're driven by is the availability of the asset and what's the market values on that day. 631 MR. SHEPHERD: So for short-term transactions for arbitraging-type transactions, you effectively have more assets available, right, because you can do them right away. You don't have to plan for what might be available; if it's available now, you can do it. 632 MR. JARVIS: Can you clarify what you meant by more assets available in relation to -- 633 MR. SHEPHERD: Well, in a practical sense, what you're saying is that -- as I understand what you're saying is that if you're planning for transactional services, then you have to accept that there's some uncertainty in your availability over time; true? 634 MR. JARVIS: That's correct. 635 MR. SHEPHERD: And so you can't use all of what's available because then the ratepayers wouldn't have as -- might be at risk. 636 MR. JARVIS: That's correct. We cannot commit all that is available on a longer-term basis on a firm basis. 637 MR. SHEPHERD: Whereas, if you do these shorter-term transactions, you can use whatever's there? 638 MR. JARVIS: Correct. 639 MR. SHEPHERD: So that means you have higher asset use; is that true? 640 MR. JARVIS: I believe the ability to use commodity in the short-term arena improves your utilization of the assets. 641 MR. SHEPHERD: Okay. Now, let me get back to what I was after in the first place, get back to my example of I've got gas at point A and want to move it to point B, the dollar per gigaJoule price differential between point A and point B, that's the maximum you can charge me for the transportation; right? 642 MR. JARVIS: In theory, yes. 643 MR. SHEPHERD: Because if you charge me that or more, I'm just going to buy and sell; true? Generally speaking. 644 MR. JARVIS: Generally speaking that's true, provided you don't have an obligation to be delivering to point B. 645 MR. SHEPHERD: And normally I'm actually only going to be willing to pay less than the dollar differential, right, because I want some benefit too? 646 MR. JARVIS: That's correct. 647 MR. SHEPHERD: On the other hand, if you do an arbitraging transaction, same situation, same quantity, you already know what you're going to make out of that, right? It's a dollar. 648 MR. JARVIS: Providing you can execute, yes. 649 MR. SHEPHERD: So doesn't that mean your gross margin on transactions that are the arbitraging type as opposed to the customer-directed type, that your gross margin is higher on average? 650 MR. JARVIS: In theory, following the lines of your questioning here, that would be correct. Where that breaks down is that the market is not perfect. People do have obligations to deliver at certain points on certain days where the thinking and the economics that go behind their decision-making is not driven simply by the pricing elements that you've outlined. 651 MR. SHEPHERD: Well, okay, why would I -- if I have a certain amount of gas at point A and I have an obligation to deliver to somebody at point B, why on earth would I pay more than the price differential to do that? 652 MR. JARVIS: In many of the points, the liquidity is just not deep enough to ensure that the price that may be quoting out there in the marketplace can actually be executed. 653 MR. SHEPHERD: Okay. As a general rule, what percentage of the price differential can you charge for transactional service, if the customer actually has the gas; right? 654 MR. JARVIS: I don't have an answer for you in percentage terms. I can talk in some absolute senses. 655 MR. SHEPHERD: Sure. 656 MR. JARVIS: When we first began conducting this business and purely as a services business, had many, many counterparties, what we found was that, generally speaking, you could capture the bulk of the spread but for 2 to 3 cents U.S. per BTU. What we're finding now as there's fewer players, more volatility, more attention to balance sheets precipitated by the meltdown of the merchant energy sector, that number is probably more in the 5 to 8 cents, depending on who the counterparty is, at what point you're trying to do business at. 657 MR. SHEPHERD: So if I understand what you're saying, then, there's two effects of adding the commodity or arbitraging type of transactions to your portfolio. Effect number one is you get a 5 to 8 percent increase in your margin for each transaction. 658 MR. JARVIS: No, I said 5 cents to 8 cents U.S. per -- 659 MR. SHEPHERD: Oh, 5 cents to 8 cents, okay. All right. And the second is, you have a higher utilization rate for the assets, which you can't quantify but you expect that it's true? 660 MR. JARVIS: Correct. Utilization is higher. 661 MR. SHEPHERD: Because it's done on a shorter-term basis, the uncertainty of future -- sorry, I'll let you explain it. I shouldn't. 662 MR. JARVIS: I'm sorry, was there a question? 663 MR. SHEPHERD: Yeah. Can you explain the higher utilization rate? 664 MR. JARVIS: Yes. The higher utilization rate comes about given the fact that by conducting the commodity, we can transact more effectively and far faster in a very short-period trading window, whereas, if we were forced to be in that marketplace offering services only, then all of the counterparties that we would be going to would have to then chase around and put all the commodity pieces together. The speed at which the market operates, the volatility of the pricing, having the commodity gives us the best ability to capture value. 665 MR. SHEPHERD: Now, there's a third advantage as well, isn't there, and that is that sometimes you have an asset available that you could -- that you would like to turn to account, but there's just nobody who wants to buy it; nobody wants to use your transportation or storage at a particular time. 666 MR. SHEPHERD: Is that a significant component of your available assets that just get wasted? 667 MR. JARVIS: Not currently with the ability to utilize the commodity. 668 MR. SHEPHERD: Separate from -- without the commodity. 669 MR. JARVIS: I couldn't say for certain what proportion of the asset may have gone unutilized because it wasn't -- we didn't allow that to occur for very long before we began to introduce the commodity. 670 MR. SHEPHERD: In 2002 fiscal year, you did about $14 million of TS? 671 MR. BRENNAN: In fiscal 2002? 672 MR. SHEPHERD: Yeah. 673 MR. BRENNAN: No, I don't think so. I think it was under 10 -- I believe it was under $10 million, if I'm not mistaken. 674 MR. SHEPHERD: I'm thinking of 2001, sorry. In 2002, you did 10? 675 MR. BRENNAN: I believe it was under 10, yes. Nine something. 676 MR. SHEPHERD: And is 10 representative of the assets you had available to turn to account, or let me put that another way. How much more could you have gotten if you got 100 percent utilization of your assets? 677 MR. JARVIS: That's a difficult question. I can't recall again, the weather patterns, the price volatility during that period. It's virtually impossible for me to answer that question. 678 MR. SHEPHERD: Is it a big number or a small number? 679 MR. JARVIS: I would suggest it's material. 680 MR. SHEPHERD: Thank you. Let me then turn to the credit costs. And as I understand what you're saying is that you'd like EGD to take the credit risk directly; true? 681 MR. WHELEN: Yes, we believe that they should take the risk and share in that proportion of the return. 682 MR. SHEPHERD: I didn't hear, but did you tell us how big that risk is? 683 MR. WHELEN: In our view, in my view, the risk is relatively modest. We only transact with relatively highly-rated counterparties. For example, for physical gas transactions, they have to be investment agreed, that means the minimum rating from one of the leading credit-rating agencies has to be triple B minus or greater. For the financial transactions where the financial derivatives are used to ensure that the spreads are locked in so there is no commodity price risk associated with this business, we will only deal with A-rated financial counterparties. The probability of default, and credit-rating agencies do compile statistics on the likelihood of A-rated credit going insolvent within a one-year period of time, the probability of default is very low. The probability of default increases over time. If it was a 20-year bond obligation outstanding over 20 years, clearly the chance that it might default in that period based on their statistical history is quite a bit higher. But over the course of a year, and Mr. Jarvis has already said, most of all of these transactions are occurring in a very short space of time, the exposure would be somewhere in the order of 55 days and I believe that's filed in evidence. So we're talking about a very short period of time. So the potential probability of default is really quite minimal. 684 For example, an A-rated company using, this is Moody's Investor Services, which is the leading rating agency in the United States, historical default probabilities for an A-rated counterparty the likelihood that it could become insolvent and then what you recover as a result of that, the probability of the expected loss is about .01 percent, so we're talking about, on an expect the basis over time, if you carried this business on year after year after year after year, the number of defaults are very, very small. In fact about .01 percent of your exposure is about what you'd be at loss for in any given year. Of course, when the loss happens, it's going to be a discrete loss that would be substantially bigger than that, whatever the counterparty had, you had out to the counterparty at that time. 685 MR. SHEPHERD: That wasn't actually what I was after but that's very useful nonetheless. What you're saying is the probability is 1 in 10,000? 686 MR. WHELEN: Yeah, I think that's right. 687 MR. SHEPHERD: Or is it 1 in 1,000? 688 MR. WHELEN: .01 percent. So .O1 divided by 100, so that sounds like 1 in 10,000 to me. 689 MR. SHEPHERD: But what I was really after is how many dollars are we talking about? How big is this commodity portfolio? Perhaps you could tell us what the maximum exposure was in the 2003 year. 690 MR. WHELEN: Well, it's important to look at that in a couple of ways. We talked about the expected loss, that is, year in and year out what you might choose to -- what you might expect to have by way of bad debts. In talking to Mr. Jarvis and others about the transactional services business, we can assume, and have assumed a portfolio of exposure at any time of about 100 million that would be outstanding, for example, so that would be the aggregate receivables exposure that you would have to a group of counterparties. And given the list of likely counterparties, which is relatively small now, and this is part of the issue that has already been filed in evidence, we would look at that list and say, Well, what is the credit quality of that portfolio? And so you can look at that and say it is $100 million times .01 percent in any given year. But it's important to remember that credit defaults are discrete events. Those histories are built up, taking data from individual companies that may have gone bankrupt in a period of time. So the actual default is going to be for an entire receivable amount. 691 Now, if we were going to put this business, start doing commodity in transactional -- pardon me, in Enbridge Gas Distribution's name, we would establish some very specific limits to given counterparties. For example, for an A-rated credit, we would probably have a $15 million limit. For a triple-B-rated credit, we would have a $10 million limit. And for a triple-B-minus-rated credit which has a higher probability of default, we would establish a $5 million limit. So in the event that one of those companies went bankrupt, what you'd be looking at is that amount of exposure at any given time less any amount you might recover in an insolvency proceeding as being the exposure that you would have on a discrete basis in any one given year. And that's really the amount that you have to have some equity on your balance sheet to protect against. 692 MR. SHEPHERD: I'm being very patient, but I asked a very specific question. The specific question was: What is the highest exposure during the 2003 test year? 693 MR. WHELEN: I don't know that. I can't answer that question. 694 MR. SHEPHERD: Can you undertake to provide that? 695 MR. WHELEN: We can determine -- I think Mr. Jarvis would have that information. We'll undertake to provide that. 696 MS. LEA: Okay. J.4.3 . Could you just restate the undertaking, please, Mr. Shepherd. 697 MR. SHEPHERD: The highest credit exposure at any point in time during the 2003 test year, aggregate. 698 MR. WHELEN: Just to be clear, Mr. Shepherd, this would be if a counterparty happened to go into default at that particular point in time. 699 MR. SHEPHERD: If all went. I'm asking how much was the line of credit at any given point in time. 700 MR. WHELEN: Fair enough. 701 MR. SHEPHERD: Right? There's a parental guarantee; right? 702 MR. WHELEN: Yeah. 703 MR. SHEPHERD: So what's the maximum exposure. 704 MR. WHELEN: So really that's a maximum receivable as well. Fair enough. 705 UNDERTAKING NO. J.4.3: TO PROVIDE INFORMATION REGARDING HOW MUCH WAS THE LINE OF CREDIT AT ANY GIVEN POINT IN TIME DURING THE 2003 TEST YEAR 706 MR. SHEPHERD: Now, just following up on that, there's a parental guarantee -- there is now and there has been since November 2002 a parental guarantee in place? 707 MR. WHELEN: Yes, there has. 708 MR. SHEPHERD: Have you filed that? 709 MR. WHELEN: I'm sorry, could you repeat that. 710 MR. SHEPHERD: Have you filed that document? 711 MR. WHELEN: The parental guarantee? Just to be clear, Mr. Shepherd, we have parental guarantees in place with every counterparty that Gas Services does business with. There isn't a unified parental, if you will, guarantee. 712 MR. SHEPHERD: But there are only a few counterparties. 713 MR. WHELEN: There are a number. I don't have those numbers here. 714 MR. SHEPHERD: Could we have those parental guarantees then filed, please. 715 MR. BRENNAN: Just give us a moment, would you, please. 716 MR. WHELEN: I think the one thing we would want to do is check the confidentiality provisions to make sure we're permitted to provide a document like that for the benefit of the counterparties you're talking about. 717 MR. SHEPHERD: Okay. Well, presumably if there's an issue of confidentiality in these documents, you'll raise it, and then we'll discuss it at that time, okay? So that's an undertaking for parental guarantees. 718 MS. LEA: J.4.4, undertaking to file parental guarantees subject to confidentiality check. 719 MR. SHEPHERD: I was actually, Mr. Chairman, I was expecting that the confidentiality issue would be raised by the company if and when it arises. I wasn't asking for a conditional undertaking. 720 MS. LEA: What I'm trying to express, Mr. Shepherd, is that we don't know whether the company is going to object to it or not, and I don't want to hold them to an undertaking that doesn't have an caveat on it and then hear that there's an objection, okay? 721 MR. SHEPHERD: Understood. 722 MR. BETTS: But it is understood that it will be filed, if necessary, under confidentiality arrangement; am I correct? 723 MR. SHEPHERD: Depending on what the document says, it might be an issue as to whether it should be confidential. But I understand that the company may object to filing it on the public record. 724 MR. BETTS: And is that understood clearly by the company? Any confusion about that? There's an expectation that it will be filed. If there's a concern about its sensitivity, it would be filed as a confidential document, and then if required, the Board would have to rule on that status. 725 MR. WHELEN: We understand. 726 UNDERTAKING NO. J.4.4: TO DETERMINE THE MAXIMUM THAT EGS COULD DRAW ON THE GUARANTEES IF THEY WERE ALL DRAWN AT ONCE 727 MR. SHEPHERD: So let me come back -- oh, just one other thing on that point, Mr. Whelen. There is presumably an agreement between EI and EGS with respect to the limits, the parameters within which they can draw on these guarantees. They can't just draw a billion dollars on them; right? 728 MR. WHELEN: The guarantees have specific limits in them. 729 MR. SHEPHERD: Each individual one does? 730 MR. WHELEN: Each individual one does. 731 MR. SHEPHERD: So what's the maximum that EGS could draw on the guarantees if they were all drawn at once? 732 MR. WHELEN: I don't have that information, but we can certainly summarize it as part of that undertaking. 733 MR. SHEPHERD: So there's no sort of line of credit terms as between EI and EGS? 734 MR. WHELEN: No, there is not currently. 735 MR. SHEPHERD: Are there policies in place imposed on EGS to limit how much they can use the guarantee? 736 MR. WHELEN: Yes, there are. We have individual corporate credit limits that apply to the company as a whole, and we allocate out to the various businesses a portion of those credits. That's part of the treasury function. It's not explicitly set out how much we allocate to the Gas Services business. If we were to undertake gas commodity in EGDI's name, we'd establish specific limits in that regard. 737 MR. SHEPHERD: Okay. Well, what's the current limit in EGS? 738 MR. WHELEN: There's a series of guarantees that are imposed on EGS. EGS has a subset which we allocate and it's allocated by treasury depending on all the other exposures that we have to counterparties across the Enbridge Inc. Group of companies. 739 MR. SHEPHERD: How much can EGS be exposed in the market at any given point in time before they have to come to you to change their limit? There's a dollar figure; right? 740 MR. WHELEN: Effectively -- it's going to be in those guarantees, because effectively they are going to be able to do any transactions without the benefit of a guarantee and the limit is imposed by the guarantee. 741 MR. SHEPHERD: So whatever the total is of the guarantees, that's how much they can draw, that's their limit? 742 MR. WHELEN: Yes, as a practical matter, that is their limit. 743 MR. SHEPHERD: They can draw them all at once? 744 MR. WHELEN: Right. So we can approve those as they come forward as a request. 745 MR. SHEPHERD: Now, normally credit-granters, when they have revolving credits like this -- this is sort of a revolving credit, right? You use it, it goes away, you use it again; true? 746 MR. WHELEN: Yes, until cancelled. 747 MR. SHEPHERD: And so normally credit-granters have limits of how much you can draw over a particular period of time, how many times you can come back to the well, if you like. Do you have limits like that on EGS currently? 748 MR. WHELEN: Well, the limits typically in my experience are based on aggregate exposure or aggregate credit support rather than necessarily the number of times you may or may not go back. As you just pointed out, you can draw down, repay, if you will, in the context of a bank line of credit, if that's what we're talking about, over time, not unlike a personal line of credit. You can repay it, you can redraw it, you can repay it over the term of whatever that agreement is, or if there's no term, until cancelled. 749 MR. SHEPHERD: So those two terms, "aggregate exposure" and "aggregate credit support," tell us what those mean. 750 MR. WHELEN: Well, the aggregate exposure would be the sum of the exposure to a given counterparty, so this would be, for example, your receivables on gas sales that have built up over time for both gas invoiced and, I guess, gas delivered but yet uninvoiced. 751 MR. SHEPHERD: And what is aggregate credit support? That's different; right? 752 MR. WHELEN: Well, the aggregate credit support would be the limit under the guarantee that Enbridge Inc. is providing to Enbridge Gas Services. 753 MR. SHEPHERD: Okay, you've lost me. So let's say the total of all the guarantees is $200 million right now. Let's just -- hypothetically. And so the aggregate exposure, the limit to how much EGS can borrow or sort of use your credit, if you like, is $200 million at any given point in time, that's the maximum that they can use; right? 754 MR. WHELEN: To use your example, yes. 755 MR. SHEPHERD: In any given period, let's say six months, can they use that and repay, use and repay as many times as they like? 756 MR. WHELEN: Yes. 757 MR. SHEPHERD: So they can have $2 billion of borrowings over the course of the period of time as long as at any given time they only borrow 200 million. 758 MR. WHELEN: Yes, conceptually that would be right. The exposure at any given point in time cannot exceed whatever that limit is, that guarantee -- 759 MR. SHEPHERD: So that's the only limit you place on them? 760 MR. WHELEN: That's right. The volume of activity, we don't place a limit on their volume of activity, only the amount of exposure they can create in undertaking that activity. 761 MR. SHEPHERD: Now, let me come back to your previous example of the probability or the risk of loss. You've said that -- we're talking about something in the order of 100 million is what EGD would have to -- the risk it would have to take at any given point in time if it took on this obligation; yes? 762 MR. WHELEN: Yes, that's been portrayed as sort of an average risk. Mr. Jarvis may want to speak to that. 763 MR. JARVIS: No, $100 million is our estimate of our maximum exposure over the two-month window that credit needs to be provided. The nature of the payment cycle in natural gas is that gas delivered in month number one is not due and payable until the 25th day of month number two, and there's usually five or six days there for payment to cure a failure to pay. And while you're waiting to get paid for deliveries in month number one, you're oftentimes making similar deliveries in month number two. So before you have a contractual right to cease delivering based on somebody's failure to pay the bill, generally a period of 55 to 62 days will have passed. 764 MR. SHEPHERD: Okay, let me understand this. So month number one, you do $100 million of transactions; you can; right? That's what you would expect. 765 MR. JARVIS: We don't expect that, but yes, we could do that. 766 MR. SHEPHERD: You could. And month number two you could another $100 of transactions. 767 MR. JARVIS: Correct. 768 MR. SHEPHERD: In each case payable months later. 769 MR. JARVIS: Yes. 770 MR. SHEPHERD: So in month number two, you would actually be exposed to the tune of $200 million. 771 MR. JARVIS: Correct. 772 MR. SHEPHERD: Then the maximum exposure you're talking about for the ratepayers is not 100 million, it's 200 million, isn't it? 773 MR. JARVIS: No, the $100 million that we have calculated as our maximum potential exposure is based on a two-month view. It would be 50 million for -- 774 MR. SHEPHERD: Oh, I see. Okay, okay. So then if 100 million is the maximum you can have outstanding at any given point in time, let's say, or the maximum you expect, and the probability is .01 percent, I calculate that to be a $10,000 probabilistic risk; isn't that right? 775 MR. WHELEN: Expected during any particular year that this program was under way, given the program is carried on for a long statistical sample period, that's right. Your exposure, Mr. Shepherd, in an absolute total disaster meltdown scenario would be a larger amount, and that's how many actual counterparties might fail in that period of time, and what would you expect to recover from them given your exposure outstanding. Now, we would never expect every single counterparty we do business with to fail all in one two-month period. 776 MR. SHEPHERD: I guess what I'm trying to understand is your probabilistic statement. When I asked you about the risk to EGD, you said it's about $10,000; right, .01 percent? 777 MR. WHELEN: Yes. The expected loss is very low. 778 MR. SHEPHERD: But when Mr. Janigan asked you how much EI would charge to take that risk, I think it was $2 million, wasn't it? 779 MR. WHELEN: Absolutely. 780 MR. SHEPHERD: So those are different numbers. Can you explain? 781 MR. WHELEN: Yes, I can. There is a difference between the expected loss and an unexpected loss, which is if a counterparty actually goes into default, you're exposed for the entire amount that that counterparty owes you. Any company needs to have sufficient equity on its balance sheet to be able to absorb that risk if it were to come about. If that risk weren't there, if everybody knew with perfect certainty when and how a default like this would happen, banks, for example, would never need a dime of equity capital. Equity capital is required for those unexpected losses because they are discrete and they are lumpy when they actually happen. That's why companies have equity for this purpose. 782 MR. SHEPHERD: You know, Mr. Whelen, I was a banker for seven years before I went to law school, and I always understood that you had your loss ratio and you had your profit, and those are the two things that made up what you charged for credit; right? 783 MR. WHELEN: No. There's your capital charge as well, where you have to -- you see most financial institutions refer to a return on risk-adjusted capital. I was a banker before I was a utility treasurer, and there is a capital charge that you would need to apply. So your fees would cover off your expected bad debt expense and you'd need to earn a rate of return on the capital that you would put up in order to be in the business that you're in. So a financial institution requires 8 percent tier-1 capital, it needs to earn a return on that tier-1 capital, so its products would be priced with the capital charge included. 784 MR. SHEPHERD: And that return on capital, right, that's what the ratepayers call profit, right? It shows on the profit line on the balance sheet on the income statement. 785 MR. WHELEN: It certainly becomes part of the net earnings to the company that is reflected this their return on capital. 786 MR. SHEPHERD: Then let me understand correctly. It's loss ratio plus profit equals $2 million; correct? 787 MR. WHELEN: Right. 788 MR. SHEPHERD: And loss ratio is 10,000. 789 MR. WHELEN: I gave you the example, by the way, for an A-rated company. The portfolio for investment-rate-graded companies would be .05 percent, to use your example, which comprises of both triple-B companies and double-A-rated companies which, by the way, over a one-year period have a zero percent chance, statistically anyway, of going bankrupt. 790 MR. SHEPHERD: So if EI charged a $2 million guarantee fee, that's what I understand you're proposing; right? 791 MR. WHELEN: That is the fee that we would charge, yes. 792 MR. SHEPHERD: Okay. So if you charged a $2 million guarantee fee, then you'd show 1,950,000 to your bottom line, and you'd show $50,000 or less, but let's say 50, as a loss -- 793 MR. WHELEN: As a charge, a charge against earnings, that's correct. 794 MR. SHEPHERD: Okay. So let me go on to another subject which is the sharing mechanism. This is issue 4.1. Now, the current sharing mechanism is 75/25 on all revenues; right? 795 MR. BRENNAN: Yes, for the most part. Yes. 796 MR. SHEPHERD: There's a guarantee -- first, basically, your budget, your 10.67, you guarantee the 75 percent to the ratepayers; right? 797 MR. BRENNAN: Yes. 75 percent of that 10.7 equals $8 million, and then the next 2.7 goes to shareholder -- 798 MR. SHEPHERD: Shareholder gets to catch up, and after that it's 75/25. 799 MR. BRENNAN: Right. 800 MR. SHEPHERD: That was new in 2003; right? 801 MR. BRENNAN: Yes, I believe it was. 802 MR. SHEPHERD: And prior to that, it was 90/10 for the forecast, wasn't it? 803 MR. BRENNAN: Yes, I think that's correct. 804 MR. SHEPHERD: And in fact, in 2002, wasn't it 90/10 for the deferral account as well, for the variance account? 805 MR. BRENNAN: I believe it was 90/10 as well. 806 MR. SHEPHERD: Okay. And you're familiar with Union's transactional services equivalent? 807 MR. BRENNAN: Not that familiar, but I know they do have one and I believe, if I'm not mistaken, all that I know about it is I think they share 75/25. Whether there's a guarantee, I don't know. 808 MR. SHEPHERD: Well, they share 90/10 on their forecasted 75/25 over forecast; right? 809 MR. BRENNAN: I'm not sure. I don't know. 810 MR. SHEPHERD: You're not familiar with that? 811 MR. BRENNAN: No, I'm not. 812 MR. SHEPHERD: All right. You're going to provide us with some budget and actual figures for Mr. Janigan's template; correct? 813 MR. BRENNAN: We'll be responding to that undertaking, yes. 814 MR. SHEPHERD: Can you add 2001 to that, please. 815 MR. BRENNAN: Okay, I'm not sure what -- where you're going with that. Both 2001 and 2002 did not have commodity related but -- 816 MR. SHEPHERD: Exactly. 817 MR. BRENNAN: -- if you just needed 2002 to show what it looked like without commodity, then -- I'm just concerned about how easy it is for us to get that information. But -- 818 MR. SHEPHERD: Well, 2001, you already know the actual; right? It's 14.1 million, wasn't it? 819 MR. BRENNAN: I'd have to go back and check. I'm not sure. You could be right. I don't know. 820 MR. SHEPHERD: Okay. 821 MR. BETTS: Did the company accept that as an undertaking, then? 822 MR. BETTS: Did the company accept that as an undertaking then? 823 MR. BRENNAN: Well, I'll ask, is it still an undertaking that you would like to see, Mr. Shepherd? 824 MR. SHEPHERD: Yes. I would like to see your gross margin from services in 2001. 825 MR. BRENNAN: Certainly. 826 MS. LEA: Is that something that is kind of part of the original undertakings, or should be add a new number to it? 827 MR. SHEPHERD: I'm happy to treat it as an amendment to the undertaking if Mr. Janigan accepts it. 828 MS. DeMARCO: Mr. Chair, I wonder if I can just step in for a minute because I think I have a further expansion to the same undertaking that may be all done best in the same format. I don't know if now is an appropriate time to raise that. 829 MR. BETTS: Actually, I was going to recommend that we have a separate undertaking number because we established two originally which were 4.1 and 4.2 to cover two aspects of it, so I think we might as well continue with that and we will make Mr. Shepherd's request 4.3, and I am happy -- 830 MS. LEA: 4.5, sir. We have a 4.3 and a 4.4. 831 MR. BETTS: Yes, sorry, I'm looking right at it and saying something differently. Let's describe that one and then I will ask, if Mr. Shepherd doesn't mind, I will invite Ms. DeMarco to indicate what hers is and see -- 832 MR. SHEPHERD: So 4.5 to be the addition of 2001 numbers to Undertaking 4.1. 833 MR. BRENNAN: The only difference between for 2001-2002, of course, there will be a different sharing mechanism than is shown in this table. 834 MR. SHEPHERD: That's fine. 835 UNDERTAKING NO. J.4.5: TO PROVIDE THE 2001 NUMBERS TO UNDERTAKING J.4.1 836 MS. DeMARCO: Along those lines, I wonder if we can get the revenue numbers from every year since TS has been offered, so it would be 1998 being the first complete year, '99, 2000, and then Mr. Shepherd's just asked for 2001. 837 MR. BRENNAN: Are you looking just for the gross -- are you looking for a gross margin for those years? Is that all you're looking for? 838 MS. DeMARCO: In the same format, if possible. But to the extent that there's not, we understand there might be restrictions. 839 MR. BRENNAN: Okay. 840 MS. LEA: That will be 4.6, then, please, so we're looking at numbers from '98, '99 and 2000 as well. 841 UNDERTAKING NO. J.4.6: TO PROVIDE REVENUE NUMBERS FROM EVERY YEAR SINCE TS HAS BEEN OFFERED; 1998, 1999, 2000 842 MR. BETTS: Thank you. Sorry for the interruption, Mr. Shepherd. Please continue. 843 MR. SHEPHERD: Mr. Brennan, perhaps you could tell us what your forecasts were for each of the years 2001 through 2004 for transactional services. 844 MR. BRENNAN: I don't have that information with me. 845 MR. SHEPHERD: Could you undertake to provide that? 846 MR. BRENNAN: For which years again? 847 MR. SHEPHERD: 2001 through 2004. 848 MR. BRENNAN: I don't believe that we gave any forecasts for 2004. I know that in the earlier years, when we were using the 90/10, when there was no guarantee, then we're working from a forecast. But my understanding from 2003 and 2004, I don't think we provided any forecasts. There were no forecasts that I'm aware of. But certainly in the earlier years for 2001 and 2002, I believe there were forecasts at that time and we can provide those. 849 MR. SHEPHERD: In each of those years when you filed your prefiled evidence in your rate case, you filed a forecast; right? 850 MR. BRENNAN: For 2001-2002 we did, yes. 851 MR. SHEPHERD: And 2003, didn't you? 852 MR. BRENNAN: Not that I'm aware of. 853 MR. SHEPHERD: No forecast? 854 MR. BRENNAN: Not that I'm aware of. 855 MR. SHEPHERD: So I'm asking as an undertaking to file for whatever years you had forecasts, 2001 through 2004, and will you confirm that in 2003 and 2004 you did not file a forecast. 856 MR. BRENNAN: Yes, we can do that. 857 MS. LEA: That will be Undertaking J.4.7. 858 UNDERTAKING NO. J.4.7: TO FILE FORECASTS FOR 2001, 2002, 2003, 2004, IF ANY 859 MR. SHEPHERD: Did you need a short name for it? 860 MS. LEA: I was just going to call it forecasts for '01, '02, '03, '04, if any. 861 MR. SHEPHERD: Thank you. 862 Finally, let's come back to that commodity transactions as they are currently being done. Now, right now, when you do these arbitraging type of transactions, EGS doesn't get any share fortunate -- doesn't get anything for the commodity side. EGS does the commodity side but doesn't get anything for it; right? 863 MR. JARVIS: That's correct. 864 MR. SHEPHERD: Except that EGS gets 25 percent of the overall deal. 865 MR. JARVIS: No, EGS gets nothing. All revenue flows to EGI. 866 MR. SHEPHERD: I'm sorry, the shareholder gets 25 percent. 867 MR. BRENNAN: Through the sharing mechanism, that's correct. 868 MR. SHEPHERD: Now, as I understand what your company is saying, Mr. Jarvis, is we're not going to do the commodity side anymore, we're deciding that we can't do it. So unless you're willing to pay for it, we're not going to do it; right? 869 MR. JARVIS: We're not prepared to continue doing the commodity without an effective credit charge. 870 MR. SHEPHERD: So if the Board says that the company is allowed to continue as it's currently doing it but without offloading the credit charges to EGD, you will stop doing the commodity side; is that right? 871 MR. JARVIS: Yes, that's correct. 872 MR. SHEPHERD: Okay. So now, Mr. Brennan, you work for EGD; right? 873 MR. BRENNAN: That's correct. 874 MR. SHEPHERD: So now, your supplier says they are not going to do this anymore. Have you looked at finding other suppliers to do this? 875 MR. BRENNAN: No, we have not. 876 MR. SHEPHERD: Why not? 877 MR. BRENNAN: We're waiting to see what the Board's decision is. We're hopeful that the Board will accept our proposal and allow the commodity to be transacted under the name of EGD. 878 MR. SHEPHERD: And if the Board elects not to, says the ratepayers shouldn't take this risk and shouldn't pay this cost, then will EGD then go out and look for somebody else to carry on the way EGS was doing it in the past for 25 percent of the gross? 879 MR. BRENNAN: It's not our intention at this point in time, no. I think what I mentioned in my examination-in-chief, that if the Board does not allow either EGD to not conduct the commodity transactions in their own name or doesn't allow for the recovery of those credit costs if EGS were to continue to provide the commodity, then basically, we would be out of the commodity business and we'd be back to the traditional transactional services. 880 MR. SHEPHERD: What's your gross margin so far in 2004 in transactional services? 881 MR. BRENNAN: Our gross margin? 882 MR. SHEPHERD: Yeah. 883 MR. BRENNAN: It's in the range of $16 to $17 million. 884 MR. SHEPHERD: And so your projection for the current year is 18, 20? 885 MR. BRENNAN: Somewhat higher than we are today hopefully, yes. 886 MR. SHEPHERD: Okay. If -- so somewhere between $4- and $5 million, then, is going to go to the shareholder, in that range? 887 MR. BRENNAN: If you follow through the sharing mechanism, it's between $3- and $5 million, probably closer to the 4, between 3 and 4 probably. 888 MR. SHEPHERD: Didn't you just say you're already at 16? 889 MR. BRENNAN: Correct. 890 MR. SHEPHERD: So 25 percent of that is 4; right? So it's not going to be 3; is it? 891 MR. BRENNAN: Then we have to take off our O&M costs as well. 892 MR. SHEPHERD: And do you have any information to help the Board as to whether that $4 million, or whatever the number is, is high or low or just about right for what the market price is, the market value of that service? Do you have any idea? 893 MR. BRENNAN: No, none at all. 894 MR. SHEPHERD: And have you made any effort to go out and find what the right number is to pay this particular -- to pay for this particular service? 895 MR. BRENNAN: No, we have not. We didn't feel we need to. We have an agency agreement with Enbridge Gas Services. They are currently doing the commodity business in their own name. All that revenue is coming back to the utility. $13, $14 million is going back to ratepayers. 896 MR. SHEPHERD: EGS also does the system gas; right? 897 MR. BRENNAN: EGS also purchases system supply, that's correct. 898 MR. SHEPHERD: And the reason why you can't go out to the market and get somebody else to do your transactional services is that you have to have the same person doing system gas as doing the TS; right? 899 MR. BRENNAN: I don't think that's necessary. 900 MR. SHEPHERD: Isn't it a significant advantage to be the same person doing both? 901 MR. BRENNAN: Not necessarily. I mean, this whole issue of whether or not there's someone else there to be able to do this for us, I mean, as you're probably well aware, we went and conducted a -- contracted, I guess, a consultant to do a survey in terms of whether or not we're paying the right price and whether or not, in fact, there's a market out there. And as far as our -- from the evidence we've seen, and from what I understand, it's accepted by intervenors as part of the settlement that what we're paying for gas services is the appropriate price and that based on that it's a cost-based rate which would suggest that there isn't a market for these services out there. 902 MR. SHEPHERD: Sorry, the settlement agreement and the study refer to what you're paying for the system-gas function; right? 903 MR. BRENNAN: No, it was for the whole thing. 904 MR. SHEPHERD: Not transactional services. 905 MR. BRENNAN: Yes, it was. 906 MR. SHEPHERD: So this study talks about whether 75/25 is the correct sharing mechanism? 907 MR. BRENNAN: No. What the study was, the first thing was to settle whether or not there was a market out there for gas services, to establish whether or not we're paying the right price. And the conclusion was that there is no market out there, what we're paying is the right price to EGD, and so your question -- coming back to your question, can we go and find someone else, well, our conclusions from the survey indicate that there isn't a competitive market out there for these services -- to provide these services that Gas Services are providing us. 908 MR. SHEPHERD: Now, the survey didn't ask whether paying $4 or $5 million to try to maximize the use of your transportation and storage assets was a good figure or not, did it? 909 MR. BRENNAN: No, it did not. 910 MR. SHEPHERD: It didn't consider that at all, did it? 911 MR. BRENNAN: No. 912 MR. SHEPHERD: Nor did it look at the entire package together, the TS plus gas supply together, did it? 913 MR. BRENNAN: Yes, it did. All the services providing by Gas Services, which includes gas-supply planning, gas acquisition, risk management, and transactional services. 914 MR. SHEPHERD: And for that EGD pays about, what, 2 million? What's the -- 915 MR. BRENNAN: EGD plays -- well, the forecast or the budget for 2005 is 2.5 million. 916 MR. SHEPHERD: 2.5 million. So that's what the survey asked was the right number, the 2.5. 917 MR. BRENNAN: And whether or not there are parties out there that can provide this service, because the only reason you fall back to the 2.5 is because it's a cost-based rate versus a market-based rate. 918 MR. SHEPHERD: That survey didn't consider the extra 4- or 5 million from TS because that goes to the shareholder; right? 919 MR. BRENNAN: The survey did not explicitly mention anything about 4 -- 920 MR. SHEPHERD: They didn't look to see whether for 6.5 or 7.5 million, anybody would like to do this, did they? 921 MR. BRENNAN: I'm sorry, could you repeat that? 922 MR. SHEPHERD: They didn't look at whether for $6.5 to $7.5 million, the total compensation -- 923 MR. BRENNAN: No. 924 MR. SHEPHERD: -- whether there was anybody to do that, did they? 925 MR. BRENNAN: No. 926 MR. SHEPHERD: Thank you, Mr. Chairman. Those are my questions. 927 MR. BETTS: Thank you. 928 Who would be next in cross? Mr. Thompson, had you intended to cross-examine? 929 MR. THOMPSON: I was really hoping to avoid it, but I'm happy to plow on. 930 MR. BETTS: Well, you don't have to. 931 MR. THOMPSON: I can take us to 1:00. I think that's your normal break time, is it? And after 1:00, I'll be fine. 932 MR. BETTS: That would be fine. 933 CROSS-EXAMINATION BY MR. THOMPSON: 934 MR. THOMPSON: Panel, I just want to go back to square one here for a moment. What is the current forecast of transactional services revenues in the revenue requirement claim for the test year? 935 MR. BRENNAN: I'm not sure I quite understand your question. Is that the same thing as asking what our forecast of what the gross margin might be? 936 MR. THOMPSON: I think it is. 937 MR. BRENNAN: Okay. 938 MR. THOMPSON: What's embedded in the revenue requirement claim that you're making here for transactional services? 939 MR. BRENNAN: For fiscal -- 940 MR. THOMPSON: For the test year. 941 MR. BRENNAN: For the test year? 942 MR. THOMPSON: Yes. 943 MR. BRENNAN: What we're proposing is that, subject to the Board approving our proposal, that $8 million would be guaranteed to ratepayers and input into rates for 2005. 944 MR. THOMPSON: All right. But what's the forecast of anticipated margin based on your proposal, first of all, your first preferred option? I heard the number 15 million. Have I got that straight? 945 MR. BRENNAN: That was our forecast or our estimate, I guess, for transactional services, was around $15 million -- 946 MR. THOMPSON: All right. 947 MR. BRENNAN: -- total gross margin. 948 MR. THOMPSON: Okay, for 2005 test year, 12 months. 949 MR. BRENNAN: Right. 950 MR. THOMPSON: Okay, thanks. And your proposal is, when you say on sharing, your proposal is to embed, as I understand it, 8 million, roughly? 951 MR. BRENNAN: Yes, that's correct. 952 MR. THOMPSON: And then the shareholder gets the next piece, which is what? 953 MR. BRENNAN: The next 2.7. 954 MR. THOMPSON: 2.7 million. And then beyond that, it's shared 75/25. 955 MR. BRENNAN: That's correct. Now, the only caveat to that, I guess, is if there are any credit costs, then they'd come off the gross margin first before we do anything. 956 MR. THOMPSON: All right. So the credit cost deduction that you're talking about would come out where in this initial proposal scenario? At the -- beyond 10.7 million? 957 MR. BRENNAN: Let's do a simple calculation. Let's say, for example, that the total gross margin is $15 million. 958 MR. THOMPSON: Right. 959 MR. BRENNAN: And let's say there is $100,000 worth of credit costs. 960 MR. THOMPSON: Right. This is when it's in the utility; right? 961 MR. BRENNAN: Yes. 962 MR. THOMPSON: Well, you tell us in the evidence, the credit costs are $32,000 in the utility. 963 MR. BRENNAN: No. It says that was the only amount that has been identified to date. It didn't say that was all of it. 964 MR. THOMPSON: Okay. Carry on with your example. 965 MR. BRENNAN: Okay. So then the gross margin of $50 million, you would subtract 100,000. The next $8 million would go to ratepayer; the next 2.7 to shareholder; the remaining would be shared 75/25. 966 MR. THOMPSON: So credit cost comes off before sharing. 967 MR. BRENNAN: That's correct. 968 MR. THOMPSON: It comes off the top, I guess is the way I -- 969 MR. BRENNAN: That's correct. 970 MR. THOMPSON: Okay, thank you. 971 Now, if you -- and you say this is the existing sharing approach; did I understand that correctly? 972 MR. BRENNAN: In terms of -- with the exception of the credit costs, yes. 973 MR. THOMPSON: Right. But if you did -- if you did 15 million as your forecasting and we're on a 75/25 sharing mechanism, it strikes me that the amount embedded in rates should be closer to 75 percent of 15 million, which would be close to 12 million. 974 MR. BRENNAN: No, that was never the arrangement. The arrangement was $8 million. 975 MR. THOMPSON: Well, when you say "the arrangement," you're referring to what? 976 MR. BRENNAN: I'm referring to the ADR settlement in 2003 and carried over to 2004. 977 MR. THOMPSON: All right. But that arrangement was based on a forecast of gross margins, as I recall it, of something less than $11 million. 978 MR. BRENNAN: Again, for 2003-2004, I don't think we provided the forecasts. 979 MR. THOMPSON: You didn't provide a forecast when we made the -- where did the $8 million come from? We didn't pick it from the air, I don't think. 980 MR. BRENNAN: We did not provide forecasts of total gross margin. What we said we would do is guarantee ratepayers $8 million, the first $8 million; the next 2 point some odd million dollars, depending on what year you're talking about as to how much the O&M was, would then go to the shareholder; and then anything after that would be shared 75/25. 981 MR. THOMPSON: Okay. But the 8 was 75 percent of the 10. 982 MR. BRENNAN: That's correct. 983 MR. THOMPSON: Okay. And so if the arrangement was 75 percent of forecasted gross margin, that's the O&M, what would be the embedded amount in rates, assuming that's the arrangement, and assuming your forecast of 15 million is accepted? 984 MR. BRENNAN: Let me see if I understand your question. You're saying what would be embedded into rates -- 985 MR. THOMPSON: Right. 986 MR. BRENNAN: -- if we did $15 million in 2005? 987 MR. THOMPSON: Right. 988 MR. BRENNAN: Well, the first 8 million would be embedded -- 989 MR. THOMPSON: Excuse me, assuming the arrangement is not as you described it, but the arrangement is 75 percent of the forecast is embedded in rates. 990 MR. BRENNAN: It would be 75 percent of $15 million, I guess, whatever that is. 991 MR. THOMPSON: Thank you. 992 MR. BRENNAN: $12 million. 993 MR. THOMPSON: Okay, thanks. Okay, now, so proposal 1, which I understood you to outline in chief in morning, is the proposal which was contained in your prefiled where bundled commodity/services transactions would be conducted by EGS as agent for EGDI as the principal; is that correct? 994 MR. BRENNAN: Gas Services would purchase the gas, the commodity, if you like, in the name of Enbridge Gas Distribution. 995 MR. THOMPSON: Now, just tell me how the accounting for that purchase would take place. Would those purchases be recorded in Gas Distribution's books or somebody else's books? 996 MR. BRENNAN: Our belief is that it would be in EGD's books. 997 MR. THOMPSON: EGD's books. And so how does this all play out with QRAM? Are we now going to see 100 million over there for gas commodity dealing with transactional services? 998 MR. BRENNAN: No, it would be separate. 999 MR. THOMPSON: Does it play into QRAM? 1000 MR. BRENNAN: No, it does not. 1001 MR. THOMPSON: So it's a separate gas cost account to support transactional services; is that the way you foresee it? 1002 MR. BRENNAN: That's correct. That's the way I foresee it, yes. 1003 MR. THOMPSON: Then just help me with how it's recorded now. Are they recorded as gas purchases in EGS's books? 1004 MR. JARVIS: They're recorded currently as gas purchases in EGS's books. However, within our systems, both from a physical deal tracking and from a risk-management perspective, we have a series of a lines of business and book, what we call books within those lines of businesses, that all the activity around the transactional services is flagged as EGDI transactions and then the subsets. 1005 MR. THOMPSON: Okay. So let me understand that. Under this heading of EGDI transactions, in EGS's books, we have a line item for gas commodity? 1006 MR. JARVIS: Actually, what each individual book would consist of at the greatest degree of granulity for a particular service, if you envision buying gas at Dawn, as an example, and selling to somebody at Parkway, within the particular book, you would see the cost of buying the gas at Dawn, you would see the sale of gas at Parkway, and any of the related fuel costs. So what would fall out of that at the end of each month would be the revenue that goes forth to EGDI. 1007 MR. THOMPSON: I just want to understand the accounting. If you're engaging in a bundled transaction, EGS has a status in the commodity side of it as a principal; right? 1008 MR. JARVIS: Contractually, yes. 1009 MR. THOMPSON: Well, and legally. 1010 MR. JARVIS: Yes. 1011 MR. THOMPSON: And then when you're doing work for EGDI, you're doing that as agent; right? 1012 MR. JARVIS: When we bundle the commodity with the EGDI assets, yes. 1013 MR. THOMPSON: All right. But when you -- when you sell services for EGDI, you're doing that as agent for EGDI; right? 1014 MR. JARVIS: Right. 1015 MR. THOMPSON: Okay. So let's just take an example. This is a big deal. You've got $100 million of gas commodity -- this is going to be a bundled deal for $120 million. You're going to go out and buy $100 million of commodity and then you're going to bundle it up with services that you administer for EGDI as agent and sell it to somebody for $120 million, okay? Now, you tell me how the accounting works. 1016 MR. JARVIS: The way the accounting would work in that circumstance is, assuming this was, again, one transaction -- 1017 MR. THOMPSON: It's a whopper. 1018 MR. JARVIS: -- within the line of business we have in our systems identified for that transaction, you would see the revenue line ultimately being the invoice to that customer and you would see the cost line, in your example, being the $100 million purchase of gas. The remaining revenues of $100 million are cleared from our books every month through an intercompany transfer to EGDI. 1019 MR. THOMPSON: Okay. 1020 MR. BETTS: Excuse me for one second. I have to ask, has anyone got a Blackberry or cell phone that's on vibrate or potentially communicating? I was told by a contractor that apparently that sound could be caused by that. If you do, perhaps you could turn it off. But I'm seeing that nobody is confessing to such a thing. Oh, oh, we have one confession. 1021 MS. DeMARCO: It might be me. I apologize. 1022 MR. BETTS: Perhaps if you could turn it off, if that ends that problem, I'll have to apologize to the contractor because I didn't believe it would happen that way. Thank you very much. I'm sorry for the interruption, Mr. Thompson. 1023 MR. THOMPSON: I'm glad it's not my pacemaker. 1024 Okay. So it sounds to me like for the purposes of the accounting, you treat these costs, these gas costs as if they were EGDI's costs; is that right? 1025 MR. JARVIS: Correct. 1026 MR. THOMPSON: Okay. But legally they are not EGDI's costs, they're EGS's costs. 1027 MR. JARVIS: Correct. 1028 MR. THOMPSON: All right. And so just taking the example through, then, we've got a $120 million deal of services and commodity, $100 million of costs for commodity, a $20 million difference, and then you say you clear that every month. And so, what, the 20 million goes to EGDI, or do you take the EI's 5 out then or later? 1029 MR. JARVIS: No. We clear the entire 20 million to EGDI. 1030 MR. THOMPSON: Okay. And so EGDI flows back whatever EI gets out of this deal; have I got that right? 1031 MR. BRENNAN: I'm sorry, can you repeat that again? 1032 MR. THOMPSON: Of the $20 million, we know the shareholder is going to get a piece of it. 1033 MR. BRENNAN: That's correct. 1034 MR. THOMPSON: And so the accounting to the shareholder is done by EGD not EGS. 1035 MR. BRENNAN: That's correct. 1036 MR. THOMPSON: Okay. Let's just move quickly, then, to your alternative 1, as I understood it this morning, which is if you can't get the Board's approval to conduct these bundled transactions with the utility as principal on a commodity transaction, then the alternative, as I understood it, is you're asking the Board to allow the way you're doing it now to continue but charging EGD with some credit costs for the way it's being done now. Have I got that clear? 1037 MR. BRENNAN: Yes, that's correct. And those credit costs, again, would come off gross margin before sharing. 1038 MR. THOMPSON: And so EGS would continue to transact the commodity piece of the bundle legally and contractually in its own name? 1039 MR. BRENNAN: That's correct. 1040 MR. THOMPSON: Okay. Now, is your alternative 1 proposition a change in position from what's set out in the prefiled evidence? And I'm looking at what was answer 22 on Exhibit A2, tab 5, schedule 1, page 5, but I don't think I've got the updated version of this so it may be the following paragraph. The sentence I'm looking at is: 1041 "EGS has indicated to the company that EGS is no longer willing to enter into any further commodity transactions in its own name beginning in fiscal 2005." 1042 It sounds to me like that position has changed. 1043 MR. BRENNAN: It is if it's not going to be able to recover any of the credit costs. 1044 MR. THOMPSON: My understanding is EGS has now told you, We will continue to conduct these transactions in our own name provided the transactions are charged with credit costs. 1045 MR. BRENNAN: Yes, if the credit costs can be recovered. 1046 MR. THOMPSON: Okay. And the credit costs that you're talking about sound to me like they -- well, whose credit costs are they? 1047 MR. WHELEN: Ultimately, they will be the credit cost of the guarantor, which is Enbridge Inc. 1048 MR. THOMPSON: So we're talking about Enbridge Inc. credit costs, and my understanding was we were talking about -- we might be talking about two things; one was an actual out-of-pocket credit cost payment to a third party. 1049 MR. WHELEN: Correct. 1050 MR. THOMPSON: And that amount was very small, as I understood what you were saying to others. 1051 MR. WHELEN: Yes. We would expect those amounts to be small. 1052 MR. THOMPSON: And how small is it? What's the forecast of that cost for the test year? 1053 MR. WHELEN: Well, I don't think we have a forecast per se, but we have said that, for example, if we continue to trade on NGX, we'll incur an out-of-pocket cost, I believe it's in the order of 32,500 for that amount, and there may be some other small credit-related out-of-pocket costs. 1054 MR. THOMPSON: Well, there is a number of 32,500 in the evidence. So it's small. Less than 100,000; would that be fair? 1055 MR. WHELEN: Yes. I think that would be the expectation. 1056 MR. THOMPSON: Okay. And then the other aspect of the credit costs that you seem to be wanting to charge to ratepayers, it sounded to me like some sort of return for capital held by Enbridge Inc.; is that right? 1057 MR. WHELEN: Right, that's correct, to take on the risk, the credit risk associated with the business. 1058 MR. THOMPSON: And so you want, in effect, the ratepayers to pay a return on capital that Enbridge Inc. holds as a "credit cost" associated with these transactions. 1059 MR. WHELEN: Well, and similarly the Enbridge Gas Distribution and the ratepayers themselves for the risk they would undertake if we continued to conduct the commodity -- or we did conduct the commodity in Enbridge Gas Distribution's name, that is a cost, if you will, that the utility effectively would have to bear. So it would be no different in either two cases, save for the fact that there wouldn't be an explicit payment necessarily. The utility could self-insure, if you will, that cost. 1060 MR. THOMPSON: Let me just understand that. I understood you to be saying that in order to conduct these transactions, we sort of have to have a piece of capital available if things go sour. 1061 MR. WHELEN: Correct. 1062 MR. THOMPSON: Okay. And right now in the utility, the equity ratio is deemed to be, I think it's 35 percent for the utility; are you aware of that? 1063 MR. WHELEN: That is correct. 1064 MR. THOMPSON: And then there's a certain return on equity that's allowed by the Board's formula that's between 9 and 10 percent, under current conditions. And so if this activity is conducted in the utility, are you suggesting we have to thicken up the equity? 1065 MR. WHELEN: I made the comment earlier that at the margin, the scope of this program is small enough that that would not be required. If the scope of this program were to increase substantially, yes, that would be something that would have to be considered. 1066 MR. THOMPSON: Right. But at -- when you say "at the margin," what do you mean? 1067 MR. WHELEN: My example before was, I believe, on the consolidated legal entity balance sheet, there's about 2 billion of shareholders' equity, and so 10 million isn't going to make a difference at the margin, to use the previous example we were working through. 1068 MR. THOMPSON: Well, the transactional services activities that produce 18 million of gross margin in 2003 - this is the number that's shown in Exhibit A2, tab 5, schedule 1, page 5, I have it in paragraph 19, and it may be in a subsequent paragraph in the update - what's the commodity cost involved there? 1069 MR. WHELEN: By commodity cost, do you mean -- 1070 MR. THOMPSON: This is the net after bundling of commodity and services -- 1071 MR. WHELEN: Right. 1072 MR. THOMPSON: -- and I'm trying to find out how much did EGS pay for commodity to generate that kind of gross revenue. 1073 MR. WHELEN: Do you mean the dollar value of -- 1074 MR. THOMPSON: The dollar value. 1075 MR. WHELEN: I'll turn that to Mr. Jarvis and Mr. Brennan. 1076 MR. THOMPSON: The dollar value, big picture. 1077 MR. BRENNAN: I'll just make sure I understand what you're asking for. In fiscal 2003, the amount of dollars that were spent to purchase commodity for transactional services was $275 million. 1078 MR. THOMPSON: So does that mean EGS purchased commodity costing $275 million? 1079 MR. BRENNAN: Yes. 1080 MR. THOMPSON: All right. And so how does that, then, translate into what we need in terms of standby equity to support that activity? 1081 MR. WHELEN: My previous answer was given in the context of, if you will, an average outstanding balance in the order of 100 million and that's where the $10 million figure came from. Your answer was a -- 1082 MR. JARVIS: Yeah. What we -- when we derived how much credit we felt we would need as a maximum capability, we forecast what a maximum two-month period might look like for activity across the pipeline assets of the utility. We also looked at the maximum activity we would anticipate in storage. And what the result was was $50 million per month was the maximum credit capability. And therefore with the two-month credit cycle in the industry, it's the $100 million. 1083 MR. THOMPSON: Okay. My last question, then, before we break for lunch is: How is it you're proposing that these "credit costs" that aren't out-of-pockets to third parties be calculated? 1084 MR. WHELEN: Well, the company would simply propose a fee, and to the extent that that wasn't satisfactory, I'm sure we could get a third party to verify the reasonableness of that charge in light of what a financial institution or other guaranteeing entity would require to carry on that business. But it would be a determined amount. 1085 MR. THOMPSON: Is that part of your proposal? Your fee proposal isn't part of your alternative 2 yet, is it? When are we going to get this fee, at the end of the piece or the front end? 1086 MR. WHELEN: When would the fee be payable? 1087 MR. THOMPSON: When are we going to have the basis upon which the fee would be derived? 1088 MR. WHELEN: Well, the fee is the -- my answer would be that, you know, there's a fee that would be acceptable to us, and we can place a number in front of -- we use an example today of a fee in the order of, say, $2 million is what would be acceptable to Enbridge and Enbridge Gas Services. 1089 MR. THOMPSON: Okay. And where did that come from? 1090 MR. WHELEN: That came from looking at the outstanding amount of capital we believe Enbridge would require, other parties might not require, to set aside and earn a return on for taking on the ongoing credit exposure related to this transactional services business. 1091 MR. THOMPSON: When you said Enbridge, were you referring to Enbridge Inc. or Enbridge Gas Distribution? 1092 MR. WHELEN: Well, it would be Enbridge -- it depends. If Enbridge Gas Services was continuing to undertake the businesses, then that would be Enbridge Gas Services. If it was doing commodity in the name of Enbridge Gas Distribution Inc., I would be comfortable as treasurer of the utility with the Enbridge Gas Distribution self-insuring that amount. Alternatively, if there's a great discomfort with the utility undertaking this business, they can pay somebody else, just like you can pay an insurer, they can pay somebody else to take that risk away. They can pay us; they conceptually could pay a third party to take that credit risk away. 1093 MR. THOMPSON: All right. I see it's after one, so I'll come back to this after the break. 1094 MR. BETTS: Thank you, Mr. Thompson. 1095 We will break now. Let us return at 2:15 and we'll resume the cross-examination of Mr. Thompson. Thank you. 1096 --- Luncheon recess taken at 1:05 p.m. 1097 --- On resuming at 2:22 p.m. 1098 MR. BETTS: Thank you, everybody. Please be seated. 1099 Before we proceed with the cross-examination from Mr. Thompson, were there any procedural matters that arose during the lunch break? 1100 MR. CASS: Mr. Chair, I understand that the witnesses are in a position to answer a couple of the undertakings from this morning. I don't know which ones, but I'll let them perhaps proceed if that is appropriate. 1101 MR. BETTS: Thank you. That would be fine. Please proceed. 1102 PRELIMINARY MATTERS: 1103 MR. JARVIS: Mr. Chairman, I've got a response to Undertaking J.4.3, it's regarding the maximum credit exposure that we had experienced during fiscal 2003. The maximum two-month credit exposure was $113.1 million, year to date, 2004, we also have similar numbers, $95.7 million. 1104 MR. BRENNAN: I also have an undertaking, Mr. Chairman, that's Undertaking 4.7, where we were asked to provide the TS budget for 2001, 2002, and to confirm whether or not there was a budget for 2003 and 2004. The TS budget for 2001 was $7.876 million. For 2002, it was $10.01 million. And I can confirm that for 2003 and 2004 there were no budgets in our evidence. 1105 MR. BETTS: Thank you. Any others? That's it. 1106 Any other preliminary matters? 1107 Can I just ask at this point who else that is present here wishes to cross-examine this witness panel? Mr. Dingwall and Ms. DeMarco. Any particular order? I'll go in the order that I spotted your hands. So Mr. Dingwall will come after Mr. Thompson. And I think with that, Mr. Thompson, let us proceed with your cross-examination. 1108 MR. THOMPSON: Thank you, Mr. Chairman. 1109 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: 1110 J.WHELEN; Previously Sworn. 1111 G.JARVIS; Previously Sworn. 1112 F.BRENNAN; Previously Sworn. 1113 D.CHARLESON; Previously Sworn 1114 CROSS-EXAMINATION BY MR. THOMPSON: 1115 MR. THOMPSON: Panel, at the break we were talking about this cost of credit item, and the number of $2 million had been mentioned and I was asking how the 2 million was derived. Can you explain how it was derived? 1116 MR. WHELEN: Well, there's a couple of ways we triangulate it in on that cost. One was to look at the stand-alone cost of a third-party credit provider coming up with a letter of credit to provide that amount, the other way we looked at it was in a some what more theoretical way as to what amount of economic capital, using some statistical analysis, would be required to reserve against a contingent unexpected loss. That's where in one given year, there would be a failure of one or more of the counterparties to these transactions, and using that approach deriving a return offer of that number. And the range we came up with was centered around the 2 percent figure which was $2 million on the $10 million capital roughly and was an average of a bunch of other numbers that we used to look at effective letter of credit costs. 1117 MR. THOMPSON: Well, there's nothing in the record dealing with all of these calculations that you've done; is that correct? 1118 MR. WHELEN: That's correct. 1119 MR. THOMPSON: So under your alternative 1, where you're asking the Board to approve a proposition where ratepayers will be required to pay credit costs, how are the credit costs that you're asking the Board to have ratepayers pay going to be determined under your proposal? Can somebody help me with that? 1120 MR. WHELEN: Can I just have a moment, please? 1121 I was just clarifying, your alternative number 1, Mr. Thompson, is where Enbridge Gas Services continues to transact the commodity in their name and charges the utility a fee; is that correct? 1122 MR. THOMPSON: That's correct. It is your proposal, alternative 1 which you have described, and alternative 2, as I understand it, is where EGS is out of the game, the bundling game. 1123 MR. WHELEN: Well, as I think I said just before we broke, we would use both of the methods that I described to come up with a charge that was acceptable to us. 1124 MR. THOMPSON: Us being who, EI? 1125 MR. WHELEN: Acceptable to Enbridge Gas Services and its parent Enbridge Inc. as the provider of the credit. 1126 MR. THOMPSON: That really doesn't help us very much. You're just saying, We'll come up with a number and, what, we'll see how it flies, is that the idea? How can the Board approve the proposal that you make without having some idea of the manner in which this cost that you're seeking to calculate is going to be determined and what it's estimated amount is? 1127 MR. WHELEN: Well, I guess I would ask the question how would it best be to give comfort that the amount is reasonable? And I think we said before the break that we could validate that for the purposes of determining an amount in '05. If this with were the alternative we were proceeding with, that we could ask a third party to come in and validate that charge as being reasonable or not. 1128 MR. THOMPSON: You have to look at these cases like a family law case. You're the spouse that's looking for support and I'm saying, How much? And you're saying, Just be reasonable. 1129 Let me ask it this way: When is it under your proposal that you propose to calculate this fee, at the end of the test year, in the middle of the test year, forecasted? Is there any meat around that issue? 1130 MR. WHELEN: I think probably as a practical matter we would do it after the fact because the amount of credit exposure that we would take on will vary over time so if this was a financial institution, we might go out in advance for some estimate, but a more accurate way of doing it would probably be saying, Here is the exposure. You need to pay us some sort of fee based on this. 1131 MR. BRENNAN: I think, Mr. Thompson, as Mr. Whelen pointed out, our estimate is $2 million. So that's something that's on the record as to what the expected costs might be, and I think once we go through the year and know what those costs are, then in my view, we'll deal with that prior to disposing of the TS deferral account. 1132 MR. THOMPSON: But that's not an out-of-pocket cost, that's an estimate of this standby capital, in effect. The estimate of -- your estimate of opportunity costs associated with standby capital. Is that a fair description of it? 1133 MR. WHELEN: Yeah, I think that's a fair description. 1134 MR. THOMPSON: Let me move on then. In terms of whose costs are these, am I correct that there are no credit costs currently being recorded in EGS associated with this commodity transaction? 1135 MR. WHELEN: Currently, there are no credit costs other than, I guess, the LC fees which are being assessed and charged to EGS. 1136 MR. THOMPSON: So the LC fees that EGS pays are flowing through to EGD now; is that right? 1137 MR. BRENNAN: Not through to EGD, no. 1138 MR. THOMPSON: So who's paying the LC fees, the parent? 1139 MR. BRENNAN: EGS. 1140 MR. THOMPSON: But in terms of the amounts that EGS charges EGD, that's a fee of some sort, as I recall it. 1141 MR. BRENNAN: That's correct. 1142 MR. THOMPSON: And it's supposed to be, I think, a cost-based fee because there's no market; is that right? 1143 MR. BRENNAN: That's correct. 1144 MR. THOMPSON: Under the Affiliate Transactions Code. 1145 MR. BRENNAN: That's correct. 1146 MR. THOMPSON: And in the cost-based fee that's being charged by EGS to EGD are there LC costs? 1147 MR. BRENNAN: No, there are not. 1148 MR. THOMPSON: So the LC costs that EGS is incurring are essentially shareholder hits; is that right? 1149 MR. BRENNAN: It's a cost being absorbed by EGS at the moment. 1150 MR. THOMPSON: EGS has other business, does it, other than what it does for EGD? 1151 MR. JARVIS: That's correct. 1152 MR. THOMPSON: And what sort of proportion? Does it do a lot of commodity trading for which it incurs LC costs? 1153 MR. JARVIS: When we spoke earlier this morning about that, I don't have an accurate split of our business based on dollar values from time to time, but my evidence at the time was from a volumetric perspective. Probably 60 percent of the activity we conduct is for our non-agency activities; 40 percent would be for our agency activity. 1154 MR. THOMPSON: And is the non-agency activity commodity trading? 1155 MR. JARVIS: No, we -- our position in the marketplace is as a risk manager and optimizer of assets. We have a situation at Enbridge where we have been allocated zero earnings at risk in our risk policy to trade natural gas. So for us to be taking positions and trading commodity in, I think, the sense that most people would attach to it, it's not prohibited -- pardon me, not allowed. 1156 MR. THOMPSON: All right. So the credit costs that we're talking about based on this calculation that you're referring to, am I correct, are EI's credit costs; they come home to rest with EI. 1157 MR. WHELEN: They currently do by virtue of the guarantees that EI provides to Enbridge Gas Services; that's correct. 1158 MR. THOMPSON: Okay. So is what we're talking about really an allocation of EI costs to EGD? 1159 MR. WHELEN: Well, I don't know if I would characterize it as an allocation. It's picking up a cost that is borne by Enbridge Inc. for undertaking risk related to commodity transactions for transactional services. 1160 MR. THOMPSON: Well, would it be fair for me to characterize that as an item of cost that falls within the ambit of corporate cost allocations? 1161 MR. WHELEN: I think this cost is very much directly related to the amount of business undertaken for transactional services. If we stopped doing it, there would be no cost; if we started doing it, there would be a cost. It does not relate to an allocation of O&M or overhead or anything like that, which I believe is what corporate cost allocations... 1162 MR. THOMPSON: Well, let's just move on. We'll argue that point. 1163 Just back to your proposal for a moment, Mr. Whelen, you used the phrase EGD could self-insure if the risk of these commodity transactions was its rather than EGS's risk. Could you just explain to me what that means. 1164 MR. WHELEN: That means that it wouldn't go out and pay anybody, Enbridge Gas Services, or a third party any amount to, if you will, lay off the credit exposure for somebody else to assume the risk. It would simply ensure that it was well capitalized, going forward, to absorb that credit exposure. And my comment earlier had been that its existing capital structure, that the marginal -- with its existing capital structure, the marginal impact is very modest on the utility as a whole. 1165 MR. THOMPSON: And is that, in effect, what EI now does with this risk, it self-insures it? 1166 MR. WHELEN: That is right. 1167 MR. THOMPSON: And so if the Board were to find that -- well, when you say self-insure in EGD, do you assume that it means ratepayers will pay the consequences of a risk materializing? 1168 MR. WHELEN: Yes. 1169 MR. THOMPSON: I see. All right. Then let's -- well, can you quantify, big picture, what this risk might be. Let's just take your $275 million of commodity purchase that generated $18 million of margin. What's the worst-case scenario there? Give me the doomsday scenario for the commodity gas purchaser. 1170 MR. WHELEN: The doomsday scenario for the commodity gas, if EGD was undertaking this and selling gas to third parties, an absolute doomsday scenario, I guess, would be the entire collapse of the energy sector and all receivables go by the wayside. And we've said here, and Mr. Jarvis gave some examples, that the maximum outstanding would be 100 million over any two-month period, which is, if you like, the life of one of these -- of this exposure. Roughly 100 million, I think he said $113 million in '03, and 2004 year-to-date is 96 million. 1171 MR. THOMPSON: Okay. And that would be doomsday for EI currently, or -- 1172 MR. WHELEN: That would be the same doomsday. It's the same exposure under either case. 1173 MR. THOMPSON: Okay. So now give me the realistic risk scenario. 1174 MR. WHELEN: The realistic risk is that periodically, at some point in time, one or more of these counterparties might default and our exposure to them will be based on how much is outstanding with each counterparty. And I mentioned earlier under the credit policy that we would operate this business on for the benefit of the customer. We wouldn't take on more than 15 million to any one customer at any point in time. And then offsetting that is any amount that you might recover, obviously, in a bankruptcy scenario, and typically there's some percentage that would be recovered of your total exposure to that counterparty. 1175 So it's the likelihood of that happening with a highly-rated counterparty, which know we know, on an annual basis, is an extremely low number, that was the .05 percent in the case of all investment-grade counterparties that we talked about before, and .01 percent in the case of an A-rated counterparty. But when it does happen that one time, it would be a larger number. So that's if one of them went under, and that's probably, you know, a more realistic bad, bad case scenario. 1176 MR. THOMPSON: So is your realistic risk scenario low, extremely low? Put some words on it that have meaning for me. 1177 MR. WHELEN: Well, it is extremely low because we've said over a long period of time, and the rating agency data goes back a long way, they calculate that on average the expected loss, which is what I said before, is less than half -- is about half a percent on investment rating. 1178 MR. THOMPSON: Thanks. So why does EI need 2 million bucks to guard against this risk? 1179 MR. WHELEN: Because it must guard against, as all counterparties -- pardon me, as all companies that are providing credit support would be, against the unexpected; that not on average over time would these losses occur, but tomorrow one of these individuals -- one of these individual parties go bankrupt and you have to have a high degree of confidence that you will have sufficient equity in your business to weather that storm, if you will. And then there might be another five or ten years where there is not another default, but when default happens, you have to have sufficient capital on your books to weather the storm. 1180 MR. THOMPSON: All right. Another side of the risk is, right now, EGS is doing the commodity purchasing as a principal; correct? And under your proposal, it will be doing it as an agent. Does that make EGS a little less vigilant if they're doing it for somebody else's ticket, i.e., the ratepayers pick up the damage? 1181 MR. WHELEN: I can speak from a risk-control perspective as somebody monitoring and -- in Mr. Jarvis's business, absolutely not. I mean, he has an agency responsibility under that agreement to be vigilant with respect to the risks that he's undertaking. So we apply the same due care and attention that we would to any other business. 1182 MR. THOMPSON: All right. Let's move on. 1183 When Enbridge Gas Services started in this activity, I think Mr. Brennan, you indicated it was sometime in November of 2002; is that right? This is the bundled commodity -- 1184 MR. BRENNAN: Yes, it was November 2002; that is correct. 1185 MR. THOMPSON: -- transactions that formed part of the portfolio beginning in November of 2002; am I right? 1186 MR. BRENNAN: Yes, that's correct. 1187 MR. THOMPSON: And if you go to Exhibit I, tab 1, schedule 12, this is Board Staff Interrogatory No. 1 -- sorry, 12, we see there the $18.1 million of transactional services transacted in 2003; correct? 1188 MR. BRENNAN: Yes, that's correct. 1189 MR. THOMPSON: And that number, I believe, is the same number that appears in the prefiled A2, tab 5, schedule 1, I have it at page 5, but there it's classified as discounted capacity commodity transactions and services; is that the same $18.1 million? 1190 MR. BRENNAN: Yes, it is. 1191 MR. THOMPSON: Okay. And so it would appear that when the answer to Board IR No. 12 or Interrogatory No. 12 was provided, you weren't classifying any of these transactions as bundled commodity, am I right? 1192 MR. BRENNAN: In the interrogatory response, no, that's right, because they wanted to know for those years the breakdown between the different TS service offerings. These are the service offerings that we're allowed to offer today and that is how this was broken down. 1193 MR. THOMPSON: Okay. But throughout these line items there must be bundled commodity with one or more of these line items. 1194 MR. BRENNAN: Yes, that's correct. I'll give you an example, maybe just to give you an idea of what some of these transactions would look like, let's say there was an opportunity to buy gas at Dawn at a certain point in time, say at $5 or whatever. Gas Services goes out and buys the gas and then utilizes some of the utilities' storage, like off-peak storage, to inject that gas into storage and then sees an opportunity to sell that gas two months later at, say, $5.50. So they go out and sell it at the 5.50, they buy the gas, inject it into storage and go out and sell it two months later and that difference of 50 cents is captured, that margin and all that revenue, if you like, associated from that flows back to Enbridge Gas Distribution. Now, how we've classified them here, because we were not in the commodity business today, we've classified that transaction under, say, an off-peak storage deal. 1195 MR. THOMPSON: Well, so is this just a labelling issue, what you used to call services you've now decided to label commodity/services? 1196 MR. BRENNAN: Yes. What I've done in this interrogatory is from Enbridge Gas Distribution's perspective, we've broken the revenue out based on the services that we're able to provide today. So if a commodity was attached to, say, off-peak storage, the revenue would be captured under off-peak storage. If it was attached to transportation it would be captured under transportation, or exchanges or whatever. 1197 MR. THOMPSON: Let me just understand. When were we were talking earlier in my example, the $20 million goes to Enbridge Gas Distribution, is this the complete margin on the deal? 1198 MR. BRENNAN: Yes. 1199 MR. THOMPSON: That's, in effect, the $18.1 million we're talking about here. When it arrives in Enbridge Gas Distribution's hands, do I understand you to be saying, We put it into these line items, we classify it as off-peak storage, peak storage, peaking supply optimization, exchange and transportation? 1200 MR. BRENNAN: Yes. 1201 MR. THOMPSON: All right. So you don't have, in Enbridge's books, a so-called bundled commodity/services classification? 1202 MR. BRENNAN: No, that's correct. 1203 MR. THOMPSON: All right. And so it's not Enbridge then, Enbridge Gas Distribution that's driving this initiative to get credit costs, it can't be because you don't even record them in that fashion; is that right? 1204 MR. BRENNAN: No, it was Enbridge Gas Services who came to Enbridge Gas Distribution saying that, We've tried this business out for a couple of years, there are costs that we're absorbing and we would like to try to recover those costs. 1205 MR. THOMPSON: So it's Enbridge Gas Services that comes up with the description, Well, what we're doing for you is really bundled commodity and services; is that right? That's where the label emanated? 1206 MR. BRENNAN: I don't know where it really came from, I think we both knew what was going on, what was -- how you want to characterize it... 1207 MR. THOMPSON: Well, you didn't characterize it as bundled commodity, that's my point. It wasn't characterized as bundled commodity in the 2003 case, apparently, was it? 1208 MR. BRENNAN: No, it wasn't. 1209 MR. THOMPSON: And I don't recall it being presented as a problem in the 2004 case, which was an accelerated type of rate case. 1210 MR. BRENNAN: That's correct. 1211 MR. THOMPSON: So here we are in the 2005 case, with $18.1 million that, as far as EGD is concerned, doesn't include bundled commodity but Enbridge Gas Services says, Well, it really is 10.5 million of bundled commodity. 1212 MR. BRENNAN: Well, no, we obviously acknowledge that it was a bundled service and there's commodity related to it, but from our perspective, given what we're allowed to conduct today, commodity isn't one of them, so we attach the revenues to the associated transactional service asset that was being used. 1213 MR. THOMPSON: All right. Well, what's happened, Enbridge Gas Services and, I guess its parent, which happens to be your parent, was prepared to do this 2003 and 2004 on the existing basis, is there something that's happened in the market that's causing them to ask for more? 1214 MR. JARVIS: The business of conducting commodity around the transactional services, when we first began to consider whether we would recommend doing that or not to EGD, we recognized that there were credit costs attached to it from the outset. However, in discussions with the treasury department at that time, and subsequently with EGD, we felt that before there was an ability to come forth with a better explanation of what the business is about and what the credit costs and risks are, that we, in effect, needed to create the business, and that in order to create that business and test out the validity of it, it was determined by Enbridge Inc., at that time, that they would not seek recovery of the credit charges and pending a determination of what the entire business model looked like. 1215 MR. THOMPSON: And that all took place, when? 1216 MR. JARVIS: Well, that would have been during the fall of 2002. 1217 MR. THOMPSON: Well, are there other bundlers out there, people that bundle commodity with utility assets? Is this a competitive market? 1218 MR. JARVIS: Yes. 1219 MR. THOMPSON: Well, who else is out there? 1220 MR. JARVIS: Union Gas would be, I believe, the closest example. 1221 MR. THOMPSON: Union Gas the utility? 1222 MR. JARVIS: Their assets. I'm not exactly sure how they're structured to manage that business right now. 1223 MR. THOMPSON: Okay. Anybody else? 1224 MR. BRENNAN: I was going to say, even today or ever since we've had transactional services, there are other people out there, for example, who come to us and, for example, want storage. Well, presumably they have a commodity involved with that so that's what they have and that's why they want our storage. Likewise, if they want to do an exchange, or transportation, we have the transportation, they may have the commodity so there's all of those third parties out there that are doing these things today on their own behalf. So they would acquire the asset from us and then do their own bundling. 1225 MR. THOMPSON: Right. So is it a competitive market? Let's try it this way: You indicated that to get the 18 million, you had to buy about $275 million of gas; is that right? 1226 MR. BRENNAN: Well, just to be more specific, Mr. Thompson, if you go back to the evidence itself, on that same table on page 5, paragraph 20, we've identified that of that $18.1 million, 10.5 had to do with commodity transactions. You keep making reference to the $18.1 million, the number is 10.5 that's related to commodity transactions and so to go on to answer your question, yes, that $275 million was to generate the $10.5 million. 1227 MR. THOMPSON: My apologies. 1228 All right. So that's a margin of, what, 3 percent, between 3 and 4 percent? 1229 MR. BRENNAN: You're taking the 10.5 divided by the 275. 1230 MR. THOMPSON: To generate $285.5 million of revenue through EGD through bundled commodity transactions, EGS incurred gas costs of 275 million, that's what I understood you to be telling me. 1231 MR. BRENNAN: Sorry, you started of by saying in order to generate 285 -- 1232 MR. THOMPSON: To generate a margin of $10.5 million on $275 million of gas purchases, I add the two together. 1233 MR. BRENNAN: Right. So we sold it for the higher number and bought it for the lower number. 1234 MR. THOMPSON: Yes. You got $285.5 million of revenues and EGS incurred $275 million of gas costs. 1235 MR. BRENNAN: Right. 1236 MR. THOMPSON: And so the margin on this activity is between 3 and 4 percent, roughly. 1237 MR. BRENNAN: Whatever that works out to be, yes. 1238 MR. THOMPSON: Okay. So is that -- is the activity in the marketplace such that margins on this business are being squeezed in the current environment? Are they still about what they were in 2002? Are they going up? Can you help me with that? 1239 MR. JARVIS: Well, what our experience has been is that as we have had fewer and fewer credit-worthy counterparties available to transact with, and as those counterparties conduct similar reviews of their balance sheet and capital requirements and credit costs, we've seen the other counterparties, if I can use that term, seeking higher margins than they have in the past. 1240 MR. THOMPSON: Okay, so margins are going up. 1241 MR. JARVIS: Yes. 1242 MR. THOMPSON: And so as far as EI is concerned, its piece is getting larger than what it was previously because margins are going up. 1243 MR. BRENNAN: I'm not sure I understand the connection. When you say EI -- 1244 MR. THOMPSON: EI gets 25 percent of the action. 1245 MR. BRENNAN: Okay. From the shareholder perspective, okay. 1246 MR. THOMPSON: Right. 1247 MR. BRENNAN: Yes. As we generate more transactional service revenue, then both ratepayer and shareholder benefit. 1248 MR. THOMPSON: I agree. But as margins widen, even if you're generating the same amount of revenue, EI's situation is improving as is the situation of ratepayers. 1249 MR. BRENNAN: That's correct. 1250 MR. THOMPSON: And margins are widening. They're not narrowing, they're widening. 1251 MR. JARVIS: I would agree with that generally. 1252 MR. THOMPSON: So there's not a whole lot of competitive activity out in the marketplace that is squeezing margins. They're going in the other direction. 1253 MR. JARVIS: There are a reduced number of counterparties in the marketplace with higher expectations for the returns to their organizations. 1254 MR. THOMPSON: All right. Let's then go to your third scenario, the third proposal, I think it is. If I understood it correctly, what the company is saying is if the Board doesn't approve the recovery of some credit costs from ratepayers, then I understood you to say EGS will not -- no longer engage in bundled commodity transactions with EGD. 1255 MR. BRENNAN: Well, there were two pieces to that. If the Board does not allow the utility to conduct the commodity transactions in its own name, and is unwilling to allow Enbridge to recover the credit costs on a proportional basis, then yes -- then basically there wouldn't be any commodity transactions going on. We would be reverting back to the traditional transactional services. 1256 MR. THOMPSON: Well, let's just take scenario -- alternative 1 where the transactions are currently being -- commodity transactions are currently being conducted in EGS's name, and that, I understand, will be continued if you can get some credit costs from ratepayers. 1257 MR. BRENNAN: If we are able to share in the credit costs, that's correct. 1258 MR. THOMPSON: Okay. Let's assume, then, that you don't get that. I understand somebody to be saying, whether it's Enbridge Gas Distribution, EGS, or both of you, that EGS will no longer participate in bundled commodity transactions; have I got that straight? They're out of the market. 1259 MR. BRENNAN: No, it would be -- Enbridge Gas Services would no longer be willing to enter into those bundled commodity transactions, and under such a situation, we would be looking to adjust the sharing mechanism in terms of the guarantee to ratepayer as well as the guarantee or next amount of money coming to the shareholder. 1260 MR. THOMPSON: Well, that means to me Enbridge Gas Services is out of the bundled commodity services market with EGD's assets; am I right or am I wrong? 1261 MR. BRENNAN: That's correct. 1262 MR. THOMPSON: All right. So EGD will not be allowing Enbridge Gas Services to use its assets for bundled commodity services. 1263 MR. BRENNAN: That's correct. 1264 MR. THOMPSON: Okay. So somebody else can use them. 1265 MR. BRENNAN: Yes. If someone else, which is the case today, wants to come to Enbridge Gas Distribution and take advantage of our assets and then, themselves, bundle it with commodity, they can do that today. 1266 MR. THOMPSON: Okay. And when you started this game up with EGS, they didn't even exist. They were created to do this business; right? 1267 MR. BRENNAN: My understanding is EGS was there before the utility appointed them as their agent to conduct these businesses. 1268 MR. THOMPSON: Not long before. 1269 MR. BRENNAN: I'm not sure of the timing. Mr. Jarvis can maybe... 1270 MR. JARVIS: It was, I think, 12 or 14 months. 1271 MR. THOMPSON: And EGS is supposedly not getting any preferences from EGD in terms of this activity; is this correct? 1272 MR. BRENNAN: What do you mean by "preferences"? 1273 MR. THOMPSON: Well, my recollection is, and you will correct me if I am wrong, but when you set up EGS to do this activity, there was a lot of concern about its competitive market implications, and I thought we were told EGS is arm's length, operating as a third-party service provider would operate from Enbridge; have I got that straight? 1274 MR. BRENNAN: Yeah, I'm not sure whether you -- what you're getting at. I guess I know there are certain parties that had concerns around the utility appointing Enbridge Gas Services as agent around issues of competitiveness, I guess, if you like, but our position is that we have addressed those through the protocols and the policies that we have embedded into the service schedule between the utility and Gas Services. 1275 MR. THOMPSON: Well, let me try it this way: Can a third party, unaffiliated bundled commodity/services provider step into the shoes of EGS and carry on the business as EGS did with EGD? 1276 MR. BRENNAN: Excuse me one moment. It's difficult to say, Mr. Thompson, whether anyone else would be, first of all, prepared to do it, and what parties would be out there that could do it without continuing, I guess, in some people's mind, continuing to be in conflict with the utility. So I think that's sort of our answer, I guess. 1277 Could it happen? I'm not sure that -- potentially, I guess, there is someone out there, but I'm not sure, again, who that other group of parties would be. For example, would it be a supplier and marketer? Well, they may be in conflict with what the utility does today with, say, a supplier, and we may be buying gas from them for system gas at the same time so -- and whether or not that party would be prepared to do it for whatever we're prepared to pay them. 1278 MR. THOMPSON: Well, I'm a little bit confused, really. You're saying an arm's-length third-party commodity gas seller/bundler might be able to step into EGS's shoes but that party's probably going to be in a conflict of interest. Explain that to me. 1279 MR. BRENNAN: They could be. For example, if they are an existing supplier to us, for example. 1280 MR. THOMPSON: So is EGS, aren't they? 1281 MR. BRENNAN: Well, they're buying gas on our behalf, they're not a supplier. 1282 MR. THOMPSON: So EGS is purified because they're an agent; is that the idea? 1283 MR. BRENNAN: They're not in the business normally of selling gas, not like a producer, for example. 1284 MR. THOMPSON: I see. So there's nobody out there that can step into their shoes, is that what you are saying? 1285 MR. BRENNAN: I'm not saying there is or there isn't. I'm saying it would be unlikely there is someone. 1286 MR. THOMPSON: The Board is saying to Union, I think, in one of its cases that it has an obligation to maximize the value of its assets, the assets available for TS. Would you take that subject to check? 1287 MR. BRENNAN: I understand that, but probably not at any cost though. 1288 MR. THOMPSON: No, but you're telling us in this case, as I understand it, that working together with EGS, these assets have a value of 15 million bucks in 2005, that's what you're telling us. 1289 MR. BRENNAN: That and combined with the commodity. 1290 MR. THOMPSON: And I suggest to you that this is a competitive arrangement, a -- sorry, if it's an arrangement that meets competitive market standards then there must be somebody else out there that can do the same thing. 1291 MR. BRENNAN: There may or may not be. 1292 MR. THOMPSON: Okay. And I suggest to you that if EGS is out of the picture, then the utility has an obligation to bring somebody else into the picture who can do it, to maximize the value of these assets; do you agree with that? 1293 MR. BRENNAN: I think we have to consider that. 1294 MR. THOMPSON: Right. And I suggest to you you won't consider it very seriously if your third option is approved, which is you're only going to embed $4 million in rates; right? 1295 MR. BRENNAN: Well, you know, it goes to both ratepayer and shareholder. I mean, if you look under the scenario that I mentioned in my examination in-chief where the first 4.5 million goes to ratepayers, the next 1.3 comes to the shareholder and out of that 1.3, the shareholder has to pay for any O&M, say in the range of $700,000, that doesn't leave an awful lot left for the shareholder. 1296 MR. THOMPSON: I don't think you're -- maybe we're missing each other. 1297 MR. BRENNAN: Okay. 1298 MR. THOMPSON: You say working with a competent gas commodity bundler like EGS we can generate $15 million of gross revenue and will embed 8 in rates. 1299 MR. BRENNAN: Yes. 1300 MR. THOMPSON: That's in propositions -- your proposal as well as in your alternative, provided you get credit costs. 1301 MR. BRENNAN: Right. 1302 MR. THOMPSON: Then your third option is, If we can't get credit costs, our proposition is we won't even do this business with EGS and we'll put 4 million in rates. 1303 MR. BRENNAN: That's correct. 1304 MR. THOMPSON: And share the rest. 1305 MR. BRENNAN: Well, not the rest -- 1306 MR. THOMPSON: Well, share after 4. 1307 MR. BRENNAN: No, 4.5 goes to ratepayer. 1308 MR. THOMPSON: I'm sorry, the next piece goes to shareholder and sharing beyond 8, is it, or 6, what's the -- how does it work? 1309 MR. BRENNAN: Let's see so it's -- say it starts with 8, first 3.5, you're left with 3.5, you take off 1.3 and you're left with 2.2, I guess. I'm just trying to do this in my head, and that's what gets shared 75/25. 1310 MR. THOMPSON: Well, that was a new proposition that came on the table this morning so let's just get it straight. 1311 MR. BRENNAN: The details of it may have been addressed this morning, but it was certainly identified, that was certainly our intention in responding to one of the interrogatories that I mentioned this morning which I believe was CME No. 27. 1312 MR. THOMPSON: So the forecast revenues under your option 3 were, instead of being 15 million, the forecast revenues dropped to 8. 1313 MR. BRENNAN: 8 million. 1314 MR. THOMPSON: 8 million. And then instead of embedding 8 in rates, your proposal is to embed 4 million into rates. 1315 MR. BRENNAN: 4.5. 1316 MR. THOMPSON: 4.5. All right. And then after the 4.5 there is a precise amount that goes to shareholders. 1317 MR. BRENNAN: 1.3 instead of the 2.7. 1318 MR. THOMPSON: And then 75/25 above that. 1319 MR. BRENNAN: Yes, that's correct. 1320 MR. THOMPSON: All right. But if the assets have a value of $15 million EGD working with a competent and capable gas-commodity bundler, why would the Board subscribe to that proposition? 1321 MR. BRENNAN: Well -- 1322 MR. THOMPSON: It seems to me it just lets you sit there and let the assets remain idle. 1323 MR. BRENNAN: Because Enbridge Gas Services no longer wants to enter into commodity transactions. 1324 MR. THOMPSON: But you should go out and find somebody who will. 1325 MR. BRENNAN: And I said we may have to consider doing that. 1326 MR. THOMPSON: And I say the way you make sure you do that is embed at least 8 million in rates and probably more, that would provide an incentive, wouldn't it? 1327 MR. BRENNAN: I don't think that's where we're going. 1328 MR. THOMPSON: I know you're not going there. Okay. Maybe I'll drag there in argument. 1329 MR. BRENNAN: But in any case, even if we did go to another party, there would be credit costs there as well, that would have to be recovered as well. I mean, it's just not because we go to another party, all of a sudden the credit costs would disappear. 1330 MR. THOMPSON: The credit costs associated with the gas purchases are with the third party. You may have to make a deal with the third party. 1331 MR. BRENNAN: Right, and they're not going to do it for free. They're going to want to recover those costs. 1332 MR. THOMPSON: They're going to assess what the margins are for that game and they're going to determine what they're prepared to do that for, right? 1333 MR. BRENNAN: They would make their assessment of what they would be looking for and, yes, right. 1334 MR. THOMPSON: And Enbridge Gas Services was prepared to do it for 5 million bucks on a $20 million of margin. 1335 MR. BRENNAN: Where is the $5 million coming from? 1336 MR. THOMPSON: It's an example of $20 million worth of margin, Enbridge Inc. through Enbridge Gas Services gets $5 million approximately. 1337 MR. BRENNAN: Less the O&M, yes. 1338 MR. THOMPSON: If they were prepared to do that, it seems to follow that somebody else out there would be prepared to do that. 1339 MR. BRENNAN: But then you're ignoring all the credit costs as well. 1340 MR. THOMPSON: Well, I don't think I am. 1341 MR. CHARLESON: Mr. Thompson, though, I don't believe the third party would see the $5 million though because that $5 million flows from earnings that EGD would continue to get through the shareholder's sharing mechanism. All we're really looking at is the credit costs component so it's not the entire, say, net margin that the shareholder would keep or transfer over to the third party. EGD would continue to keep its share of the sharing mechanism. It's just the total cost that you would now pay to that third party would be the difference. 1342 MR. THOMPSON: Well, I don't know that I'm coming at it that way. If you put the opportunity to do bundled commodity business with Enbridge Gas Services Inc. Out for bid for, let's say, 12 months, some commodity bundler may say I'll pay you $15 million for that opportunity. You tell us that's what it's worth to you. To them it will be worth whatever they can get over and above the 15 million and it would appear they could get at least 5; do you agree? 1343 MR. CHARLESON: No, I don't know see how you're arriving at them getting 5 out of it. 1344 MR. THOMPSON: All right. Well, I won't argue it with you any longer. 1345 Is any consideration being given to putting the opportunity to do bundled transactional services/commodity transactions with EGD out for tender? 1346 MR. BRENNAN: It certainly hasn't been considered at this point in time. 1347 MR. THOMPSON: Okay. Let's just move on to a couple more points, if I might. I just want to find out what's going to happen in certain scenarios. Let's assume the Board rejects your proposal but accepts alternative -- accepts your alternative 1, but fixes the credit costs recoverable from ratepayers at a number that's approximately equivalent to the actual out-of-pocket third-party credit costs, say $100,000. What happens then? Well, let's -- stop there. What happens then? 1348 MR. BRENNAN: Well, as I identified this morning when I was talking about alternative 1, if the Board -- well, let me rephrase that. In alternative number 2, if the Board does not allow the utility to conduct the commodity in its own name, or the Board does not approve the commodity or the credit costs being recovered in the same proportion as the revenues are being generated, then we would revert back to a new sharing mechanism. 1349 MR. THOMPSON: Okay. But I'm putting a credit cost recovery scenario to you that's $100,000, not the 2 million that you're talking about. What happens then? 1350 MR. BRENNAN: My view would be that it will revert back to alternative number 2. 1351 MR. THOMPSON: Let's assume, then, the Board embeds in rates in that scenario $8 million. What happens then? 1352 MR. BRENNAN: In the third scenario or the second -- 1353 MR. THOMPSON: No, in the scenario where they approve the method of operating the status quo with EGS taking the commodity risk -- 1354 MR. BRENNAN: Okay. 1355 MR. THOMPSON: -- they approve some credit costs but it's only actual credit costs in the order of $100,000, and then they embed in rates at least $8 million. What happens then? What will the Enbridge, one company, one vision, do in that scenario? 1356 MR. BRENNAN: I don't know. We would have to think of our options at that time. 1357 MR. THOMPSON: When you shake it all down, gentlemen, is this initiative any more than an attempt by EI to get a greater share of TS revenues than 25 percent? 1358 MR. BRENNAN: Absolutely not. No intention whatsoever. I mean, we're just trying to recover the costs that that have been incurred. And, you know, we've identified that if parties have difficulty in agreeing on what those costs are, that we are prepared to have an independent party look at those costs. 1359 MR. WHELEN: I would echo, I think, on the risk of our own balance sheet, we have demonstrated and proven out a new product for enhancing the revenue substantially; I think that will show up in all of the numbers that everybody has asked for. And now we're doing -- looking to simply prudently recover for the risk, going forward, if it isn't something which the utility is prepared to take on, which we think on a risk basis it should be quite prepared to take on. 1360 MR. THOMPSON: Is the company still operating under the auspices of this one company, one vision strategy? 1361 MR. BRENNAN: I've heard the expression. I haven't heard it lately. 1362 MR. WHELEN: I haven't heard the expression in a long time, but I don't think any of us are in a position to comment on it. 1363 MR. THOMPSON: Okay. Well, it was described in the Board's Decision of November 7, 2003, which is not too long ago, but it's drifted from your memory, has it? 1364 Okay. Well, then, my final question, Mr. Jarvis and Mr. Whelen, is just to get an understanding of what companies you represent. Mr. Jarvis, you're shown here under Enbridge Inc., Vice-President, Gas Services. Are you a vice-president of Enbridge Inc.? 1365 MR. JARVIS: Yes. 1366 MR. THOMPSON: Okay. And does Vice-President Gas Services refer to EGS, or is it something else? 1367 MR. JARVIS: Actually, it's Vice-President Gas Services of Enbridge Inc. There is a corporate entity called Enbridge Gas Services Inc. -- 1368 MR. THOMPSON: Right. 1369 MR. JARVIS: -- for which I am the president. 1370 MR. THOMPSON: Does that show up on this CV? 1371 MR. JARVIS: I don't believe so. 1372 MR. THOMPSON: All right. So you're the president of EGS. 1373 MR. JARVIS: Correct. 1374 MR. THOMPSON: Okay. Thank you. 1375 Mr. Whelen, you're shown as Vice-President and Treasurer of Enbridge Inc. 1376 MR. WHELEN: That's correct. 1377 MR. THOMPSON: And then you're also -- I think you're the Treasurer of Enbridge Gas Distribution? 1378 MR. WHELEN: I am. 1379 MR. THOMPSON: Do you have any office in Enbridge Gas Services? 1380 MR. WHELEN: I do not believe I do. 1381 MR. THOMPSON: Thank you very much. Those are my questions. 1382 MR. BETTS: Thank you, Mr. Thompson. 1383 Mr. Dingwall, are you prepared to proceed? 1384 MR. DINGWALL: I am prepared to proceed, sir. I'll leave it to the Panel's discretion as to what they want to do with the clock and when. 1385 MR. BETTS: Sorry, with? 1386 MR. DINGWALL: With the clock. 1387 MR. BETTS: We're going to try and keep going until 4:00, if everybody can manage that, so another 45 minutes, and then we'll end the activities for today. 1388 MR. DINGWALL: Okay. Thank you, sir. 1389 MR. CASS: Mr. Chair, just in line with earlier discussions, if we can just indicate for the record to the new witnesses that Mr. Dingwall is with Energy Probe, represents Energy Probe. 1390 MR. BETTS: Thank you, Mr. Cass. I should have -- and Mr. Thompson wasn't here when I think we suggested that. In fact, Mr. Thompson, we suggested that counsel for the intervenors could describe who they were representing, so would you mind doing that at this point. 1391 MR. THOMPSON: Yes, I represent the Industrial Gas Users' Association. I was going to say Pollution Probe. 1392 MR. DINGWALL: You can pass the tree back here to hug. 1393 CROSS-EXAMINATION BY MR. DINGWALL: 1394 MR. DINGWALL: Gentlemen, I'm trying to gain an understanding of the various roles and entities involved. Mr. Brennan, to whom do you report? 1395 MR. BRENNAN: I report to Arunas Pleckaitis, Vice-President of Opportunity Development. 1396 MR. DINGWALL: And does he have a role within Enbridge Inc. as well? 1397 MR. BRENNAN: Within Enbridge Inc.? 1398 MR. DINGWALL: Yes. 1399 MR. BRENNAN: Not that I'm aware of. 1400 MR. DINGWALL: Mr. Jarvis, who do you report to? 1401 MR. JARVIS: I report to Stephen Letwin, Group Vice-President for Distribution and Services, Enbridge Inc. 1402 MR. DINGWALL: I've had the opportunity to read through the morning's transcript, so I'll do my best to try not to repeat questions from my absence, so I'll ask the panel to bear with me. 1403 Am I to understand correctly that the only reason that credit support would be needed for EGS is because of the bundling of commodity? 1404 MR. JARVIS: As it relates to the transactional services and any of our other functions under the agency agreement, I believe that's correct. 1405 MR. DINGWALL: So in the absence of bundling commodity together with the assets that are released for transactional services, you would not need credit to simply dispose of those assets and receive funds for them. 1406 MR. JARVIS: Not of the magnitude that we've talked of. There would still be the Natural Gas Exchange letter of credit requirement. 1407 MR. DINGWALL: And so I understand it, earlier on you clarified that approximately 275 million was the sales volume in dollars of transactions associated with commodity plus transactional services for the previous year? 1408 MR. BRENNAN: The $275 million represents the amount of dollars spent on purchasing commodity in 2003. 1409 MR. DINGWALL: So the revenues would have been the amount for commodity plus the assets that would have been bundled with them. 1410 MR. BRENNAN: Yes, that's my understanding. 1411 MR. DINGWALL: So without dealing with commodity, what kind of dollar volume would EGS have been flowing in on an annual basis for EGD? 1412 MR. BRENNAN: I'm sorry, I was just checking my notes here. Would you repeat your question. 1413 MR. DINGWALL: I very likely maybe could. In the absence of commodity, what ballpark of dollars was involved for EGS before that? 1414 MR. BRENNAN: With EGS? I'm not sure I understand your question. When you say "involved with EGS," if they weren't doing the commodity? 1415 MR. DINGWALL: Before EGS began bundling commodity with the transactional service assets, approximately what kind of dollar volume were they carrying on business with? 1416 MR. BRENNAN: Are you talking gross margin? Again, I'm not sure -- 1417 MR. DINGWALL: No, gross revenue on EGD's behalf. 1418 MR. BRENNAN: Gross revenue? I don't know the number offhand, but it would probably be very close to the gross margin. The only difference between the gross revenue and the gross margin would be any direct costs or avoided costs, primarily being fuel, so that would be the difference. So if you take a look at what the gross margin is, you have a pretty good idea of what the gross revenues are going to be when you're not including the commodity piece there. 1419 MR. DINGWALL: So it would really come down to what the previous transactional service budgets were in the past years, apart from fuel. 1420 MR. BRENNAN: That would be a good estimate, yes. 1421 MR. DINGWALL: And would it be reliable to ballpark that for the past three or four years as somewhere in the 8 to $15 million range? 1422 MR. BRENNAN: Again, just going from memory, I believe 2002 was just under $10 million, 9 million and change or whatever, 9.5, and then in 2001, I believe it was in the range of $13 million. 1423 MR. DINGWALL: Is EGS involved in the business of transacting in commodity for itself or any company apart from EGD? 1424 MR. JARVIS: We have a number of other arrangements where we are involved in transacting commodity for other customers; however, in so doing, we do not generate our profits or our fees or our compensation from the commodity side, so if we're executing a transaction for this customer at $5, the customer pays $5. So the commodity is a pure pass-through. 1425 MR. DINGWALL: But you'd still be transacting in the customer's -- or for the customer? 1426 MR. JARVIS: Yes. 1427 MR. DINGWALL: Has EI had to put in place any form of credit support for EGS's other commodity transactions? 1428 MR. JARVIS: Yes. 1429 MR. DINGWALL: So, Mr. Brennan, in looking at your credit exposure to EGS since they're doing a fair bit of business for you, what credit enhancement or what review of the books of EGS have you undergone? 1430 MR. BRENNAN: I'm not sure, again, I understand your question of what -- in reviewing the transactions at Gas Services are doing on behalf of Enbridge Gas Distribution, what have we done to review their books; is that what you're asking? 1431 MR. DINGWALL: Yes. Essentially EGS is a counterparty that you're essentially doing business with, are they not? 1432 MR. BRENNAN: No. Enbridge Gas Services is acting as our agent. 1433 MR. DINGWALL: They're receiving the funds, are they not? 1434 MR. BRENNAN: They are receiving the revenues, that's correct, and then as Mr. Jarvis mentioned, they get posted to EGDI once a month. 1435 MR. DINGWALL: So up until the time that they're posted to you, you're at the risk of whatever fate might transpire for EGS. 1436 MR. BRENNAN: What fate might that be? 1437 MR. DINGWALL: Do you have a parental guarantee from EI to cover your exposure to EGS? 1438 MR. BRENNAN: No. If something happens on the commodity side, Gas Services currently is the one that's at risk, not the utility. 1439 MR. DINGWALL: But they're collecting for you on the transactional service side, are they not? 1440 MR. BRENNAN: Yes, they are, but they are the ones who are already paying the dollars, too. 1441 MR. DINGWALL: Is there a lag at all between the time that you're paid and the time that they collect? 1442 MR. JARVIS: I'm not sure, again, exactly the lag you'd be looking at, but the gas payable and the gas receivable are settled on the same date. 1443 MR. DINGWALL: But when you release an asset to EGS for their disposition as being excess to utility needs, are you paid on the same day for that asset? 1444 MR. BRENNAN: The same day as that asset was released? 1445 MR. DINGWALL: Yes. 1446 MR. BRENNAN: No. 1447 MR. DINGWALL: So there is a time when -- 1448 MR. BRENNAN: I mean, you could argue, for example -- in fact, I guess, Enbridge Gas Services would look at it and say, Okay, well, we have excess storage available, or we have an opportunity to do some off-peak storage. That has nothing to do as to whether or not there's any exposure or -- you need a customer to be able to do something who wants to deal with that storage before there is any transaction or dollars changing hands. 1449 MR. DINGWALL: When the dollars change hands, Mr. Brennan, do they -- they go to EGS; correct? 1450 MR. BRENNAN: Again, it would depend on whether -- if it was strictly a transactional service, no, the revenue would go to Enbridge Gas Distribution. If there's a commodity involved where Gas Services had bought the gas, then the revenue for that gas, that transaction, if you like, the bundled transaction, would go to Gas Services, and then Gas Services then would credit EGDI the same amount. 1451 MR. DINGWALL: Let me just take you back to that last answer, Mr. Brennan, so I can make sure that I understand fully what the implications are after a morning of dealing with the kindergarten graduation. 1452 If it's just a straight transactional service asset disposition, does the money, or would the money have in the past gone directly to EGD? 1453 MR. BRENNAN: Yes. 1454 MR. DINGWALL: But now that there's a bundling of commodity with those assets, all the money goes through EGS first? 1455 MR. BRENNAN: Yes, simply because you -- we haven't broken out between what the commodity and what's the transactional services. But at the end of the day, all that revenue is coming back to the utility so there didn't appear to be any need to have to split that out. 1456 MR. DINGWALL: I'm trying to understand as well one of the -- one point that's before this, which is in addition to your proposal for how this is treated going forward for the 2005 test year, you've also put forward year-to-date balances and those year-to-date balances include some previously completed transactions involving both commodity and transactional services. Would those be cleared through this proceeding, or is that another proceeding that the previous year's treatments would be addressed in? 1457 MR. BRENNAN: You're talking about 2004. Well, 2004, we already embedded in rates $8 million. Then my understanding would be the next, whatever it is, $2.68 million, whatever it is, I can't remember what it is exactly, would go to the ratepayer and then the rest would -- to the shareholder, I've got to watch that, and then the remaining would go into the transactional services deferral account which would be disposed at the end of the year. 1458 MR. DINGWALL: And would that be through separate application? 1459 MR. BRENNAN: My understanding would be it's part of the process where we dispose with all of the deferral accounts, whether they be the PGVA or whatever. So my guess, it would be sometime in October of this year. 1460 MR. DINGWALL: So for the 2004 period, is there some amount that's to be put forward by the company suggesting that there were credit costs incurred? 1461 MR. BRENNAN: Not for 2004, no. 1462 MR. DINGWALL: Okay. What would be the average size of a transaction involving commodity? 1463 MR. JARVIS: The average size involving the commodity would probably be in the neighbourhood of 5,000 MMBtu per day up to 10,000 MMBtu per day, so in any month, 150 to 300,000 MMBtu's; gas price today, just to pick a round number, $6, so you're talking $1.8 million. 1464 MR. DINGWALL: What visibility does Enbridge Gas Distribution have into Enbridge Gas Services for audit purposes? 1465 MR. BRENNAN: The agency agreement allows audits. Also we have the right to review any of the confirmation deals that Enbridge Gas Services conducts which captures the -- all the components of the deal, the price, the counterparty, and everything else. 1466 MR. DINGWALL: And have you ever done so? 1467 MR. BRENNAN: Not to date, no. In terms of looking at the confirmations, no. We have had, I believe, if I'm not mistaken, one audit but it wasn't necessary to look at transactional services in particular. 1468 MR. DINGWALL: What I'm trying to understand is why the company has now only come out with the fact that it had bundled some time ago commodity together with transactional services. 1469 MR. BRENNAN: Well, I don't know whether you could say this is something new. I mean I can remember announcing this and making statements about this at some of our stakeholder meetings certainly last fall for sure, prior to going into this rate case. As far as why did we not let ratepayers or come to the Board earlier, well, from Enbridge Gas Distribution's perspective, the commodity was being carried out by Gas Services at no risk to the utility. We saw no need to change the sharing mechanism. We weren't going charged any sharing costs so we didn't see there was a need. We are coming forward now because we see a need for a change. 1470 MR. DINGWALL: Was there no thought given to the concerns of the competitive market at adding this new service to transactional services? 1471 MR. JARVIS: Part of the competitive situation at the time that was very much taken into consideration was the fact that our counterparty list, I want to call it, and I know it's been filed before, I know we went from 19 approved counterparties down at one point to 5, and I think of the 5 approved counterparties, I think only three of them were active in the eastern Canadian marketplace. So our ability to place services on behalf of the transactional services activity the way it had traditionally been operated had severely been eroded. 1472 MR. DINGWALL: Has that trend changed at all since the time? 1473 MR. JARVIS: It is improving but it is not near what it used to be. I believe today of the creditworthy and active counterparties in eastern Canada, I believe the number is eight. 1474 MR. DINGWALL: So that's up from five. 1475 MR. JARVIS: Creditworthy and active up from three to eight. 1476 MR. DINGWALL: Up from three to eight so it's more than doubled. 1477 MR. JARVIS: Frank's just corrected me. There was 17 counterparties initially and it was down to six, six approved, three active. 1478 MR. DINGWALL: Six approved, three active, is that current or -- 1479 MR. BRENNAN: In an interrogatory response, the question was asked: How many counterparties are approved by EGS? And the number was 17. How many are active? Six were active. It could be a timing issue as well, I mean it depends when you asked the question, but at the time I responded to the interrogatory, it was 17 counterparties that have approval, and only six are active. 1480 MR. BETTS: Mr. Brennan, just for the record, what was that interrogatory roughly? 1481 MR. BRENNAN: I'll try and find it here. It's Exhibit I, tab 16, schedule 38, it's a response to School Energy Interrogatory No. 38. 1482 MR. BETTS: Thank you. 1483 MR. DINGWALL: So that was the point in time at which you answered the interrogatory, that -- the number of counterparties; correct? 1484 MR. BRENNAN: Yes. 1485 MR. DINGWALL: And the time before you decided to enter into commodity together with transactional services, how many counterparties did you have? 1486 MR. BRENNAN: Again, if you go back to our evidence at A2, tab 5, schedule 1, paragraph 13, it talks there about: 1487 "At one point during 2002, Enbridge's approval counterparty list shrunk from 19 to 9, and only 5 of the 9 continued to be active in Ontario." 1488 So that would have been prior to entrance to the commodity. So it has, as Mr. Jarvis indicated, it has improved somewhat. 1489 MR. DINGWALL: So you've gone from 9 up to 17 in terms of number approved. 1490 MR. BRENNAN: And from five to six -- 1491 MR. DINGWALL: Five to six. 1492 MR. BRENNAN: That's correct. 1493 MR. DINGWALL: What's the historical bad-debt experience with transactional services? 1494 MR. BRENNAN: Again, if you go to response to I believe it's Board Staff 13, just let me check. Right. Again, that's Exhibit I, tab 1, schedule 13, page 2 of 3, about two-thirds of the way down there, there is a sentence that says: 1495 "During the period of the agency agreement between Enbridge Gas Distribution and EGSI has been in place, there has not been a single such bad debt incurred to either entity that has affected the customers of Enbridge Gas Distribution." 1496 MR. DINGWALL: Does that mean that there have been bad-debt circumstances that haven't affected customers of Enbridge Gas Distribution? 1497 MR. WHELEN: No, I think it's generally fair to say that we have not experienced any material bad debts or bad loan losses related to bad debts. 1498 MR. DINGWALL: What policies are in place to prioritize payments received from suppliers or other customers between EGS and EGD? 1499 MR. WHELEN: Can you explain what you mean by "prioritize"? 1500 MR. DINGWALL: Certainly. If there were to be a default of a particular customer who transacted both with EGS on its own account and EGS in a bundled transaction with Enbridge assets and you were looking at a 50 cents on the dollar scenario, how would that play out? 1501 MR. WHELEN: Well, right now we would incur the entire credit loss since Enbridge Gas Services isn't conducting these transactions and it's the principal's transactions, the loss, exposure is to Enbridge Gas Services. That's really the issue we're here about. 1502 MR. DINGWALL: Is that your intention, going forward, that Enbridge Gas Services takes whatever loss there might be? 1503 MR. BRENNAN: No. Our intentions going forward is that the utility conduct the commodity transactions in its own name. 1504 MR. DINGWALL: In the event the Board does not choose that option that you put forward, how would you be allocating payments or partial payments between the two entities? 1505 MR. BRENNAN: Under alternative number one when Enbridge Gas Services is conducting -- continues to conduct the -- commodity transactions in their own name and, if you like, charge back the commodity or the credit costs, then Enbridge Gas Services would be responsible for any bad debt. So they would be on the hook for it. 1506 MR. DINGWALL: But the credit costs, would they not be reflective of the bad debt? 1507 MR. WHELEN: The credit costs -- well, there would be a credit charge for mitigating, if you will, or taking on the exposure, if that's what you're thinking of which would be a payment from Enbridge Gas Distribution to Enbridge Gas Services. In return for that payment, Enbridge Gas Services is taking on the risk that if there is a loss, they would absorb it. It's not unlike paying an insurance company, it's an analogy, but to take that -- to take that risk. 1508 MR. DINGWALL: Thank you very much, gentlemen. Those are my questions. 1509 MR. BETTS: Thank you, Mr. Dingwall. 1510 Ms. DeMarco, what is your expectation for time requirement? 1511 MS. DeMARCO: Probably, depending on whether I have the opportunity to be efficient and try not to cover what's been covered already, in the range of half an hour to an hour. 1512 MR. BETTS: And clearly, we will not have the opportunity, even if we tried to conclude yours today, of hearing from Board Staff or the reply. Do you want to go ahead now for, let's say, 15 or 20 minutes or would -- does it -- do you want to leave it until tomorrow and begin at that point? 1513 MS. DeMARCO: I guess my preference would be to do the whole thing together and in that way, what I can try to do for the Board is eliminate questions that have been asked by reviewing the transcript tonight. 1514 MR. BETTS: I think then to try and capture -- the 15 minutes just probably doesn't make sense in terms of your efficiency and ours so we will conclude the cross-examination for today at this time and we will resume tomorrow morning. 1515 Are there any matters that should be considered before we adjourn for this afternoon? 1516 Originally we had -- or the schedule indicates that we would move from this panel immediately on to the Late Payment Panel, assuming that we were able to deal or -- or conclude this particular issue sometime mid-morning tomorrow, would you be in a position to continue that tomorrow with the late payment? 1517 MR. CASS: Yes, Mr. Chair, I think that's right. Ms. Persad would be responsible for the next panel, but I think it is ready to proceed as soon as this panel is finished. 1518 MR. BETTS: Okay. Thank you. I think then with that, and if there are no further items that we need to consider, we will adjourn for now and we will reconvene tomorrow morning at 9:30 a.m.. Thank you. 1519 --- Whereupon the hearing adjourned at 3:45 p.m.