Rep: OEB Doc: 12YPL Rev: 0 ONTARIO ENERGY BOARD Volume: 5 22 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 Tuesday, 22 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 22 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. TANIA PERSAD Enbridge Gas Distribution Inc. MICHAEL CADOTTE Union Gas Limited ROBERT WARREN CAC & CCC MICHAEL JANIGAN VECC ROGER HIGGIN VECC PETER THOMPSON IGUA JAY SHEPHERD School Energy Coalition DAVID POCH Green Energy Coalition MELANIE AITKEN Direct Energy Marketing Limited ELISABETH DeMARCO CEED, OESC, Superior Energy Management, TransAlta Energy Corporation MALCOLM ROWAN CME CAROL STREET CME MURRAY KLIPPENSTEIN Pollution Probe BRIAN DINGWALL Energy Probe VALERIE YOUNG OAPPA, Casco, Maple Lodge Farms, Markham District Energy MURRAY ROSS TransCanada PipeLines 8 TABLE OF CONTENTS 9 PRELIMINARY MATTERS: [20] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: [41] CROSS-EXAMINATION BY MS. DEMARCO: [46] CROSS-EXAMINATION BY MR. THOMPSON: [106] CROSS-EXAMINATION BY MS. DEMARCO: [131] PROCEDURAL MATTERS: [553] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: [566] CROSS-EXAMINATION BY MS. DEMARCO: [571] CROSS-EXAMINATION BY MR. WIGHTMAN: [835] RE-EXAMINATION BY MR. CASS: [848] QUESTIONS FROM THE BOARD: [866] PROCEDURAL MATTERS: [914] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON LATE PAYMENT PENALTY - LADANYI, BOYCE, McGILL: [933] EXAMINATION BY MS. PERSAD: [940] CROSS-EXAMINATION BY MR. THOMPSON: [1010] CROSS-EXAMINATION BY MR. DINGWALL: [1157] CROSS-EXAMINATION BY MS. GIRVAN: [1298] CROSS-EXAMINATION BY MR. SHEPHERD: [1323] CROSS-EXAMINATION BY MS. STREET: [1350] CROSS-EXAMINATION BY MS. LEA: [1406] QUESTIONS FROM THE BOARD: [1427] PROCEDURAL MATTERS: [1465] 10 EXHIBITS 11 EXHIBIT NO. K.5.1: PREFILED EVIDENCE FROM ENBRIDGE RATE CASE RP-2001-0032 ON TS [135] EXHIBIT NO. K.5.2: CEED INTERROGATORY NO. 1 FROM RATE CASE RP-2002-0133 [374] EXHIBIT NO. K.5.3: CEED INTERROGATORY NO. 17 IN RATE CASE RP-2002-0133 [418] EXHIBIT NO. K.5.4: OEB FACT SHEET ON LATE PAYMENT PENALTIES [979] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.5.1: TO ENSURE THAT THERE IS NO DOCUMENTATION REGARDING TRANSACTIONAL SERVICES COMMODITY; IF THERE IS DOCUMENTATION, TO PROVIDE IT [329] UNDERTAKING NO. J.5.2: TO PROVIDE THE DOCUMENTATION FROM THE STAKEHOLDER MEETINGS LAST FALL REGARDING THE SALE OF USE OF COMMODITY IN TRANSACTIONAL SERVICES [357] UNDERTAKING NO. J.5.3: TO PROVIDE REDACTED/SAMPLE TRANSACTION DOCUMENTS FOR A TRANSACTION WHERE EGS IS SELLING COMMODITY BUNDLED WITH TS WHERE EGS IS AGENT OF EGD FOR THE TS PORTION AND PRINCIPAL, BUT IN ACCOUNT OF EGD, FOR THE COMMODITY PORTION [588] UNDERTAKING NO. J.5.4: TO PROVIDE REDACTED/SAMPLE TRANSACTION DOCUMENTS FOR A TRANSACTION WHERE EGS IS SELLING COMMODITY BUNDLED WITH TS WHERE EGS IS OR WAS AGENT OF EGD FOR THE TS PORTION AND PRINCIPAL, FOR ITS OWN ACCOUNT, FOR THE COMMODITY PORTION [608] UNDERTAKING NO. J.5.5: TO PROVIDE THE ALLOCATION FACTOR APPLIED TO THE AMOUNTS IN CASDA [1041] UNDERTAKING NO. J.5.6: TO CONFIRM WHETHER EXHIBIT I, TAB 9, SCHEDULE 118, ARE PROJECTED NUMBERS [1373] 14 --- Upon commencing at 9:32 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. As I learned yesterday, through practical experience, I'm going to remind everybody on a regular basis to make sure they have their cell phones turned off, and the BlackBerries particularly seem to very much confuse our audio system, so please shut those down if you haven't already. 17 Today is day 5 of the hearing of this application, RP-2003-0203. We're scheduled to complete the examination of issues 4.1 and 4.2, which are associated with transactional services, and we are also scheduled to commence with the examination of issue 11.2, directed at the requested creation of the 2005 class action suit deferral account known as the CASDA. At the end of day 4 of the hearing, we were about to have cross-examination of company witnesses by Ms. DeMarco and that's where we will commence today's activities. 18 Just in terms of some housekeeping items and then I'll ask for preliminary items, I indicated yesterday when it appeared that we may need to use July 6th as a hearing day, that I might personally have a conflict until 11:00 a.m. I've corrected that so if we are sitting on that day, we can start at 9:30 a.m. as usual. 19 Are there any preliminary matters for the Panel's consideration? 20 PRELIMINARY MATTERS: 21 MR. CASS: Mr. Chair, the company has some undertaking answers that can be provided at this time. Two of them relate to the panel now on the witness stand, but actually, there are two that go back to previous panels, so perhaps in order to do it in an orderly fashion, I will start with the earlier undertaking responses. 22 MR. BETTS: That's fine. Please proceed, Mr. Cass. 23 MR. CASS: The first undertaking response that is available to be provided to the Board and parties concerns Undertaking J.1.3. This goes back to the first day of the hearing and the discussion of the Union storage contract and it related to an update to the evidence that was requested, so that's Undertaking J.1.3 that can be provided at this time. 24 MR. BETTS: Thank you. Thank you, Mr. Cass. 25 MR. CASS: The next undertaking response, Mr. Chair, is from day 2 of the hearing, this is Undertaking J.2.5 on the risk management issue, a request was made for the company's proposal with respect to recovery of costs for the customer survey and the answer to that undertaking is available. 26 MR. BETTS: Thank you. Please continue, Mr. Cass. 27 MR. CASS: Now, the next two, as I said, Mr. Chair, actually relate to the testimony of this panel. The first is Undertaking J.4.1, everyone will recall this was the VECC template that the company was requested to complete and that has been done so the response to Undertaking J.4.1 can be provided. 28 MR. BETTS: Thank you, that's been received. 29 MR. CASS: Then finally, Mr. Chair, there was an undertaking given to provide copies of the parental guarantees that have been discussed in the testimony of this witness panel. That was Undertaking J.4.4 and the answer to that undertaking can now be provided. 30 MR. BETTS: Thank you. Thank you for that. Is there anything further, Mr. Cass? 31 MR. CASS: Those are all of the preliminary matters that I have, Mr. Chair. 32 MR. BETTS: Thank you. Are there any other preliminary matters? 33 Before we then proceed with the cross-examination by Ms. DeMarco, the Board wanted to make a statement regarding issue 11.2, hopefully to assist parties as we enter into the next stage of evidence. 34 The Panel's statement is that this Panel of the Board cannot confirm that the Board will undertake a generic proceeding dealing with utility late payment penalties. In the absence of a direction for a generic proceeding, the parties have suggested that the issue is, and I quote, "Should the Board establish a 2005 CASDA and if so, what costs should be included therein." 35 While the Panel agrees to consider whether to approve establishment of the requested deferral account, it will not be determining whether any of the amounts to be recorded in a deferral account would eventually be recovered from rate base. Furthermore, the Panel expects parties to restrict their treatment of the matter to the narrow issue the panel has to decide. The Panel presumes that any parties wanting to deal with the question of what costs should be included will be directing their examination to the type of costs to be included. It is unlikely that a detailed discussion of forecast amounts would be useful to the Board panel. 36 I'm going to reiterate that statement as we begin the next issue as well in the event that any other parties join us during the day, but that is hopefully going to assist all of you in dealing with that matter. 37 I believe at this point, we're prepared to continue with the cross-examination of the witness panel and I welcome the witnesses back. 38 Ms. DeMarco, are you prepared to proceed? 39 MS. DeMARCO: I am, thank you, Mr. Chair. 40 MR. BETTS: Then please, do so. 41 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: 42 J.WHELEN; Previously Sworn. 43 G.JARVIS; Previously Sworn. 44 F.BRENNAN; Previously Sworn. 45 D.CHARLESON; Previously Sworn 46 CROSS-EXAMINATION BY MS. DEMARCO: 47 MS. DeMARCO: Just by way of organizational purposes, I will try and fill in certain areas and not cover what was covered yesterday. So in doing so, there are a few areas I would like to touch upon and one would be the history in the context of transactional services as it started within Enbridge and moved outside the company. Secondly, the process surrounding the change involving the sale of commodity. Thirdly, the agreements themselves, that govern the interaction. Fourth, the market conditions. And fifth, information that's available to the company or to EGS. And in doing so, I will be referring predominantly to Exhibit A2, tab 5, schedule 1. 48 So with that by way of introduction, Mr. Brennan, if I could take you to the evidence at Exhibit A2, tab 5, schedule 1, and specifically there in paragraph 2, your evidence indicates that EGD first established a transactional services function in 1997 when it established a TS department; is that fair? 49 MR. BRENNAN: Yes, that's correct. 50 MS. DeMARCO: And did the concept of optimizing the use of the company's storage and transportation assets originate within Enbridge, or Consumers as it then was? 51 MR. BRENNAN: Yes, it did. 52 MS. DeMARCO: It wasn't an initiative of any of the other related parties or the Enbridge family of companies? 53 MR. BRENNAN: Not that I'm aware of, no. 54 MS. DeMARCO: Did any of the Enbridge family of companies have a role in the development of the concept? 55 MR. BRENNAN: No, they did not. 56 MS. DeMARCO: Was there a business plan or other internal document that outlines the company's strategy in bringing forward transactional services as a new function? 57 MR. BRENNAN: Not that I'm aware of. Of course I wasn't in charge of transactional services at that time so I can't say. I'm not aware of any myself personally. 58 MS. DeMARCO: Would any other members of the panel be aware of such document? 59 MR. JARVIS: I'm not aware of such document. 60 MR. WHELEN: Neither am I. 61 MR. CHARLESON: Nor am I. 62 MS. DeMARCO: Again, referring to your evidence, it indicates that EGD's first TS department had the primary responsibility of optimizing the use of EGD's storage and transportation assets. What other responsibilities did it have? 63 MR. BRENNAN: On the transactional services? To provide the services that are listed at paragraphs, I guess, 6 through to 11, those being offering the services, peak storage, off-peak storage, loans, exchanges, load balancing and transportation assignments. 64 MS. DeMARCO: So that appears to be falling within the rubric of the primary responsibility as outlined in paragraph - let me just find the specific reference for you - paragraph 2 again. That would be -- all of those services would be optimizing the use of the company's storage and transportation assets; is that fair? 65 MR. BRENNAN: That's correct. 66 MS. DeMARCO: What other responsibilities would it have? 67 MR. BRENNAN: That's it as far as I'm aware. 68 MS. DeMARCO: So there were no other responsibilities outside of... 69 MR. BRENNAN: No. 70 MS. DeMARCO: Would you agree that optimizing the use of the assets is not the same as maximizing the revenue from such assets? 71 MR. BRENNAN: Yes, there's probably a subtle difference there. 72 MS. DeMARCO: Given this mandate, is it safe to say that the transactional services department was not involved in the purchase and sale of commodity? 73 MR. BRENNAN: That's correct. 74 MS. DeMARCO: And when Enbridge, or Consumers as it then was, first started doing transactional services, did it seek Board approval or direction to do so? 75 MR. BRENNAN: That's my understanding, yes. 76 MS. DeMARCO: And do you know if any direction was provided by the Board? 77 MR. BRENNAN: Well, I think the Board -- I think there was -- again, going from memory, there were several hearings where transactional services was addressed and the Board, I believe, ultimately approved the services that are being provided today. 78 MS. DeMARCO: And from a practical standpoint of your role now in the company, were there limits or any limits and conditions imposed upon Enbridge, or Consumers as it then was, providing transactional services? 79 MR. BRENNAN: I think there were meant to be short-term transactions, if you like. There is also the need to be able to demonstrate that, in offering transactional services, that it wasn't to the detriment of our customers, so those were a couple of things that I can remember that were discussed. 80 MS. DeMARCO: And you were part of that department, Mr. Brennan? 81 MR. BRENNAN: No, I was not. 82 MS. DeMARCO: You were not. When did you become involved with that department? 83 MR. BRENNAN: I became involved in probably 2001. 84 MS. DeMARCO: Do you know if Enbridge Gas Distribution provided any internal direction to the transactional services department related to the TS business? 85 MR. BRENNAN: I'm sorry, Enbridge -- would you repeat the question. 86 MS. DeMARCO: As it was then Consumers, provided any internal direction or limits related to the transactional services business? 87 MR. BRENNAN: No. The only one that I can remember was making sure that all the deals were reviewed and make sure that there is no impact on customers in offering those services. 88 MS. DeMARCO: Now, I've asked you as part of the undertaking to Mr. Shepherd to provide for the traditional revenue numbers, and I understand that that is still outstanding. 89 MR. BRENNAN: Yes. And maybe this would be probably a good opportunity to go through that table, because there are two tables and I'd like to be able to explain what we've done in answering not only Undertaking J.4.1, but as you see the response to the undertaking, we're also saying that it includes information requested under Undertakings J.4.2, J.4.5, and J.4.6. 90 So maybe if I can just start with the first table -- 91 MR. BETTS: Mr. Brennan, can I just make certain I understand that, then. So this is, in fact, the response to all of those undertakings. 92 MR. BRENNAN: Yes, it is. 93 MR. BETTS: And there's nothing further coming in on 4.2, 4.5, and 4.6. 94 MR. BRENNAN: That's correct. 95 MR. BETTS: Thank you. 96 MR. BRENNAN: So the first page or the first table, if you like, looks at the period 1998 to 2002, and the reason we split it in that fashion is that between 1998 and 2002, there was one sharing mechanism that was being looked at or approved, if you like. The second table for the period 2003 and 2004 and some of the forecast numbers for 2005 are based on a different sharing mechanism. 97 And going back to the first table, what we've shown there are the gross margins for each year. We've shown the O&M, if you like, and at that time the O&M was taken right off the gross margin. And then the sharing began, and it was shared not 90/10 across the board. How it was shared was it was 90/10 based on the budget numbers and anything over the budget was shared 75/25. So what you have on lines 14 and 15 are the total revenues, if you like, going to the ratepayer and to the shareholder. 98 Now, going to page 2, this is probably where -- well, this is where we are today for 2003. These are the sharing formula of what we have today, where starting with the gross margin, you take off the $8 million guaranteed to ratepayers; the next 2.7 going to the shareholder of which the shareholder deducts the O&M leaving the shareholder with $2 million; and the remaining $4.7 million is shared 75/25 with ratepayers. And at the bottom, you can see on line 14, 2003, that the ratepayers benefit to the tune of $13.55 million, and the shareholder, $3.85 million. Likewise, the same thing for 2004, but those are year-to-date numbers. 99 In 2005, we provided two scenarios, the first being a scenario whereby the commodity transactions are conducted under EGD's name. So again, you would have the sum of $15 million, that being $8 million from services and $7 million from commodity. Then we deducted $50,000 for credit costs, leaving a net gross margin, if you like, of $14.95 million, and then the same sharing mechanism as was provided in 2003 and 2004. 100 The last scenario, without commodity, is, I guess, as we discussed yesterday where the services would provide $8 million; the ratepayer would be guaranteed 4.5; the shareholder would then receive the next $1.3 million of which it has to deduct its marginal O&M costs, leaving it with 600,000; and the remaining $2.2 million would then be shared 75/25, leaving the ratepayer with $6.15 million and the shareholder with $1.15 million. 101 MR. THOMPSON: Mr. Chairman, just before Ms. DeMarco continues, I had some questions about this document and I plan to raise them when she finished, but it might make more sense just to put them on the record now, if that's acceptable to you. It would only take maybe two minutes. 102 [The Board confers] 103 MR. BETTS: Ms. DeMarco, would that be okay with you, rather than -- we will be interrupting your cross by doing that. 104 MS. DeMARCO: I'm absolutely fine with that. 105 MR. BETTS: And are there any comments from any parties with respect to that? Then the Panel certainly has no problem, so please proceed, Mr. Thompson. 106 CROSS-EXAMINATION BY MR. THOMPSON: 107 MR. THOMPSON: Thank you, very much, Mr. Chairman. 108 Yes, panel, what I'm interested in is a further column in 2005 with commodity but assuming commodity transactions are conducted in EGS's name and so what I wanted to do is just quickly run down the numbers if I might. 109 I assume it would be the same as the current with commodity column for the first three lines; am I right? 110 MR. BRENNAN: Yes. 111 MR. THOMPSON: 8 million, 7 million, totalling 15 million? 112 MR. BRENNAN: Yes. 113 MR. THOMPSON: And then line 4 is deduct credit costs. In the utility that, as I understand it, is the costs paid to third parties of about $50,000. 114 MR. BRENNAN: That's our estimate, yes. 115 MR. THOMPSON: Okay. And in the scenario where the transactions are conducted in EGS's name, does that line item appear or is it encompassed by a fee to EI? 116 MR. BRENNAN: I'm sorry, I'm not understanding you. The line here that talks about deduct credit costs of $50,000. 117 MR. THOMPSON: Yes, does that appear in the with commodity scenario in EGS's name as a deduction? 118 MR. BRENNAN: Yes, it would. 119 MR. THOMPSON: And then I understand there's an additional credit cost deduction in the EGS's name scenario which was the fee we were discussing yesterday. 120 MR. BRENNAN: No, it would be -- if we were to reproduce in another column 2005 with commodity being conducted by EGS, in EGS's name as opposed to EGD's name, this third column would more or less be the same but the only exception would be that the credit costs wouldn't be $50,000, it would be a much bigger number. 121 MR. THOMPSON: All right. And that's the $2 million number that we were discussing about yesterday as an estimate. 122 MR. BRENNAN: Yes, that's the $2 million that we were talking about yesterday. 123 MR. THOMPSON: And everything else below that would fall out according to the same math. 124 MR. BRENNAN: That's correct. 125 MR. THOMPSON: Thank you very much. Would it be too much to ask to have you produce this with that additional column just so we'd have it all on one page? 126 MR. BRENNAN: No, that's not a problem. 127 MR. SCHUCH: Mr. Chair, I think that's another undertaking. 128 MR. BETTS: We could do it that way or we could simply ask for a revision of 4.1. I think that's the most appropriate way. We will end up with too many tables, I think, otherwise. So let's just revise 4.1 at the earliest possible. 129 MR. THOMPSON: Thank you very much, Mr. Chairman. 130 MR. BETTS: Sorry, Ms. DeMarco, please continue. 131 CROSS-EXAMINATION BY MS. DEMARCO: 132 MS. DeMARCO: Not a problem. I actually have a handout, and I apologize, I don't have enough copies. It's previously filed evidence in RP-2001-0032. I have about five copies, shall I distribute them accordingly? 133 MR. BETTS: For ease of reference, I think we shall establish an exhibit number for this. 134 MR. SCHUCH: Mr. Chair, that would be Exhibit K.5.1. 135 EXHIBIT NO. K.5.1: PREFILED EVIDENCE FROM ENBRIDGE RATE CASE RP-2001-0032 ON TS 136 MS. DeMARCO: First and foremost, let me apologize for not having more copies and I will undertake to provide a stack at the break, and Mr. Brennan has informed me that he does, in fact, have this exhibit with him. 137 If I could take you to page 4 of 8 in what was previously marked as RP-2001-0032 Exhibit A, tab 13, schedule 1. The company has listed its historical revenue numbers that appear to coincide with what's just been filed - sorry, I have a bit of a cold here - in Exhibit K.4.2. And based on the table that you've got in front of you, is it fair to say that the actual net revenue numbers increased fairly significantly every year from 1998 through to 2001? 138 MR. BRENNAN: Yes, that's fair to say. Now, I think if you were to look at 2002, there was a distinct decline in the gross margin and that year it dropped to $9.36 million. 139 MS. DeMARCO: Why don't we confine ourselves to the period prior to when you started selling commodities. 140 MR. BRENNAN: That was prior to introducing the commodity as well. 141 MS. DeMARCO: I understood that to be in 2002. 142 MR. BRENNAN: No, we started the commodity in fiscal 2003. It was November 2002, which was fiscal 2003, but in fiscal 2002, we were not using the commodity and in that year the gross margin was $9.36 million. 143 MS. DeMARCO: That being said, we've got 1998, 1999, 2000 and 2001, where we've seen, first of all, your actual revenues go from 5.2 million to 10.1 million. 144 MR. BRENNAN: Yes, you're referring to net revenue. 145 MS. DeMARCO: That's right. If we want to look at gross margins we can go 5.7 million through to 10.7 million? 146 MR. BRENNAN: The 10.7 is the approved not the actual, the actual was 14.1 if you're talking gross margin. Just as an added comment, there is an asterisk beside that and that should be taken out. Those are actual final numbers. We had filed this table earlier on where we only had information up to August 31st, but the information presented in this table is final numbers, just so people know that. 147 MS. DeMARCO: If we look at the actual approved numbers year by year, in 1998 you were approved for approximately 2.1 million and your actuals far exceeded that and were 5.7 million, is that fair? 148 MR. BRENNAN: Yes, this is at the early stages of the transactional services business and not knowing how much we could do, our ability to forecast those. 149 MS. DeMARCO: So that's fair? 150 MR. BRENNAN: Right. And you know, of course, you could take me through the remaining years as well, but I think we've always contended that or always said that transactional services is a business that changes from year to year and it's very difficult to provide an accurate forecast. It depends on what assets you have available from year to year, what the weather is, what the prices are, what the counterparties are from year to year. So, yes, so that's one of the reasons why there is this difference between forecast and actual. 151 MS. DeMARCO: So let's just do that just momentarily in each of the years. 1999, your approved level was 3.5 million and again your actual was virtually double that. 152 MR. BRENNAN: It was at $6.9 million, yes. 153 MS. DeMARCO: And in 2000, your approved was 4.5 million and your actual was more than double, 9.9 million. 154 MR. BRENNAN: Yes, that's correct. 155 MS. DeMARCO: And in 2001, we see still an increase in revenue, your actual was 13.3 million. 156 MR. BRENNAN: I'm sorry, whereabouts are you getting 13.3? 157 MS. DeMARCO: Under the actual column. 158 MR. BRENNAN: I have gross margin because -- are you talking gross margin? 159 MS. DeMARCO: Yes, I am. 160 MR. BRENNAN: I have 14.11 million. 161 MS. DeMARCO: So the handout I have just handed out then is quite likely actual to August 31st, 2001. 162 MR. BRENNAN: Sorry. 163 MS. DeMARCO: So the actual number you have then in 2001 is, I'm sorry? 164 MR. BRENNAN: $14.112 million. 165 MS. DeMARCO: And you were approved for 10.7? 166 MR. BRENNAN: That's correct. 167 MS. DeMARCO: So would it be fair so stay that it's been an increasing revenue business. 168 MR. BRENNAN: With the exception of 2002. I think you know if you want to carry on through the document, I guess, and go to page 8 of that document -- 169 MS. DeMARCO: I actually am not there. 170 MR. CASS: Well, can Mr. Brennan be permitted to finish his answer, Mr. Chair. The proposition was put to him that it was an increasing revenue business and he is trying to answer that question, if he may be permitted to finish. 171 MR. BETTS: Please continue, Mr. Brennan. 172 MR. BRENNAN: Thank you. I think if you go to page 8, all I was wanting to add was that while the actuals had been increasing over those years, the benefit is also shown on this table where ratepayers, I guess, have increased from 75 percent of the net revenue up to 86 percent of that net revenue over that time frame as well while the shareholders' share of that net revenue has decreased from 24.8 percent down to 13.9 percent. I think -- just to put everything in into context. 173 MS. DeMARCO: And in each of these years, Mr. Brennan, no commodity was offered for sale? 174 MR. BRENNAN: That's correct. 175 MS. DeMARCO: Your evidence indicates at paragraph 3 that in July 2001, EGD outsourced the TS functions to its parent. 176 MR. BRENNAN: Sorry, we're back to Exhibit A2 -- 177 MS. DeMARCO: That's right, tab 5, schedule 1, page 1. 178 MR. BRENNAN: Yes. July 1st the TS function was outsourced to Enbridge Inc. 179 MS. DeMARCO: And at the same time, EGD also outsourced it's gas-supply planning function to its parent. 180 MR. BRENNAN: That's all part of the same outsourcing. The outsourcing arrangement that we had with Enbridge Inc. at the time was for four particular functions, they being gas-supply planning, gas acquisition, risk management, and transactional services. 181 MS. DeMARCO: And I believe regulatory support. 182 MR. BRENNAN: Regulatory support, and I believe maybe contract support as well. 183 MS. DeMARCO: Is it fair to say that subsequently, all the functions were assigned to EGS? 184 MR. BRENNAN: There is a novation letter, I believe, that basically moves all those responsibilities from Enbridge Inc. over to Enbridge Gas Services Inc. 185 MS. DeMARCO: And that would be the exhibit that we entered yesterday marked as K.4.1? 186 MR. BRENNAN: I believe that's correct. I believe on the front page there was an assignment and novation agreement; that's correct. 187 MS. DeMARCO: And that was October 1st, 2002; is that correct? 188 MR. BRENNAN: That's correct. 189 MS. DeMARCO: So would it be fair to say that that agreement now entered into the record as K.4.1 accurately and fairly reflects the agreement between now EGS and EGD? 190 MR. BRENNAN: Yes. The agreement hadn't been changed at all; it was just the parties to the agreement. 191 MS. DeMARCO: Yesterday, Ms. Aitken covered several of my questions regarding the specific question of outsourcing, and you've just covered them again so I'm just going to skip over that, if I might. But would it be fair to say that EGS would be deciding on things such as how much storage would be purchased? 192 MR. BRENNAN: Are you talking about incremental storage that -- if we were to -- in conjunction with the utility, it's not simply their decision. In all likelihood, it may even start within the utility. But any discussions that we've had around storage to date have generated within the utility as opposed to Enbridge Gas Services. 193 MS. DeMARCO: Certainly as part of its function in doing the gas-supply plan, this would be an element that you'd need to be looking at to be competent? 194 MR. BRENNAN: That's correct. They would be looking at the plan and say, There is a need, in our view, for additional storage, and then make a recommendation back to the utility. 195 MS. DeMARCO: They would, in fact, be involved in completing a portion of the plan, the development of the plan? 196 MR. BRENNAN: I would say their responsibility would be making a recommendation to the utility as to how much storage, what type of storage it would need. For the most part, it would be the utility, then, who would go out, and maybe in conjunction with Gas Services, to develop that storage or develop that plan. 197 MS. DeMARCO: And another element it would be required to do would be to determine how much system gas to supply each year. 198 MR. BRENNAN: Yes, to a certain degree, that's correct. 199 MS. DeMARCO: And how much transportation would be needed, and where? 200 MR. BRENNAN: Yes. They would again make those recommendations back to the utility. 201 MS. DeMARCO: What other functions would be involved, specific elements that would be involved in that gas-supply planning acquisition function? 202 MR. BRENNAN: The gas-supply planning function? They are also responsible for looking at what I call the short-term, this is the one-day -- I'm sorry, the one-year supply plan, where we're just looking at how we would meet our demand going throughout the year. We have -- during the busy winter periods and also late summer when we are looking about injection of storage, there is a group within the utility, Gas Services, Enbridge Operational Services, which is the gas control nomination function in Edmonton, plus our storage group Tecumseh, would meet weekly to discuss what our needs are for additional supply, whether we need to curtail those types of issues to meet the market, I guess, to meet our demand going throughout the year. And gas-supply planning's role in that, they run the models on a weekly basis to come up with the latest supply/demand balancing. 203 MS. DeMARCO: So it would definitely have a role in the determination of how much storage, how much transportation, where, when? 204 MR. BRENNAN: Are you referring to the latter or -- are you referring to the shorter term or the longer term? 205 MS. DeMARCO: In both. 206 MR. BRENNAN: Well, in the shorter term, they are not looking at how much storage you need, how much transportation. You're looking at how do we utilize the storage and the transportation we have already under contract to meet the demand, I guess, for that particular year. Whereas in the longer term, then they're looking at how much incremental storage and transportation we would need over the longer term. 207 MS. DeMARCO: Right. And as part of EGS's function in transactional services, it's also charged with selling any excess storage assets or any excess transportation assets; is that fair? 208 MR. BRENNAN: Yes, once it's confirmed that it's in excess of our needs. 209 MS. DeMARCO: If I can now refer you to the agreement that's marked as Exhibit K.4.1. Ms. Aitken took you through many of the relevant portions of the agency agreement pertaining to gas-supply planning and decision-making around gas-supply planning and transactional services, so I won't address those provisions. But I wonder if I can just refer you to section 5, which is now on page 2 of the actual agreement, not the novation agreement. If you just want to have a look at 5(a) and 5(b). 210 MR. BRENNAN: Okay. 211 MS. DeMARCO: So is it fair to say that the agency agreement contemplates EGS competing in the natural gas market for its own account? 212 MR. BRENNAN: It contemplates -- it states that the service provider is allowed to go out and conduct these businesses, if you like, in their own name. 213 MS. DeMARCO: And it also provides for procedure where the service provider, and that would be EGS - 214 MR. BRENNAN: In this case, yes. 215 MS. DeMARCO: - is acting as principal for its own account. 216 MR. BRENNAN: Yes. 217 MS. DeMARCO: There's a procedure that it needs to follow. 218 MR. BRENNAN: That's correct. 219 MS. DeMARCO: Right. 220 MR. BRENNAN: And those procedures are attached to the services schedule which can be found, if parties are interested, at Exhibit A3, tab 4, schedule 1, and the title of that is "Schedule of Agency Agreement Services Schedule." And at the back of that document, under appendix B there are what's called protocols for gas-supply acquisition, and in appendix C there are protocols for transactional services. 221 MS. DeMARCO: So just to be clear, just reading the transcript, there appeared to be a bit of confusion last evening, and maybe Mr. Whelen and Mr. Jarvis, you might want to wade in on this. Is it fair for EGS to enter into commodity transactions as principal in and of its own accord? 222 MR. BRENNAN: Are you asking is it fair? 223 MS. DeMARCO: Is it eligible to do so? 224 MR. BRENNAN: With respect, yes, EGS is allowed to enter into those types of transactions as principal as long as they abide by the language within the agency agreement. 225 MS. DeMARCO: And does it? 226 MR. BRENNAN: Does it abide by -- 227 MS. DeMARCO: Does it enter into those type of transactions as principal? 228 MR. JARVIS: I think the answer is yes; however, I would suggest in terms of transactions that have been entered into with ourselves as principal with EGD under the protocols, I would suggest there's probably been fewer than five. 229 MR. BRENNAN: I wouldn't even think that, but anyway... I think it's maybe one or two at the most. I know that in some cases, Gas Services have put bids in, I guess, but haven't been successful. 230 MS. DeMARCO: So I'm just thinking of the transaction document here and the parties listed on the transaction document would be EGS as agent on behalf of EGD? 231 MR. BRENNAN: Maybe it would be helpful if you give me an example of the typical transaction that you are thinking of and then we can take it step by step. 232 MS. DeMARCO: Well, you've itemized about five transactions where this has occurred, so why don't you pick one of those transactions where you think it has occurred and tell me if you think it's reasonable if the parties on the document would list EGS... 233 MR. JARVIS: We have two examples that we would like to illustrate. The first one was a situation where Enbridge Gas Distribution had some TransCanada capacity that for one year was going to be excess to the needs of the utility. They had determined that they would undertake an RFP process to secure the release of this capacity for one year. In that circumstance, Gas Services was interested in potentially acquiring some of that capacity as principal, so as part of the RFP process, we responded per the protocols in advance of other counterparties and the protocol responses in that circumstance where we participate are directed to Frank in Toronto. 234 In that particular instance, we did not -- we were not successful in acquiring any of the capacity. So that's an example of how it worked, the protocol worked with this capacity assignment. 235 There was a second circumstance that we can think of which was EGD was looking for some incremental transportation on the TCPL system for a short period of time, we're not certain whether it was one month or two or three months, but they were looking for short-term capacity on the TransCanada system and again, they went out and conducted an RFP and we elected as Gas Services to participate in that RFP process using the protocols and we made a bid to EGD through that process for which we secured part -- I'm not sure if it was all, but we secured part of their requirement to provide transportation to the utility for a period of time. 236 In that circumstance, I believe the contractual arrangement would have been for Enbridge Gas Distribution to provide gas supply to Enbridge Gas Services in Alberta, either at AECO or at Empress, I can't recall which one. Our obligation would be to redeliver that volume to Enbridge Gas Distribution into their franchise. We would have been principal on our side; EGD would have been principal on their side contractually and there would have been a fee related to the provision of that transportation. 237 MS. DeMARCO: So on the actual title of the transaction document, would it have been EGS as agent for EGD and EGS? 238 MR. JARVIS: I don't believe there would have been any reference to EGS as agent in that contractual document for that specific transaction. 239 MS. DeMARCO: Okay. I'll touch further a little later on about the specific transactional documents, it's just interesting to know. 240 In relation to paragraph 5(b) it's fair to say that EGS can certainly enter into transactions or agreements with other parties for the purchase or sale of gas, gas-supply management and gas storage; is that fair? 241 MR. BRENNAN: I think what it says, I mean it says: 242 "The Services Provider acknowledges that when it engages in the businesses of gas acquisitions, gas sales, gas supply management and gas storage, the Services Provider is not acting in the capacity of agent of the Services Recipient" and therefore "the Services Recipient is not liable for the acts of the Services Provider or its employees in this regard." 243 So if Enbridge Gas Services wants to go out and buy gas or buy storage on its own behalf, that's fine, but if something falls apart then the utility is not held responsible for it. 244 MS. DeMARCO: So there's absolutely no prohibition on Enbridge Gas Services entering into those types of transactions in the marketplace with any other parties? 245 MR. BRENNAN: No, there's not. 246 MS. DeMARCO: And when it does so, it's not acting in the capacity of agent? 247 MR. BRENNAN: That's correct. And when it is acting as agent, it has to identify to third parties that it is doing so. 248 MS. DeMARCO: Right. So is it fair to say, then, that the agreement contemplates two roles for EGS, the first being as agent of EGD in the transactional services business. 249 MR. BRENNAN: Well, I wouldn't restrict it just to transactional services, but it's acting as agent for those items that I -- those functions that I listed earlier. 250 MS. DeMARCO: Right. But specific to TS. 251 MR. BRENNAN: Yes. 252 MS. DeMARCO: Agent of EGD in the TS business. 253 MR. BRENNAN: Yes, it's acting as agent, that's correct. 254 MS. DeMARCO: And secondly, as principal in the natural gas market for its own account. 255 MR. BRENNAN: It has the right to do that, if you like. 256 MS. DeMARCO: That's right. Is it fair to say that the agreement does not contemplate, nor authorize EGS to sell commodity for EGD's account? 257 MR. BRENNAN: No, it does not. 258 MS. DeMARCO: Can I take you to some of the specific definitions in the service schedule that you've referred to already. Just by way of reference, it is filed in this proceeding at Exhibit A3, tab 4, schedule 1. 259 If I can take you near the back of that agreement, specifically to page 20 of 30. At paragraph A 36, the term Transactional Services, capital T capital S, which is used throughout the document is defined, and could you read me that definition? 260 MR. BRENNAN: I'm sorry. 261 MS. DeMARCO: Could you read that definition, please? 262 MR. BRENNAN: "Transactional Services: One or more of the following transaction types: Assignments, exchanges, load balancing, loans, off-peak storage and peak storage." 263 MS. DeMARCO: And there's no specific mention of commodity there. 264 MR. BRENNAN: No, and that's consistent with our evidence that we filed in this case, these are the services that we're, in our view, authorized to conduct today and we're here seeking to add the commodity transactions as well. 265 MS. DeMARCO: And it's fair to say that there are a number of other definitions that refer to each of those specific elements and I'll take you back to page 16 of 20, you see the definition of load balancing at A 18. The definition of loan at A 19. And the definition of off-peak storage at A 20. And none of those refers to commodity. 266 MR. BRENNAN: No, nor would one expect to see commodity there. 267 MS. DeMARCO: And specifically if we look at the definition at A 20, off-peak storage, it refers to a type of transactional services whereby the recipient A injects a person's gas into the storage facility. 268 MR. BRENNAN: That's correct. 269 MS. DeMARCO: Not the company's gas or Enbridge Gas Services's gas. 270 MR. BRENNAN: Well, this is transactional services, so it's a third party's gas. 271 MS. DeMARCO: And the same would be true of the term assignment; no reference to commodity. 272 MR. BRENNAN: That's correct. 273 MS. DeMARCO: I'm now going to turn to ask you a few questions regarding the process surrounding EGD's decision to allow EGS to enter into the commodity transactions. If I can ask you to turn back to the evidence in chief, and specifically paragraph 19 found at page 5 of 7. 274 You indicate there that the company allowed Enbridge Gas Services to offer services that included the use of commodity -- 275 MR. BRENNAN: I'm sorry, what paragraph are you on? 276 MS. DeMARCO: That's paragraph 19 of the -- 277 MR. BRENNAN: I'm sorry, 19. 278 MS. DeMARCO: It was updated on June 16th. 279 MR. BRENNAN: Yes, I'm sorry, I have that now. 280 MS. DeMARCO: So paragraph 19, it indicates that the company allowed Enbridge Gas Services to offer services that included the use of commodity. By the term "use," I take it that you mean purchase and sale of commodity. 281 MR. BRENNAN: Yes. 282 MS. DeMARCO: And it did that to generate additional TS revenue? 283 MR. BRENNAN: On behalf of ratepayers and shareholders, right. 284 MS. DeMARCO: Provided that, and there were two conditions that applied? 285 MR. BRENNAN: That's right. 286 MS. DeMARCO: And the first was that there was no opportunity to sell a transactional service alone for a similar value. 287 MR. BRENNAN: That's correct. 288 MS. DeMARCO: And secondly, 100 percent of the gross margin would accrue to the company's TS account. 289 MR. BRENNAN: That's correct. 290 MS. DeMARCO: When did the concept for this initiative to allow EGS to do bundled commodity transactions first arise, first get started? 291 MR. BRENNAN: As Mr. Jarvis mentioned yesterday, it was the fall of 2002. 292 MS. DeMARCO: This is when you actually started conducting commodity transactions, but when did the idea first -- 293 MR. BRENNAN: No, I think we said -- well, we said that the commodity transactions started in November, and a time frame that was discussed was prior to that, September/October of 2002. 294 MS. DeMARCO: I'm just trying to get a feel for the timing of the internal decision-making and maybe that might be a place to ask you about, how that works within the company. How long would it take from somebody first having the idea to actually going through the process and getting the requisite approvals, doing the requisite studies? 295 MR. BRENNAN: In this particular one, it didn't take all that long, I don't think, because Mr. Jarvis contacted me and said, We have an opportunity here to capture a greater revenue, and explained what he was contemplating in terms of the types of transactions that would be taking place. And then I went back to my boss, if you like, explained it to him as to what was being contemplated; we discuss that and discussed are there any risks or anything associated with that, and came to the conclusion that as long as Enbridge Gas Distribution was not held responsible for any of the transactions related to the commodity in terms of them defaulting, and the utility was protected -- you want to make sure also, as it says here, these two conditions here as well that, you know, we couldn't get the same value from just offering the transactional service itself, and that was obviously clear to us that all revenue will come back to the utility. 296 So we relayed that back to Gas Services, under what conditions we would be prepared to introduce the commodity, and they had no issues or concerns around that and were prepared to go forward on that basis. 297 MS. DeMARCO: So I take it that it was, in fact, Mr. Jarvis's idea to go forward and sell commodities; is that fair, Mr. Jarvis? 298 MR. BRENNAN: Yes. I'm sorry. 299 MR. JARVIS: It was myself and my group that made the recommendation to Enbridge Gas Distribution. 300 MS. DeMARCO: Do you remember approximately when? 301 MR. JARVIS: It would have been in the time frame that Frank is alluding to, September/October, as it became evident, based on the results for 2002, that the program that we had going at the time was going to make it very difficult to sustain that level of revenues. 302 MS. DeMARCO: So it was you and your group. Was there any consultation with EI? 303 MR. JARVIS: I believe the only consultation that we conducted with EI was around the issue of credit costs. 304 MS. DeMARCO: But, in fact, you are an employee of EI, aren't you? 305 MR. JARVIS: Yes. 306 MS. DeMARCO: So the concept originated within Enbridge a few months, three, four, before we actually... 307 MR. JARVIS: I believe it was in September or October. 308 MS. DeMARCO: So that would have been two or three months before? 309 MR. BRENNAN: Yes, that's correct. 310 MS. DeMARCO: Okay. And so you referred to the internal concept and then you looked -- you referred, Mr. Brennan, to risk around that. How did you consider that risk? 311 MR. BRENNAN: Well, the only -- how do I consider the risk? Well, whether or not Enbridge Gas Distribution would be liable for any non-payment, I guess, from the commodity transaction, and given that the commodity was going to be transacted in Enbridge Gas Services's name, then we didn't see that as being a risk to Enbridge Gas Distribution. 312 MS. DeMARCO: Was there any study done of any of the risk elements, such as credit risk? 313 MR. WHELEN: Well, I can speak to the credit risk. We certainly looked at it, and we have pretty standard ways of looking at credit. We already have credit policies outstanding for transaction of commodity anyway for companies of the credit quality in our group of Enbridge Gas Distribution and so on. So that work was completely covered. 314 MS. DeMARCO: So when you say we looked at it, Enbridge Inc. looked at that credit risk and did a study? 315 MR. WHELEN: Enbridge Inc. provides treasury services and risk, if you will, financial risk-management services to a broad group of companies and affiliates within the group; that's correct. 316 MS. DeMARCO: So, Mr. Brennan, you sent it to Mr. Whelen's group to look at that risk? 317 MR. BRENNAN: No. As Mr. Jarvis mentioned, he had already contacted Mr. Whelen to discuss the issues of credit costs and risks. 318 MS. DeMARCO: What Enbridge entity or group was charged with developing the actual implementation plan? 319 MR. BRENNAN: It would be Enbridge Gas Services. 320 MS. DeMARCO: And then, Mr. Jarvis, are there any planning documents to support that activity? Was there anything that you can point to that was provided? 321 MR. JARVIS: I don't believe there was any planning documents. I believe the nature of the discussions between myself and Frank centered around Frank inquiring about the nature of some of the types of transactions we would contemplate doing, how we would deal with risk management from a commodity perspective, and as well, a discussion around credit issues and credit risks and who would be bearing the burden of a bad debt. 322 MS. DeMARCO: So these were all verbal discussions; there was no paper that changed hands at all? 323 MR. JARVIS: Yes, I believe that's correct. 324 MS. DeMARCO: And same for the credit piece, Mr. Whelen? There was no paper that changed hands, no e-mails, nothing that was provided to you? 325 MR. WHELEN: Not that I'm aware of. There may have been an e-mail, but if it was, it was pretty perfunctory because we get requests for credit analysis all the time, so there wouldn't be anything of significance. 326 MS. DeMARCO: Mr. Brennan, could you undertake to ensure that there's no documentation that would support that change, and if there is, could you provide it, please. 327 MR. BRENNAN: Yes, we could. 328 MR. SCHUCH: Mr. Chair, that would be Undertaking J.5.1. 329 UNDERTAKING NO. J.5.1: TO ENSURE THAT THERE IS NO DOCUMENTATION REGARDING TRANSACTIONAL SERVICES COMMODITY; IF THERE IS DOCUMENTATION, TO PROVIDE IT 330 MS. DeMARCO: So where was the final decision made to allow EGS to do commodity transactions? 331 MR. BRENNAN: It was with the utility. 332 MS. DeMARCO: And who specifically? 333 MR. BRENNAN: It was with myself and Mr. Plekaitis, my supervisor, my boss. 334 MS. DeMARCO: And was that decision written? 335 MR. BRENNAN: No, it was not. 336 MS. DeMARCO: It was strictly a verbal decision. 337 MR. BRENNAN: Yes, that's correct. 338 MS. DeMARCO: Can I ask you how that decision was implemented, then? Mr. Jarvis, did EGS seek a resolution from the EGD board of directors in order to be providing commodity? 339 MR. BRENNAN: I'm sorry, can you repeat the question again. I didn't -- 340 MS. DeMARCO: Did EGS seek a -- how the decision was implemented, first of all, and did EGS seek a resolution from EGD's board of directors in order to do that? 341 MR. BRENNAN: How it was implemented, well, once the decision between Mr. Plekaitis and myself was made, then I relayed that decision back to Mr. Jarvis. 342 MS. DeMARCO: And then Mr. Jarvis, as I asked, did EGS seek a resolution from the EGD board of directors to do that? 343 MR. JARVIS: No, Enbridge Gas Services has not sought resolutions from Enbridge Gas Distribution's board. 344 MS. DeMARCO: Mr. Jarvis, did EGS seek a written authorization from EGD to sell commodity? 345 MR. JARVIS: No. 346 MS. DeMARCO: Was written notice of the decision or the change in activity provided to the OEB? 347 MR. BRENNAN: No, there was not. We didn't see a need to at that point in time, given that from Enbridge Gas Distribution's perspective it was still offering the transactional services as contemplated and as approved and on the same sharing mechanism, so it did not see a need that it had to notify the OEB at that point in time. 348 MS. DeMARCO: But you've agreed with me, Mr. Brennan, that the term transactional services didn't include commodity sales; is that right? 349 MR. BRENNAN: That's correct and it didn't at that time either. Not as far as Enbridge Gas Distribution was concerned. 350 MS. DeMARCO: So within the documents before the Board, they were aware of you doing Transactional Services, all of which did not include commodity; is that right? 351 MR. BRENNAN: That's correct. 352 MS. DeMARCO: Was there any written notice of this activity given to intervenors? 353 MR. BRENNAN: No, there wasn't any -- well, I would say yes and no. No, I would say yes. I changed my mind. Because there were stakeholder meetings and I believe there was presentations at those stakeholder meetings last fall that we made it aware to intervenors that commodity transactions were being conducted by EGD and that all the revenue from those transactions were flowing back to Enbridge Gas Distribution for sharing with ratepayers. 354 MS. DeMARCO: Can you provide those presentations, Mr. Brennan? 355 MR. BRENNAN: Yes, I believe they're available. We can certainly provide them. 356 MR. SCHUCH: Mr. Chair, that would be Undertaking J.5.2. 357 UNDERTAKING NO. J.5.2: TO PROVIDE THE DOCUMENTATION FROM THE STAKEHOLDER MEETINGS LAST FALL REGARDING THE SALE OF USE OF COMMODITY IN TRANSACTIONAL SERVICES 358 MR. BETTS: Can we have a description of that, please. 359 MR. SCHUCH: To provide the documentation from the stakeholder meetings last fall regarding -- 360 MR. BRENNAN: Let's narrow it down a bit more than that regarding the sale of use of commodity in transactional services. 361 MS. DeMARCO: Mr. Jarvis and Mr. Brennan, was there any written agreement between EGD and EGS that outlined any of the conditions that EGD purportedly imposed on EGS in providing commodity sales? 362 MR. BRENNAN: I'm not aware of any offhand, no. 363 MR. JARVIS: I agree, I'm not aware of anything. 364 MS. DeMARCO: So this was just verbal discussion between the two of you? 365 MR. BRENNAN: Yes. In some ways, it seemed -- I hate to use the expression a no brainer, but obviously there was an opportunity there to generate more revenue and again, just to not sound like a broken record but, on behalf of both ratepayers and shareholders, and again, as long as the utility was held harmless, it seemed like it was the right thing to do. 366 MS. DeMARCO: Did EGD provide any written notice to parties that EGS was now selling bundled commodity with TS as part of its 2003 rates case? 367 MR. BRENNAN: Was there any evidence filed in our 2003 rate case related to Enbridge Gas Services conducting commodity transactions, the answer to that is no. 368 MS. DeMARCO: In the 2004 rates case? 369 MR. BRENNAN: I'm sorry? 370 MS. DeMARCO: In the 2004 rates case was there any information provided to parties indicating that transactional services now included commodity? 371 MR. BRENNAN: No, not 2004. Well, primarily, I guess, because there was sort of a shortened version of the rate case for 2004. It was just sort of a carry over, if you like, from 2003. 372 MS. DeMARCO: Mr. Brennan, can I provide you with a response provided in the context of the 2002 rates case, and I do have extra copies for the parties. 373 MR. SCHUCH: Mr. Chair, that would be Exhibit K.5.2. 374 EXHIBIT NO. K.5.2: CEED INTERROGATORY NO. 1 FROM RATE CASE RP-2002-0133 375 MR. BETTS: Thank you. 376 MS. DeMARCO: Mr. Brennan, would you agree with me that this is a response filed by you? 377 MR. BRENNAN: Yes, and Mr. Rubino. 378 MS. DeMARCO: And the date of that response is December 12th -- sorry, November 12th -- is that December 11th or November 12th, help me out here. 379 MR. BRENNAN: That's a good question, I'm not sure. 380 MS. DeMARCO: I'm just going to look at your current confirmation. It would be December 11th according to your current way of filing, so filed on December 11th, 2002. 381 MR. BRENNAN: That's correct. 382 MS. DeMARCO: And this is after you began selling commodity as a part of your transactional services? 383 MR. BRENNAN: I think this is where we need clarification, again it wasn't Enbridge Gas Distribution that was selling the commodity, it was Enbridge Gas Services that was selling the commodity. 384 MS. DeMARCO: Can I, first, take you to the question which is -- the evidence states that: "EGD does not currently build facilities or contract for services in order to enhance its TS business. Please advise whether any of EGD's affiliates or related companies..." 385 You would agree with me that EGS is an affiliate or related company? 386 MR. BRENNAN: Yes. 387 MS. DeMARCO: "... currently builds facilities, contracts for services or enter into any other financial arrangements inside or outside Ontario in order to enhance their or EGS's businesses in Ontario." 388 MR. BRENNAN: Yes. 389 MS. DeMARCO: And your answer was "no"? 390 MR. BRENNAN: Well, certainly they don't build any facilities. Contract for services, you can debate whether that includes commodity or not. Obviously I didn't interpret it to mean commodity. And financial arrangements, again, no. When I wrote this, I didn't contemplate or consider commodity transactions as including the items that were listed here. 391 MS. DeMARCO: But you do now consider it to be part of transactional services, that was your evidence yesterday. 392 MR. BRENNAN: We're asking for it. We're not saying it is now, but we're asking for it. 393 MS. DeMARCO: Because you feel it's part of the services. 394 MR. BRENNAN: Well, we would like to have it part of the services. 395 MS. DeMARCO: I'd like to refer you to Board Staff Interrogatory No. 11, which is Exhibit I, tab 1, schedule 11. 396 And would it be fair to say that this expands on your evidence in chief as to the reason why you want to enter into commodity transactions in your own name and, in fact, why you have been doing commodity transactions? 397 MR. BRENNAN: Yes, it expands on those reasons. 398 MS. DeMARCO: And would it be fair to characterize those reasons as first less liquidity in the natural gas markets? 399 MR. BRENNAN: Yes, that's what we've identified here. 400 MS. DeMARCO: And second, increased margin expectations? 401 MR. BRENNAN: Well, I mean, the answer is there, I guess. 402 MS. DeMARCO: Just my characterization, would that be fair? 403 MR. BRENNAN: Well, I think it's just trying to say that there are short-term opportunities that you have to move very quickly to be able to capture those. The current process wouldn't allow for that if we're just looking at services only. 404 MS. DeMARCO: That's fair. I'd like to come back to the second portion, but if you can focus first on the first bullet which is liquidity in the natural gas market and increased market expectations. So it's your evidence that in November 2002, EGD felt that there was decreasing liquidity in the natural gas markets? 405 MR. BRENNAN: Yes, I think that's fair to say. 406 MS. DeMARCO: And also the number of counterparties was decreasing. 407 MR. BRENNAN: That's right, as our evidence has stated. 408 MR. CASS: Mr. Chair, if I may interrupt at this time, the usual practices before this Board, in my understanding, have been for many years that when documents are to be provided to the witnesses on cross-examination, that they are provided in advance to expedite the proceeding. We've been getting a steady string of documents now, and I don't know how long it will continue, which are really just being provided as the cross-examination proceeds and have not been provided in advance at all. And I just want to bring that to the Board's attention. 409 I don't know whether Ms. DeMarco is intending to proceed with more documentation, but I would suggest that fairness would dictate that these things could easily have been provided to the witnesses in advance. 410 MS. DeMARCO: Mr. Chair, this is the last document, first and foremost; and secondly, this is the witnesses' own evidence, so in terms of fairness and prejudice, I don't think there is any concern there whatsoever. 411 MR. BETTS: I accept that. 412 I would comment, though, I think in the interests of the Board procedures in allowing the witness the opportunity to read, in fact, what was there, it is appropriate to hand them out in advance wherever possible. I appreciate that some items might pop up without that being a possibility. But where it can be provided in advance, I think that would benefit the proceeding as well. 413 MS. DeMARCO: Thank you, Mr. Chair. 414 MR. CASS: Mr. Chair, without meaning to be argumentative, if I might just say for the record, Ms. DeMarco has said it's the witnesses' own evidence, but it is from previous proceedings, and in my submission, this shouldn't become like a memory test from the witnesses. If they are to be asked about previous proceedings, they could at least have a chance to refresh their memories if they knew in advance. Thank you, Mr. Chair. 415 MR. BETTS: Thank you. The point has been taken. I'll certainly allow the witnesses as much time as they require to read the information before they comment on it. 416 Mr. Schuch, can we have an exhibit number? 417 MR. SCHUCH: Mr. Chair, that would be Exhibit K.5.3. 418 EXHIBIT NO. K.5.3: CEED INTERROGATORY NO. 17 IN RATE CASE RP-2002-0133 419 MR. BETTS: Thank you. 420 Ms. DeMarco, I would allow you to proceed as soon as the witnesses are comfortable with the document. 421 MS. DeMARCO: Mr. Brennan, just give me a shout when you're through that. 422 MR. BRENNAN: Yes, I've read it. 423 MS. DeMARCO: Would you agree with me that the date that that was filed was December 13th, 2002? 424 MR. BRENNAN: Yes. 425 MS. DeMARCO: And that was just after you commenced selling commodity as part of transactional services? 426 MR. BRENNAN: That's correct. 427 MS. DeMARCO: And you were asked specifically: 428 "Please advise of the value of the avoided S&T revenues on a going-forward basis, as opposed to an average basis over the last five years." 429 And is it fair that as part of your response, you indicated that, in the last line: 430 "The company believes that going forward the number of creditworthy third parties will increase and that the $5.5 million amount is a reasonable estimate for future net revenues associated with the Basket #1." 431 MR. BRENNAN: Yes, I think that that was our estimate at that time, but I think it also says that the company believes that in fiscal 2002, EGS's ability to generate TS revenue was somewhat limited due to the number of creditworthy third parties with which to transact. And yes, I guess our expectation was that we were hoping it would get better, going from, at that time I believe it was five counterparties that were actually transacting has moved up to six, so obviously our expectations were a little high here as to when that was going to happen. 432 MS. DeMARCO: Can we talk about the total number of counterparties that are eligible. Your evidence yesterday was that there were 17; is that fair? 433 MR. BRENNAN: Seventeen that are approved, I believe. 434 MS. DeMARCO: And you said six are active. 435 MR. BRENNAN: Six are active, correct. 436 MS. DeMARCO: And of those six that are active, your response on interrogatory, I believe it's to Board Staff, I believe it's the Board Staff No. 10, Exhibit I, tab 1, schedule 10. 437 MR. BRENNAN: Yes, I have that, sorry. 438 MS. DeMARCO: Is that the vast majority of these transactions are done with wholesale marketers. 439 MR. JARVIS: That's correct. 440 MS. DeMARCO: And in terms of wholesale marketers, Mr. Jarvis, Mr. Whelen, can you give a general statement as to their creditworthiness, do they have a general rate rating? 441 MR. WHELEN: And this is just from memory, if you will, but wholesale marketers who are wholly-owned subsidiaries of larger energy groups with hard assets, producers, other participants who have hard assets, are typically are creditworthy or they tend to fall into the investment-grade category. There's another subset of marketers who very much have to rely on third-party credit support in order to enable them to participate in the market. 442 MS. DeMARCO: So the five or six, the six now that you've been dealing with regularly would all be creditworthy parties; is that fair? 443 MR. WHELEN: Yeah, by definition, they must be. 444 MS. DeMARCO: And your credit requirement is triple B minus. 445 MR. WHELEN: For physical transactions, yes, investment grade which is anything higher than a triple B minus, although most of our counterparties are a higher credit quality than that, and for financial counterparties, the limit is A. Yeah, and Mr. Jarvis is reminding me of course if a counterparty doesn't have sufficient credit quality, they can provide us with credit enhancement in the form of a letter of credit, for example, from a creditworthy financial institution that would meet our credit standards or, conceptually, they could also post collateral to us which would give us satisfaction with respect to credit and security. 446 MS. DeMARCO: Thank you. Yesterday, Mr. Brennan, you and Mr. Shepherd touched upon the Navigant study which is filed at Exhibit A3, tab 4, schedule 3, appendix A. 447 MR. BRENNAN: I don't believe I have it with me. It's okay, Mr. Charleson has it. I have a copy. 448 MS. DeMARCO: If I took your answers correctly, it was your position that the study supported the premise there was little if any market to support the services in question, the commodity services in question? 449 MR. BRENNAN: No, I don't think I said that. What I was trying to say was that the support -- the report supports the contention that the company had that there was not a market for these services that EGS was providing to the utility and then therefore, we could not establish a market-based price and then because of that then we would revert back to the cost-based price which would be the cost that the provider would have to pay or incur, I guess, to provide the service to the utility. 450 MS. DeMARCO: Thank you for that clarification. So then consistent with the first page of the document, what you're specifically referring to is as supply services, and gas operation services, and if I can refer you to the first page there, the two questions asked are: Is there a market in gas-supply services? 451 MR. BRENNAN: I'm sorry, whereabouts are you? 452 MS. DeMARCO: This is the first page, number one and number two of that exhibit. It's part of the cover letter. 453 MR. BETTS: Can you read that once again, Ms. DeMarco? 454 MS. DeMARCO: It's Exhibit A3, tab 4, schedule 3, appendix A. 455 MR. BETTS: Thank you. 456 MR. BRENNAN: Are you referring to the Navigant report itself? 457 MS. DeMARCO: It's actually the cover letter that goes along with it dated January 14th, 2004. 458 MR. BRENNAN: I'm sorry, I don't have that. 459 MS. DeMARCO: I can give you my copy, if you'd like. 460 MR. BRENNAN: We're trying to see if we can get a copy here. Okay. What I have here is appendix A3, tab 4, schedule 3, appendix A. 461 MS. DeMARCO: That's right. 462 MR. BRENNAN: Is that where you are? 463 MS. DeMARCO: That's right. And just to clarify again, the two questions that the study refers to are, first, it was asked to determine is there a market in gas-supply services. 464 MR. BRENNAN: Yes. 465 MS. DeMARCO: And secondly, is there a market in gas operation services? 466 MR. BRENNAN: Correct. 467 MS. DeMARCO: So the study wasn't specifically asked to look at the question of whether or not there was a market in commodity or bundled commodity services that would go along with transactional services. 468 MR. BRENNAN: Not specifically, but obviously when it was talking about gas-supply services, it was talking about again those six functions that Gas Services were providing us today, which includes transactional services. 469 MS. DeMARCO: Transactional Services, capital T, capital S, not including commodity; is that fair? 470 MR. BRENNAN: Correct. 471 MS. DeMARCO: Thank you. Can I refer you now to the study itself, which is Exhibit A3, tab 4, schedule 4. 472 MR. BRENNAN: I have that. 473 MS. DeMARCO: And the specific conclusion that you and Mr. Shepherd were discussing yesterday, is it fair to say it's best set out in the third bullet? 474 MR. BRENNAN: What page are you looking at? 475 MS. DeMARCO: Page two under "Summary observations and conclusions." 476 MR. BRENNAN: Page 2, second bullet, is that right? 477 MS. DeMARCO: Third bullet. 478 MR. BRENNAN: Sorry, third bullet. 479 MS. DeMARCO: And as I understand it, you were indicating that there was, in fact, a very limited market for LDCs to acquire gas supply and gas control services from third-party suppliers. 480 MR. BRENNAN: Yes, that's correct. 481 MS. DeMARCO: You weren't discussing the commodity bundled in with transactional services in that market? 482 MR. BRENNAN: I was including under gas supply all those functions that are being conducted today including transactional services. 483 MS. DeMARCO: But the study does not look at bundled commodity transactions as part of transactional services? 484 MR. BRENNAN: I don't believe -- I'm not sure what Navigant explained to the participants, whether or not it included commodity transactions. My suspicion is that it probably didn't. I think it just probably said under gas supply it includes gas-supply planning, gas acquisition, risk management, transactional services. I think it probably restricted to those four items so it did include transactional services, but not specifically anything that talked about the bundling. 485 MS. DeMARCO: So it's fair to say then the questions referred to broad gas-supply services. 486 MR. BRENNAN: Well, I would say it referred to those four things. 487 MS. DeMARCO: Right. And the conclusions referred to broad gas-supply services? 488 MR. BRENNAN: Those same four things. 489 MS. DeMARCO: That's right. Not commodity bundled with transactional services. 490 Can I refer you back to Board Staff Interrogatory No. 11. And specifically to the first bullet in your answer which indicates that in the last portion of the answer: 491 "The margin expectations to the counterparty were such that fair value could," and you corrected that yesterday, not be captured by Enbridge Gas Distribution." 492 Can you tell me what evidence the company has to show that the market expectations prohibited a fair value from being captured? 493 MR. JARVIS: I don't believe that we have any written evidence to the nature that you have inquired. The evidence that we would have been bringing forth to EGDI at the time that we recognized that we felt that this was a troublesome issue would have been to go back to an example that we spoke about yesterday where, if, in the marketplace, the value between point A and point B was recognized based on price indications to be a dollar, our experience had been in times of higher liquidity that if EGDI had had an asset that would allow for service to be provided between those two points, that generally speaking we would receive 97 or 98 cents of that one dollar's worth of value. So the marketers or counterparties in that circumstance were prepared to undertake that transaction and earn a 2 to 3 cent U.S. per MMBtu margin. 494 What our experience became as the number of counterparties dwindled and the again as those counterparties that had managed to preserve their balance sheets and stay in the business began taking more attention to their own balance sheets and credit costs, we saw that for that same type of transaction with a dollar's worth of value, EGD was only in a position to be able to capture maybe 92 or 93 cents. 495 So the expectations of the counterparties who needed to employ their capital to make those transactions occur had expanded the margins. 496 MS. DeMARCO: And there's no evidence filed to that effect, this is the first time that we're hearing about the specific quantification issue? 497 MR. JARVIS: I believe that's correct. 498 MS. DeMARCO: Now, I'd like to ask you a question particularly, Mr. Jarvis, about your concept of fair value. Mr. Brennan indicated yesterday that EGS is the only party offering transactional services; is that fair, Mr. Brennan? 499 MR. BRENNAN: On behalf of the utility, yes. 500 MS. DeMARCO: How would you, Mr. Jarvis, determine what the fair value is? 501 MR. JARVIS: Well, fair value for any particular asset is going to be a function of the market prices at the various points and times that are impacting the underlying service that is available. 502 MS. DeMARCO: So there was a market where you'd be able to determine what the fair value was? 503 MR. JARVIS: At many points within the foot print of eastern Canada, there is very transparent pricing. 504 MS. DeMARCO: So there's a liquid market that you can determine fair value from? 505 MR. JARVIS: There is a transparent market. It is not always as liquid as you would like it to be. 506 MS. DeMARCO: Liquid enough for you to determine a fair value? 507 MR. JARVIS: At some of the points yes, at others, no. 508 MS. DeMARCO: So at some points, you could determine fair value and at other points you couldn't? 509 MR. JARVIS: I would agree with that, yes. 510 MS. DeMARCO: So we'd have to qualify your answer there to determine -- your answer in relation to the interrogatory to be when you could determine fair value. 511 MR. JARVIS: I think my response to the tail end of your comments there would be that in a circumstance where we're dealing at a price point that is not liquid, and that price indications there may or may not represent fair value, our determination of fair value in terms of evaluating whether or not we would enter into a transaction on behalf of EGDI or not would be a determination of whether it presents fair value to EGDI. 512 MS. DeMARCO: And are there criteria associated with that determination? 513 MR. JARVIS: Not -- no -- not codified criteria, no. 514 MS. DeMARCO: No. That's at your discretion. 515 MR. JARVIS: Yes. 516 MS. DeMARCO: Mr. Jarvis, is EGS is non-share capital corporation? 517 MR. WHELEN: I believe it's a share capital corporation. 518 MS. DeMARCO: So it's a for-profit corporation, is that fair? 519 MR. WHELEN: I think that's a fair statement. 520 MS. DeMARCO: And as such, like any other for-profit corporation, it has a duty to act in the best interest of its shareholders; is that fair? 521 MR. WHELEN: Yes. 522 MS. DeMARCO: And would you view maximizing revenue as consistent with that duty? 523 MR. WHELEN: Well, I can answer that and I think others would as well but maximizing revenue would be an objective but subject to a number of constraints obviously operating within your contractual obligations to your customers and so on and forth. 524 MS. DeMARCO: So under the agency agreement with EGD, EGS has the ability to enter into commodity transactions as principal; that's fair, we've established that? 525 MR. JARVIS: Yes. 526 MS. DeMARCO: And it could then bundle the commodity with transactional services; is that fair? 527 MR. JARVIS: I'd like to put some clarification around that. We do not undertake activities where we go out and conduct commodity activities independent of underlying transactional service and then all of a sudden decide, Oh, gee, I need to suddenly bundle this together for some reason. The conduct of commodity activity as it relates to transactional services is executed at the same time in conjunction with the underlying transactional service. 528 MS. DeMARCO: I wonder if you can clarify in terms of the actual activity that EGS does, and this arises in the context of a number of questions yesterday as well. Is there ever an instance where EGD -- sorry, EGS, as principal, sells the commodity portion for its own account, and EGS, as agent, sells the TS portion, as agent for EGD, in effect, a bundled transaction with EGS as principal on the commodity and ... 529 MR. JARVIS: I think if I understand your question properly, the answer would be that that circumstance does exist in those instances where Enbridge Gas Services participants in the RFP subject to the protocols, as agent, we issue the RFP to counterparties including ourselves but that -- when we determine we are going to participate in that RFP process through the protocols, that's where our agency role ends, it is upon the issuance of the RFP. All the responses and the decision making regarding the responses is managed by Frank. 530 MS. DeMARCO: I understand that when there's an internal transaction that's the case, what about to a third party, say to one of our customers, one of my clients Encana or Cargill or Coral. 531 MR. JARVIS: And your question related to one of your clients is which, sorry? 532 MS. DeMARCO: Could EGS as principal sell commodity bundled with EGS as agent in a bundled service offering? 533 MR. BETTS: Ms. DeMarco, while the Panel is contemplating that answer, if you could just watch and try and find an appropriate time for a break for us, I do not want to interrupt your cross, though, so continue until you find that satisfactory opportunity. 534 MR. JARVIS: If I can, to provide -- help us with clarity in terms of what you're seeking, if we can maybe use -- outline an example and have you help us. 535 Let's envision a point in time when Enbridge Gas Distribution may have the ability to transport some gas from Dawn to Parkway. I think the first part of your premise here is they offer up that service and potentially one of your clients is awarded the service. So your client has bought a transactional service from EGDI and as agent, we had entered into that. 536 Is that the first premise? 537 MS. DeMARCO: No, I'm sorry, let me clarify. There's a buyer out there who wants a bundled service offering. Would it be possible for that buyer to purchase the commodity portion from EGS as principal and the TS portion, the storage or the transportation, from EGS as agent? 538 MR. JARVIS: I think there's a potential for that to occur, yes. 539 MS. DeMARCO: Does it occur? 540 MR. JARVIS: I don't think I can say for sure whether it has or has not occurred because, generally speaking, when we would be approached by one of your customers, they're not telling us what they're doing with the gas. Again, to go back to my example, if your customer has acquired transportation capacity from Dawn to the CDA from Enbridge Gas Distribution, and then they come to us and they want to buy gas at Dawn, you can't tell whether it's going in that capacity, whether it's going into storage, whether it's going elsewhere, and they don't tell you. 541 MS. DeMARCO: Now I'm a bit confused. As I understood it, what you're currently doing in relation to commodity is EGS is selling the gas as principal, but for EGD's account, and EGS is selling the transactional service as agent for EGD; is that right? 542 MR. JARVIS: We are confused here. When Enbridge Gas Services conducts commodity activities on behalf of Enbridge Gas Distribution, there is not a service being sold to any other third party. Does that make a clarifying distinction for you? 543 MS. DeMARCO: What is the bundled commodity offering? Maybe that's the best way to answer it -- to ask the question. 544 MR. BRENNAN: Maybe I'll take a crack at it. Under a bundled, the Enbridge Gas Services would purchase the gas, for example, at Dawn, and simply utilize the utility's transportation between Dawn and Parkway. It's not that it's going out and -- for bid for that capacity, it's just utilizing the company's excess transportation. So it moves that gas on that excess transportation to Parkway and sells the gas at Parkway. And then whatever that difference between the buy and sell, a bundled service, if you like, is the revenue that gets captured into the TS. 545 MS. DeMARCO: So let me envision the transaction document. The actual buyer is buying strictly commodity and you agree to move it for free? 546 MR. BRENNAN: No. The customer is buying a delivered service, if you like. That's how I would describe that. And when I say "delivered service," and we get this all the time, it includes both commodity and transportation. You can't split out how much is transportation and how much is commodity. I mean you could attempt to it by saying, Well what is the rate for the toll for that transportation path, but that doesn't necessarily mean anything on that day because it really depends on what value those counterparties put on that transportation capacity at any given time. So you're buying a delivered service. 547 MS. DeMARCO: So if I understand you correctly, while you're buying a bundled entity, bundled product, there are two entities providing elements of that bundle. Is that right? 548 MR. BRENNAN: You could say that there are two in that EGS is providing the commodity, if you like, and EGD is providing the transportation for that transaction. If that's what you're asking. 549 MS. DeMARCO: Mr. Chairman, I'm aware of your request for a break and it might be that some of this haze might be far dissipated when we come back, so it might be appropriate at this point to take a break. 550 MR. BETTS: Thank you. And that probably is a wise conclusion. Let us break then and we'll allow for 20 minutes. We'll come back here at approximately 25 minutes to 12:00. Thank you. 551 --- Recess taken at 11:15 a.m. 552 --- On resuming at 11:40 a.m. 553 PROCEDURAL MATTERS: 554 MR. BETTS: Thank you, everybody. Please be seated. 555 Any preliminary matters? 556 MR. CASS: Just by way of preliminary matters, Mr. Chair, I do have two more undertaking matters. Now, one of them doesn't relate to this panel, but one does, so maybe it would be convenient to introduce them both at this time. 557 MR. BETTS: I think it would, thank you. 558 MR. CASS: The one that does relate to this panel is the revised page of Undertaking J.4.1, if my memory serves correctly, as to the number of the undertaking. 559 MR. BETTS: That's correct. 560 MR. CASS: Now, we have another one, Mr. Chair, that does not relate to the panel now on the witness stand; however, since we're addressing undertakings, it would probably be convenient. This is from the first day. It is the undertaking in respect of producing the RFP for incremental storage that was issued by Enbridge Gas Distribution. It's Undertaking J.1.7. 561 MR. BETTS: Thank you. 562 Thank you, Mr. Cass. Any other preliminary matters? Mr. Thompson has just arrived, and you may not have heard that the revised version of the table contained in J.4.1 has just been handed out. 563 MR. THOMPSON: Yes. The company was kind enough to show me that at the break, so I had advance viewing. 564 MR. BETTS: Thank you. I think, then, are we ready to resume with the cross? 565 Ms. DeMarco, please proceed. 566 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON TRANSACTIONAL SERVICES - WHELEN, JARVIS, BRENNAN, CHARLESON: 567 J.WHELEN; Previously Sworn. 568 G.JARVIS; Previously Sworn. 569 F.BRENNAN; Previously Sworn. 570 D.CHARLESON; Previously Sworn 571 CROSS-EXAMINATION BY MS. DEMARCO: 572 MS. DeMARCO: Thank you, Mr. Chair, and I apologize to both the company and the panel, both panels, for going over what I anticipated to be the amount of time that it would take me. 573 To try and start up where we left off with far less confusion, if we might, it's my understanding that when you're selling bundled TS commodity sales, the actual TS portion is sold by EGS as agent of EGD; is that fair? 574 MR. JARVIS: I don't believe that to be correct, no. When we use the commodity to conduct a transactional service, the third-party customer is buying a delivered commodity product. Within that delivered commodity product, there's two components: There's the commodity itself and there's the underlying service, either storage or transportation, that forms the bundle that is sold to that customer. We execute the commodity transaction that envelopes both those components and derives the revenue stream. From that revenue stream comes off the cost of gas which we would have purchased and other direct costs that we alluded to, fuel and that type of thing. The resulting net revenues then flows 100 percent to EGDI. 575 MS. DeMARCO: So I think what would be really useful, because what I'm trying to get at is who is selling and in what capacity, it would be extremely useful if we could have a set of the transaction documents with the appropriate counterparty blacked out so we could see exactly who is selling what in what capacity. Could you undertake to provide those? 576 MR. BRENNAN: We can undertake to do that. 577 MR. CASS: Just for clarity, Mr. Chair, are we talking about a sample transaction document? 578 MR. BRENNAN: That's what I interpret the question to be, yes, or the undertaking. 579 MS. DeMARCO: Or a blacked-out or appropriately redacted document. 580 MR. BETTS: A document that relates to a single transaction or more than one? 581 MS. DeMARCO: Well, if I can expand the request to two types of documents: One, the type of transaction where Enbridge Gas Services is bundling for EGD's benefit, whether as agent or not; and the second type of transaction documents would be where EGS is selling the commodity for its own account as principal, bundled or otherwise. 582 MR. CASS: Mr. Chair, I'm just trying to understand the relevance of this second category, and perhaps I just didn't understand it. I understood Ms. DeMarco to talk about, in the second category, a transaction where EGS is doing something totally for its own account, and so I'm not sure of the relevance of that to transactional services. Perhaps she might clarify, with your permission, Mr. Chair. 583 MS. DeMARCO: And I think Mr. Cass's question really does hit the nail on the head in terms of the challenges we're having here. As we understand it, EGS is able to enter into commodity transactions as principal for its own account, and our questions earlier referred to them bundling that commodity sold as principal for its own account with transactional services sold as agent for EGD's account or benefit. So as I understand from what Mr. Jarvis has just said, the first type of transaction is such that EGS is selling the commodity portion -- well, EGS is selling everything, but as it pertains to the TS portion, it's agent of EGD, and as it pertains to the commodity portion, it's principal, but it's for the benefit of EGD. Is that right? Have I understood that correctly? 584 MR. JARVIS: That's right. 585 MS. DeMARCO: That's what the transcript reflects yesterday. 586 MR. BETTS: Since everybody agrees that it's something we can deliver and we agree what it is, we're going to call it exhibit -- 587 MR. SCHUCH: Undertaking J.5.3, Mr. Chair. 588 UNDERTAKING NO. J.5.3: TO PROVIDE REDACTED/SAMPLE TRANSACTION DOCUMENTS FOR A TRANSACTION WHERE EGS IS SELLING COMMODITY BUNDLED WITH TS WHERE EGS IS AGENT OF EGD FOR THE TS PORTION AND PRINCIPAL, BUT IN ACCOUNT OF EGD, FOR THE COMMODITY PORTION 589 MR. BETTS: Undertaking 5.3. And I've taken that to be EGS selling the bundled transaction for the benefits of EGD. Would you expand on that if you need it to be clearer. 590 MS. DeMARCO: Yes, that would be the first type of transaction documents. 591 MR. BETTS: All right. Now let's go to the second, and can you describe that one. 592 MR. SOMMERVILLE: I have just a clarification "for the benefit of" is not neutral language. If you could explain the contractual nexus in each case, I think that would be better. 593 MS. DeMARCO: Let me try and do that based on the responses given yesterday, if I can. 594 In the first instance -- so we're back to the first type of contract -- EGS is selling both commodity and transactional services, TS as agent for EGD and on account of EGD; commodity as principal but on account of EGD. Is that fair? 595 MR. JARVIS: Yes, that's fine. We can do that. 596 MS. DeMARCO: Now, the second type of transaction documents would be exactly the same except the commodity that's being sold by EGS will be sold as principal and on its own account, not on account of EGD. 597 MR. CASS: So then just through you, Mr. Chair, for clarity, there would be some transactional services element to it; is that understanding correct? 598 MS. DeMARCO: Through you, Mr. Chair, as I understand it, yes, there are two types of bundled transaction, and the only distinction is in the portion of the transaction where EGS is selling commodity, it can either do it on account of EGD as principal, and I understand that to be how things currently operate, and the second would be on its own account as principal. 599 MR. BETTS: Is everybody clear with that? 600 Mr. Schuch, let's identify that -- 601 MR. JARVIS: We're clear on the first part of it, on the first request. I thought I was clear on the second part until the last go-round here. So is it fair to say you're looking for two examples which are identical in their underlying nature but are for the account of one entity versus the other? 602 MS. DeMARCO: Let me try it again, if I can. Sorry, I apologize, and it does exemplify the confusion of who's doing what. It's transaction documents, first and foremost, so not an example; and secondly, yes, in terms of the commodity portion on account of whom, on account of EGD or on account of EGS? 603 MR. JARVIS: Mr. Chair, I don't think we have any problem with trying to undertake these requests. 604 MR. BRENNAN: And we'll try and put some explanation around the transaction documents so you're just not receiving the document itself. We'll try and put some words around it. 605 MR. BETTS: Thank you. That will be very helpful. 606 So, Mr. Schuch, can you tell me what the conclusion was on the next undertaking. 607 MR. SCHUCH: Mr. Chair, I understood you to say that the second part of that undertaking should be given a second undertaking number, so why don't we call it J.5.4, and I wouldn't dare to undertake to try to explain what that undertaking is all about. 608 UNDERTAKING NO. J.5.4: TO PROVIDE REDACTED/SAMPLE TRANSACTION DOCUMENTS FOR A TRANSACTION WHERE EGS IS SELLING COMMODITY BUNDLED WITH TS WHERE EGS IS OR WAS AGENT OF EGD FOR THE TS PORTION AND PRINCIPAL, FOR ITS OWN ACCOUNT, FOR THE COMMODITY PORTION 609 MR. BETTS: I think the primary difference is that the second one, and correct me if I'm wrong, relates to the commodity portion occurring with EGS being the principal in that transaction, in the commodity portion; am I correct? 610 MS. DeMARCO: As I understand it, EGS is the principal in both transactions, it's just on account of whom. 611 MR. BETTS: Thank you. So with that differentiation, the benefits would be derived by EGS in that case, they would not go to EGD; am I correct? 612 MS. DeMARCO: Subject to Mr. Sommerville's qualification about the use of the term "benefits." 613 MR. BETTS: We'll see what we get back with that. 614 MR. BETTS: Ms. DeMarco, you can proceed. 615 MS. DeMARCO: Let me talk about the first type of transaction which I understand we've got now; that is, EGS doing a bundled transaction where the transactional services portion is as agent on behalf of EGD and the commodity portion is as principal but upon account of EGD. 616 Does the buyer realize that EGD has no obligations with respect to the failure to deliver the commodity in that case? 617 MR. JARVIS: I would believe the buyer believes that the principal counterparty is Enbridge Gas Services, and that they would not be expecting that any other Enbridge entity, save for Enbridge Inc. who has guaranteed Enbridge Gas Services, would have any responsibility for that transaction. 618 MS. DeMARCO: In relation to the commodity or the entire transaction? 619 MR. JARVIS: The entire transaction. 620 MS. DeMARCO: Not even the transactional services portion where it's acting as agent? 621 MR. JARVIS: There is no -- again, when we get these documents in front of you, you will see that there is no specific document that will evidence the underlying transactional service that you're alluding to. 622 MS. DeMARCO: Maybe it's best let for receipt of the documents, then. Thanks very much. 623 A question about the commodity, if I could. The commodity that's used in the bundled transactions, who is it obtained from? 624 MR. JARVIS: Again, we have a -- just like we go through a counterparty review of companies that we're prepared to sell gas to, we also go through the counterparty review of gas suppliers that we're prepared to buy gas from. So we have a fairly lengthy list of gas suppliers who we believe to be creditworthy, reputable, and have demonstrated a reputable performance history. 625 MS. DeMARCO: And does it purchase gas other than from the Enbridge group of companies? 626 MR. JARVIS: Who is "it"? 627 MS. DeMARCO: EGS. 628 MR. JARVIS: The only -- we do buy a bit of gas from an entity -- "we" being Gas Services, buys a bit of gas from time to time from an entity called Enbridge Energy Partners located in Houston. I don't know whether any of that activity would have been in relation to transactional services or not. 629 MS. DeMARCO: So then all the rest of the gas that you'd be purchasing for transactional services would come from the Enbridge group of families -- companies? 630 MR. JARVIS: No, they would come from third parties. 631 MS. DeMARCO: Can you give me a ballpark figure of the amount for transactional services that would be coming from the Enbridge group of companies and the amount that would be coming from non-related parties, non-affiliates? 632 MR. BRENNAN: As it relates to these transactional services? 633 MS. DeMARCO: Yes. 634 MR. JARVIS: No, I can't, because as we sit here right now, I'm not even certain that any of the gas that we buy from that entity has been involved in transactional services, but I can't say for sure. 635 MS. DeMARCO: Then the majority would come from -- 636 MR. JARVIS: The majority of the gas purchased for use in transactional services would come from third parties. 637 MS. DeMARCO: And would you obtain any of the gas that would be used in transactional services from curtailing customers? 638 MR. JARVIS: No. 639 MS. DeMARCO: Okay. Now I'm going to undertake the rocky task of trying to compare the two situations that are the subject of the undertaking, so I apologize for wading into this. 640 As I understand it, when EGS enters into a bundled transaction selling commodity as principal for its own account and selling transactional services as agent, in that case, the shareholder would keep 25 percent of the margin on the TS portion? 641 MR. BRENNAN: If we could just have a minute, please. 642 MR. JARVIS: Again, around the transactional service that you've alluded to in this example, can you clarify for us if that's a transactional service that we may have acquired through an RFP using the protocols, or whether it's a transactional service that we have simply bundled with commodity for the benefit of EGD? 643 MS. DeMARCO: It would be the latter, when you're acting as agent. 644 MR. BRENNAN: I'll try to take a stab at it. I think what you're asking is, when Enbridge Gas Services goes out and purchases gas and sells gas as principal and on its own behalf, the question really becomes, I think, what we're having difficulty understanding, is how they get access to the transactional services asset. If Enbridge Gas Services wants to buy gas and sell gas on its own behalf and its own account, and it wants to -- and it needs, I guess, in order to carry out that bundled transaction some of the utility's transactional service assets, whether it be storage or transportation, in order for them to be able to do that, they're going to have to be involved in an RFP process in order to obtain that transactional service asset before they -- if they want to do something on their own -- as principal on their own behalf, they just can't go and take the utility's asset; they have to acquire that asset through a bidding process. Does that clarify? I hope that clarifies it. 645 MS. DeMARCO: Let me try to clarify again. So right now what we have is them acting as principal; is that fair? 646 MR. BRENNAN: Is what? 647 MS. DeMARCO: Is EGS acting as principal. Forget whose account it's for. They are acting as principal. 648 MR. BRENNAN: They are buying and selling the gas. 649 MS. DeMARCO: As principal. 650 MR. BRENNAN: As principal. 651 MS. DeMARCO: And they don't have to go through an RFP process. 652 MR. BRENNAN: Are you talking about what is being done today? 653 MS. DeMARCO: Yes. 654 MR. BRENNAN: Okay, you didn't say that so I wasn't sure. What they're doing today is that if they are buying and selling gas as principal but all of the revenue that comes to the utility using that asset, then they just use that asset as part of their function to optimize the use of our assets. But if they want to -- sorry, to carry on, so all of that revenue comes back to the utility. Now, if they want to go and buy and sell gas as principal to their own account, then they simply can't take the utility's asset and use that and none of the revenue comes back to the utility. If they want to use that asset, then they have to achieve or obtain that asset through a bidding process, and then match it up with the commodity -- because if -- when we go through the bidding process, they achieve, say, transportation, we don't care what they do with it after that. If they want to bundle it with gas or do whatever they want, it's not -- Enbridge Gas Distribution doesn't care, because we've achieved a revenue from releasing the asset. 655 MS. DeMARCO: I understand the distinction, and that's reflected in the undertaking, to be the intention of EGS. Is it for EGS's account or is it for the account of EGD? 656 MR. BRENNAN: Well, going through the undertaking, the first case, as I understand it, was for the benefit of EGD; on the second case, it was the benefit of EGS. 657 MS. DeMARCO: That's right. So that's the distinction that you're telling me right now. 658 MR. BRENNAN: Yes. 659 MS. DeMARCO: That's what makes the process different internally. 660 MR. BRENNAN: No, there is another difference in how they get access to the actual transactional services as well, the asset itself. 661 MS. DeMARCO: Right. 662 MR. BRENNAN: Not only is it to whose account, but how Enbridge Gas Services gets access to that transactional service asset. 663 MS. DeMARCO: So as I understand it, then, Mr. Brennan, if it is for EGS's own account, there are more procedural hurdles. 664 MR. BRENNAN: Yes. They have to be able to obtain the asset itself through a bidding process. 665 MS. DeMARCO: And once it does, 100 percent of the margin goes to EGS. 666 MR. BRENNAN: No. The revenue that EGS would pay EGD for the use of the asset will come back to EGD, and that revenue is shared. Anything that Gas Services does with that, if they want to then take it and rebundle the whole thing, all of those revenues go to Enbridge Gas Services. 667 MS. DeMARCO: Maybe I didn't use the term "margin" correctly. Net margin; is that fairer? 668 MR. BRENNAN: I don't know. I'm just -- I tried to explain it the way that I understand how it works. 669 MS. DeMARCO: Let me start back at first principles here. We've got two situations: One where Enbridge is selling as principal bundled commodity for the account of EGD. In that situation, 25 percent of the margin goes to the shareholder, 75 percent of the margin goes to the ratepayer; fair? 670 MR. BRENNAN: Under the current scenario, when Gas Services buys gas, sells gas as a bundled product for the benefit of Enbridge Gas Distribution, 25 percent of that revenue, minus the O&M, goes back to the shareholder; 75 percent goes to the ratepayer. 671 MS. DeMARCO: Now talk to me about the other situation. 672 MR. BRENNAN: Okay. On the other scenario where Enbridge Gas Services purchases gas as principal, on its own behalf, the first thing that has to happen is, if they want to do a bundled transaction, they have to acquire, let's say in this case, transportation to make it simple. So Enbridge Gas Services, through a bidding process, would purchase the transportation piece. The revenue from that, 25 percent would go to the shareholder, 75 percent would go to ratepayer. Now, once Enbridge Gas Services has access to that transportation, what it does with that transportation beyond that is of no interest to Enbridge Gas Distribution. If it wants to take that transportation and bundle it with commodity and sell it to a third party, all that revenue goes to Enbridge Gas Services. 673 MS. DeMARCO: Which one is more profitable for the shareholder? 674 MR. BRENNAN: For the shareholder? Potentially the former, like where it's bundled and all the revenues come back -- I'm sorry. It's a good question. Hang on a minute. 675 Sorry, we were just discussing how often Enbridge Gas Services has come to us and actually bid on some of those transactional services, to be able to try and answer your question, and quite frankly, I don't think that if they have bid -- I know they have bid on certain things, but very rarely have they won, so very rarely do they use one of our assets to do something on their own -- to their own account, if you like. 676 MS. DeMARCO: You're providing us with transaction documents to that effect; yes? 677 MR. BRENNAN: Yes. And I'd be -- yeah. I'd be surprised, I could be wrong, whether or not we would have a document where they have access to those assets prior to -- for that second scenario that you provided, where they have to get access to the asset first. 678 MS. DeMARCO: You gave the undertaking, Mr. Brennan? 679 MR. BRENNAN: Yes. We undertook to see if we could find any. 680 MS. DeMARCO: So theoretically, which one is more profitable for the shareholder? 681 MR. BRENNAN: On the surface of it, I would say the latter, that being where Gas Services acquires the asset from the utility and then does its own bundling of commodity. 682 MS. DeMARCO: And Mr. Whelen and Mr. Jarvis, you indicated that Enbridge Gas Services intends to maximize revenue. Why wouldn't it be doing all the transactions that way? 683 MR. JARVIS: I think it goes back to the -- some of the fundamentals of the risk-management program and what my boss and my management has instructed around our activities related to this business, and that is that, despite the fact that you're correct, we have a mandate to maximize the bottom line for Enbridge Gas Services within the confines of our risk policies and this and that and the other thing, we are not going to be utilizing opportunities to take revenues off the backs of the customers of EGDI to benefit our bottom line in that fashion. 684 MS. DeMARCO: Can I turn you now to the evidence at A2, tab 5, schedule 1, at page 4, and paragraph 17, bottom of the page. And I believe also yesterday, Mr. Whelen -- Mr. Jarvis, you indicated that these transactions happen very quickly, you need to move very quickly to realize the opportunities; is that fair? 685 MR. JARVIS: Yes. 686 MS. DeMARCO: And we're talking in the order of minutes, hours? 687 MR. JARVIS: At times it's minutes. 688 MS. DeMARCO: Let's talk about those times when it's minutes, and I'd like you to just walk me through the process. 689 First of all, EGS would need to be notified that excess TS assets are available; is that fair? 690 MR. JARVIS: Correct. 691 MS. DeMARCO: Who would notify them? 692 MR. JARVIS: Generally in the periods when it's most active, it's the wintertime, and the notification comes from operational -- Enbridge Operational Services. 693 MS. DeMARCO: So EOS notifies EGS that there are excess assets available. 694 MR. JARVIS: Correct. 695 MS. DeMARCO: Are other marketers notified of that? 696 MR. BRENNAN: No, they are not. 697 MS. DeMARCO: And EGS would then need to go to the market to ensure that there's no opportunity to sell the TS alone? 698 MR. JARVIS: A judgment has to be made, again, given the circumstances in the market at the time whether we believe we have time to go to the market and canvass the sale of the service, or whether it is our judgment that by waiting to do that, opportunity will erode or, in fact, evaporate, again depending on the day, time of day, what's going on in the market. 699 MS. DeMARCO: So I guess we need to qualify your evidence in paragraph 19, specifically at number A: "In not every case do you go to the market to see if there is the opportunity to sell the transactional service alone." 700 MR. JARVIS: There are circumstances where we know there is not an opportunity to sell a service, and that the only way to get something done within the time frame that we've got is to conduct a commodity transaction to generate that value. 701 MS. DeMARCO: So there are circumstances where you don't canvass the market. 702 MR. JARVIS: Correct. 703 MS. DeMARCO: And you don't contact other marketers. 704 MR. JARVIS: Correct. 705 MS. DeMARCO: And they might not have a change to realize that opportunity. 706 MR. JARVIS: Correct. 707 MS. DeMARCO: In the circumstances -- now I'm referring you to paragraph 19 again, in the circumstance where you have more than minutes, where you've got hours, say, to compare the values of selling the transaction alone or selling the transaction plus commodity, what precise values are you comparing? 708 MR. JARVIS: The word "precise" is loose in terms of part of the evaluation. We can be very precise in terms of what a third party may offer us for the service. You can phone them up and they'll say, We'll pay you 50 cents. That's very precise. We have to make a judgment, then, on, if we're going to bring the commodity to bear, we have to look at the prices, again, at the various points and make our assessments on the liquidity and the depth and the validity of the market prices at those points. So our evaluation would center around the market prices that we believe we can execute at the points necessary to generate the revenue versus that precise number that a third party may have indicated to us they would transact at. 709 MS. DeMARCO: In terms of the substance of what you're comparing, are you comparing the value of the TS alone, so the absolute value, the dollar figure on that, with the dollar figure on the TS plus commodity? 710 MR. JARVIS: Yes. 711 MS. DeMARCO: So really we're talking about apples and oranges here. 712 MR. JARVIS: Yes. 713 MS. DeMARCO: Would it be a more accurate comparison to compare the value of the TS alone with the weighted value or the determined value of the TS portion of the bundled offering? 714 MR. JARVIS: There's no way to make that determination. 715 MS. DeMARCO: But you do it, don't you, after the fact. 716 MR. JARVIS: No. We allocate 100 percent of the remaining revenues and we make no determination between commodity value and TS value. 717 MS. DeMARCO: Can I point you to paragraph 20 of your evidence, and the most recently filed schedule K.4.2. There are several determinations there, would you agree with me, pertaining to the value of the commodity and the value of the services? 718 MR. BRENNAN: No, I would disagree. If you look at paragraph 20 of our evidence, what we show in that table, commodity transactions, $10.5 million. My understanding is that embedded in that is probably -- well, is not only the commodity but also the services as well. But by far, the commodity is the much larger portion of that. But as to what the exact amount is between the two, I can't tell you. 719 MS. DeMARCO: So -- 720 MR. JARVIS: If I may, I'm going to challenge that just a bit. The value of 10.5 million that's ascribed in there is the sum of revenues that result from our commodity transactions on pipelines or storage. Embedded within that $10.5 million, in theory one could suggest there's a commodity value there and there's value described to the underlying TS service. It's my premise that that there is no mechanism with which to accurately or validly take that $10.5 million and say, Well, 9 of it is related to the underlying asset and 1.5 is related to the commodity. I don't believe that can be achieved. 721 MS. DeMARCO: So, then, referring to Exhibit K.4.2, wherever we've got line 2 there, gross margin related to commodity, that's really not an accurate assessment of the pure commodity portion. 722 MR. BRENNAN: It's a combined, bundled commodity service. 723 MS. DeMARCO: So we're seeing revenue from the actual TS assets, capital T, capital S, reflected in that line. 724 MR. BRENNAN: Yes, embedded in there, there would be some, correct. 725 MS. DeMARCO: Right. So the figure in the last column, without commodity, is not very accurate; is that fair? 726 MR. BRENNAN: I'm not sure why you would say that. 727 MS. DeMARCO: It doesn't reflect the services that would otherwise be sold in row 2. 728 MR. BRENNAN: I'm sorry, you're looking at the last column where it says "without commodity"? 729 MS. DeMARCO: Right. 730 MR. BRENNAN: And you're asking me whether or not the $8 million is accurate? 731 MS. DeMARCO: No, whether or not we're missing a portion that would otherwise be embedded in column 2. 732 MR. BRENNAN: Yes. No, I think what we have here is accurate. I think that if we were not doing the commodity, then we may not be able to sell the transactional service piece itself. 733 MS. DeMARCO: So it's fair to say, then, that in row 2, any point where you've got referenced as the "gross margin related to commodity" should be more appropriately reflected as "gross margin related to commodity plus TS assets"? 734 MR. BRENNAN: Or a bundled service, if you like. 735 MS. DeMARCO: And do you have any evidence that you would not sell the TS portion absent the sale of the commodity? 736 MR. BRENNAN: Well, our whole reason for doing it, as we stated in our evidence, is that we would do this if -- only if there was greater value to -- that we couldn't necessarily sell the transactional service by itself, and then we'd go ahead and introduce the commodity to it. 737 MS. DeMARCO: Mr. Jarvis, you've indicated that in assessing that value, to date we're doing an apples-and-oranges comparison; is that fair? 738 MR. JARVIS: In some circumstances, yes. 739 MS. DeMARCO: Thank you. Just a few more questions regarding the situation prior to November 2002. 740 Prior to November 2002, did EGS enter into what I'll call the type-2 transaction where it was selling principal on its own account, bundled? 741 MR. BRENNAN: Not to my knowledge, no. 742 MS. DeMARCO: So, Mr. Jarvis, in your response to Ms. Aitken about the 60/40 split based on volume numbers that EGS business is comprised of, what would that be referring to? That would be what sort of revenues? 743 MR. JARVIS: That was a reference to an estimate of volume of business we conduct in non-agency activity versus the volume we've estimated is to be conducted on commodity around the transactional services. 744 MS. DeMARCO: So the 60 percent would be EGS acting as principal for its own account. 745 MR. JARVIS: Correct. 746 MS. DeMARCO: How does EGS determine which commodity transactions to do on its own account and which to do on EGD's account? 747 MR. JARVIS: The transactions that we conduct on our own account are transactions around assets that we have the contractual principal relation for. The transactions we conduct with the commodity on behalf of Enbridge Gas Distribution are around assets for which they have the underlying principal obligation. 748 MS. DeMARCO: Underlying principal obligation being the obligation to? 749 MR. JARVIS: That obligation being, as an example, they are a customer of Union Gas and have a contract to transport gas on the Union Gas system. 750 MS. DeMARCO: Can you just expand upon that decision-making process. An opportunity comes in the door and you ...? 751 MR. JARVIS: An opportunity comes in the door, as an example, someone looking for services or commodity across the Union Gas system. Enbridge Gas Services does not have any of that asset. We are not in a position to offer that type of service. So by default it's automatically going to become a consideration on that day as to whether the assets of Enbridge Gas Distribution fit the need of the customer, and are available for the duration of the customer's requirement. 752 MS. DeMARCO: Thank you for that clarification. 753 Can I just ask you a few questions now about your answers to Mr. Thompson, and as I understand it, do I fairly understand it that it's EGS -- EGD's proposal to have EGS recover all of its credit costs prior to any sharing? 754 MR. BRENNAN: Well, our first proposal is for the commodity to be conducted under the utility's name, and if there are any credit costs, as we identified in the Undertaking 4.1, I believe it is, under that scenario, we've estimated a number here of $50,000, and yes, that would be taken off the gross margin prior to any sharing. And under the other scenario that Mr. Thompson requested, again, that number -- it would be the same calculation, and all you would do, you would replace the $50,000 for credit costs with the $2 million and then the sharing would carry on from there. 755 MS. DeMARCO: And if you're not selling commodity, those -- there would not be such credit costs. 756 MR. BRENNAN: That's correct. 757 MS. DeMARCO: And, in fact, the more you sell, the higher the costs. 758 MR. WHELEN: I guess in theory, the larger your obligation was outstanding, the higher the credit cost would be, so the higher the volume -- although I think we've said that there is an expected volume where we would think the credit cost would come in, and therefore, we're not thinking that we are particularly exposed as a provider of that credit support to some -- to a particular number. 759 MS. DeMARCO: So it's fair to say, then, that it would be dependent on the relative activity levels, generally, subject to that qualification? 760 MR. WHELEN: Just a moment. 761 Just by way of clarification, the way the business works, we can replicate transactions again and again during the course of the year so that the dollar value and volume of commodity, if you will, can be sold several times over, let's say, once a month where there's a cycle that we can go through. We're not having to get a full multiple, it's not the entire outstanding amount, if you will, of the aggregate transactions added up that we then need to go to credit for. From a financial perspective, it would be more the -- the credit costs would relate more to the average balance that was outstanding over the course of the year. 762 MR. JARVIS: If I can further add to that. The $100 million that we've put on the record a number of times here in the last couple of days, again, relates to an estimate of two months' worth of business. So after every month falls off, this $100 million credit limit or guarantee -- credit expectation continues to roll on, so over a period of a year, you have as much as $600 million of activity that could be conducted, in theory, if you were at your maximum at all times. I think our evidence yesterday suggested that in 2003, for the entire year, it was $275 million. 763 MS. DeMARCO: Thank you for that. Can we move now - and I promise that this is my last line of questioning, with apologies again for going on - to appendix B of the service schedule to the Enbridge Operational Services agreement with EGD, and the actual reference number there, I believe, is Exhibit A3, tab 4, schedule 2, and specifically, I'm at page 11 of 13. 764 MR. BRENNAN: Okay. I think I have it. 765 MS. DeMARCO: Just by way of preliminary matters, have there been amendments to reflect the Board's decision in RP-2002-0133 to this service schedule? 766 MR. BRENNAN: Yes. This report, or this appendix, if you like, was a reflection of that decision to update the services schedule to reflect the Board's comments around what information was being transferred between different parties, if you like. 767 MS. DeMARCO: Can we just go through and fairly quickly look at what is reported and to whom -- 768 MR. BETTS: Ms. DeMarco, my apologies, could we just get that reference once more, please. 769 MS. DeMARCO: I'm sorry, it's Exhibit A3, tab 4, schedule 2, and I'm at page 11 of 13, which is entitled "Appendix B - Schedule of Reports." 770 MR. BETTS: Thank you. 771 MS. DeMARCO: So these would be all the reports that are provided by EOS to EGD or EGS? 772 MR. BRENNAN: Well, you can see on the far side there, far right-hand side, it indicates where the documents are -- where the documents are coming from and who they are going to. 773 MS. DeMARCO: And where specifically it's reported to EGD/EGS, do I take that to mean that it's provided to both entities? 774 MR. BRENNAN: Yes, that's correct. 775 MS. DeMARCO: At the same time? 776 MR. BRENNAN: Yes. 777 MS. DeMARCO: So if I can just highlight those reports by referring to them by their cell number, cell number 1 would be the degree days on daily basis; cell number 2 would be degree days on a monthly basis? Just stop me if I'm wrong here anyway. Cell number 3 would be the budget versus send-out of degree days; cell number 4 would be the LRF, the long-range forecast; the send-out details, cell number 5; moving to cell number 7, the curtailment advice; cell number 8, is that the monthly volume, "M vol"? 778 MR. BRENNAN: Yes, it is. 779 MS. DeMARCO: Moving down to cell number 15, the peaking supply. 780 MR. BRENNAN: That's a case where EGS provides this to EOS and EGD. 781 MS. DeMARCO: Sorry. Cell number 23, the daily budgeted degree file; cell number 24, the daily budgeted send-out file. And would that be an accurate -- oh, I've forgotten one, too. Cell number 20, the supply file. Would that be an accurate representation of all the reports that are provided by EOS to EGS? 782 MR. BRENNAN: It would also include reports that EGD would provide EGS as well. It's not just EOS in a couple of instances. I'm thinking here, in particular, of number 23 and 24, where Enbridge Gas Distribution provides to EOS and EGS. But apart from that, yes. 783 MS. DeMARCO: Right. So the contents, the type of information that's in those reports would be things such as the forecast quantities by region for the following year? 784 MR. BRENNAN: Can you -- 785 MS. DeMARCO: That would be number 24. 786 MR. BRENNAN: Twenty-four? Yes. 787 MS. DeMARCO: And degree-day forecasts both annually and daily by region; is that fair? Number 23. 788 MR. BRENNAN: I'm sorry, 23? 789 MS. DeMARCO: Yes. 790 MR. BRENNAN: Yes. 791 MS. DeMARCO: In the course of number 3, the variances, the aggregate send-out variances by delivery area? 792 MR. BRENNAN: Yes. 793 MS. DeMARCO: Number 4, send-out forecasts by actual -- actual -- forecast and actual by region as well as storage, pipeline deliveries, storage injections and withdrawals, storage balances, weather forecasts; that's on a daily basis? 794 MR. BRENNAN: Yes, that's what it says. 795 MS. DeMARCO: Is it fair to characterize all this information as system information that's necessary for you to operate the utility services that you do? 796 MR. BRENNAN: That's correct. 797 MS. DeMARCO: So utility service information; is that fair? 798 MR. BRENNAN: Yes, it is. 799 MS. DeMARCO: And in each of these instances, none of this information is provided to marketers at the same time? 800 MR. BRENNAN: No, it's not, nor do we see, necessarily, a need to, really. 801 MS. DeMARCO: Can I take you now to the Enbridge Gas Services service-level agreement. Let me give you the appropriate reference for that one. That would be Exhibit A3, tab 4, schedule 1, and specifically at appendix E to the service schedule. 802 MR. BRENNAN: Yes, I have that. 803 MS. DeMARCO: At page 28 of 30, there's a host of reports that are provided specifically to EGS by EGD. I won't go through them in detail, only to note that I think possibly the numbers, shall we do that? Cell number 1 goes to EGS; cell number 2 to EGS; number 3, number 4, number 5, number 6, and those are the balance that go to EGS from EGD. 804 MR. BRENNAN: Those ones that you've listed, I believe they are the first six, I believe, go to EGS; that's correct. 805 MS. DeMARCO: So as a result of those reports, EGS would have information on budgeted demand for short-term purposes? 806 MR. BRENNAN: Aggregate budgeted demand, yes. 807 MS. DeMARCO: Design demand? 808 MR. BRENNAN: Aggregate design demand, yes. 809 MS. DeMARCO: Capacities for transportation segments? 810 MR. BRENNAN: Yes, our total capacities on the various pipelines; that's correct. 811 MS. DeMARCO: Supply of volumes for a number of different options, supply options? 812 MR. BRENNAN: Aggregate supply volumes, yes. 813 MS. DeMARCO: Storage information, injection and withdrawal curves, costs, inventory values? 814 MR. BRENNAN: That's correct. That's -- all this information is -- and particularly, I guess, the storage, is such that through the send-out model that we use, we're able to simulate how storage would operate, so you need the injection and withdrawal curves to be able to do that. And, of course, if you're looking at doing the planning, you need to know what potential costs you might have to have in there to develop additional storage. That's -- all that information is going to Enbridge Gas Services in order for them to carry out those short-term and long-term planning functions. 815 MS. DeMARCO: And it can do the same for specific storage facilities as well? 816 MR. BRENNAN: I'm sorry? 817 MS. DeMARCO: It can do the same for specific storage facilities as well analyze the costs, inventory levels, deliverability rates? 818 MR. BRENNAN: Yes, to the extent -- for example, the prime example would be our contract with Union Gas where, again, they're able to mimic that storage as well and use that as part of the long-term and short-term planning process. 819 MS. DeMARCO: And EGS would also be provided with design volumes by delivery area and rate class and annual limits? 820 MR. BRENNAN: Are you under curtailment volumes? 821 MS. DeMARCO: Yes. 822 MR. BRENNAN: Yes, again in aggregate form. 823 MS. DeMARCO: And that would work for both long-term and short-term purposes; is that right? 824 MR. BRENNAN: Yes, it would. 825 MS. DeMARCO: And it's fair to say that none of those reports are provided to marketers at the same time that they are provided to EGS? 826 MR. BRENNAN: No, they are not. Again, nor do we see a need to. I mean, I'm not sure what a marketer is going to do with our injection and withdrawal storage curves, but anyway ... 827 MS. DeMARCO: And is there any protection in the agreement itself to prevent EGS from using that information for 60 percent activities? 828 MR. BRENNAN: I believe you go back to the agency agreement. I believe there is a confidentiality provision in there. 829 MS. DeMARCO: And I believe Ms. Aitken took you through this yesterday in some detail. 830 MR. BRENNAN: Yes, that's correct, I believe she did. 831 MS. DeMARCO: So I'm not going to touch that at this point. Thank you very much. Those are all my questions. 832 MR. BETTS: Thank you, Ms. DeMarco. 833 Are there any further questions from intervenors? I think we have polled everybody. I think we're at questions from Board Staff. 834 MR. WIGHTMAN: Thank you, Mr. Chair. 835 CROSS-EXAMINATION BY MR. WIGHTMAN: 836 MR. WIGHTMAN: Can you confirm that under the protocols, there's no possible way that EGS could be providing TS services to an affiliated or related company at less than what some other party would be willing to pay? 837 MR. BRENNAN: Well, your reference to the protocols, maybe I'll just explain how the protocols work. If Enbridge Gas Services were looking to acquire transportation or storage assets from the utility, then -- and there was an RFP that was sent out, then Enbridge Gas Services would have to have their bid in, and I can't remember the exact time, I believe it's 10 or 15 minutes, ahead of everyone else, and all the bids would come back to the utility for awarding, if you like. Obviously, you don't want a party that's bidding on the asset to also be doing the evaluation. So in those circumstances, those bids would come back to myself, in this case. 838 MR. WIGHTMAN: And you would take the best bid? 839 MR. BRENNAN: We would take the best bid, that's correct. 840 MR. WIGHTMAN: Now, with respect to the transactional services described in your evidence, you have a reference to peak storage, and I wonder if you could just explain to us how the utility can have peak storage that's in excess to its requirements? 841 MR. BRENNAN: Yes, certainly. Peak storage is -- we haven't sold much recently, but the way it was done when we did do it, we would loan gas out to a third party. In essence, that creates a hole, if you like, in the storage field, and then we would go out and sell that storage to a third party. In some cases, in most cases, I guess, the loan would cost you, say, 20 cents or whatever, but we would also generate maybe 50 cents for the peak storage and then therefore, overall, we generate a 30-cent net profit. 842 MR. WIGHTMAN: Okay. And finally, you refer in your evidence that most of these TS, or transactional services, are interruptible. Can you explain to me how interruptible peak storage would work? 843 MR. BRENNAN: Certainly. If a customer was contracting for off-peak storage or peak storage, as most of the contracts are interruptible, what that means is that during the winter period, for example, on withdrawal, the utility needs that withdrawal capability for its own in-franchise use, it would interrupt that transactional service customer on that particular day. 844 MR. WIGHTMAN: Thank you. Those are Staff's questions. 845 MR. BETTS: Mr. Cass, do you have any questions arising at this point in redirect? 846 MR. CASS: I have just a few, Mr. Chair, thank you. 847 MR. BETTS: Please go ahead. 848 RE-EXAMINATION BY MR. CASS: 849 MR. CASS: During one of the earlier cross-examinations, it was brought out that to date, the credit costs have not been charged by Enbridge Inc. Or Enbridge Gas Services in relation to the commodity element of these bundled transactions that have been discussed. Can the panel explain why Enbridge Inc. and/or Enbridge Gas Services have been prepared to proceed this way up to now? 850 MR. JARVIS: I'll maybe start, Mr. Chairman. 851 At the time that it became evident that this may be a business model for consideration to apply to the transactional services activity, there was a recognition at that point in time, in the fall of 2002, that there was a credit element and a credit-cost element to the business. We did spend some time at that time, and work has continued to try and get our collective minds around how you do that, but where we arrived at was that our thinking around how the credit costs would be valued at the time. And frankly, uncertainty over the success or lack thereof that the program may result in in being able to generate revenues for ratepayers and EGDI through the revenue set sharing mechanism was unknown. So it was our view that the business model should be tested and proven prior to bringing it forth as something that you would formally embed within the transactional services program. 852 MR. WHELEN: And I guess from our perspective, then, the business model has proven itself out and therefore will be, you know, carried on in the future, subject to, you know, these proceedings. And our thinking around the cost of credit and how credit should be charged has evolved in that intervening period as well. 853 MR. CASS: Thank you. Now, some of the questions pursued the history of bundling commodity with transactional services and notification to various stakeholders in that regard. Can the panel explain why the company is coming forward now to ask for Board approval for the specific changes to the transactional services program rather than earlier? 854 MR. BRENNAN: Well, I guess the first reason would be that Enbridge Gas Services indicated that they no longer were prepared to conduct these transactions in their own name, so that was one of the reasons why. Why we didn't come forward earlier? Well, there was no need at that point in time because the utility, in its mind, was not conducting the commodity in its own name so it saw no need to come to the Board to request to add a commodity to its basket of transactional services, if you like. 855 MR. CASS: Okay. Now I'm going to come to Ms. DeMarco's cross-examination and a couple of the areas she covered. A considerable amount of time in that cross-examination was spent discussing the sorts of transactions, and I'll probably go wrong in describing them, but where Enbridge Gas Services would acquire a transactional service, and I take it that would be through an RFP service, in order to bundle it into a transaction for its own account. Can the panel give us a sense of how often this comes up? 856 MR. BRENNAN: As I tried to indicate earlier, again subject to my memory and everything else, that very rarely happens, if at all. 857 MR. CASS: And I don't know whether you can answer this or not, but can the panel explain why it doesn't come up very often? 858 MR. JARVIS: I think the biggest reason why it doesn't come up very often is if you look at the nature of the transactional services business right now and where the bulk of the value is being generated, it's in the very short-term market. As the Staff alluded to in their questions, we're not really in -- EGDI is not really in a position to be going out and doing longer-term releases or assignments of any of the assets because they're needed to serve the franchise. So the nature of the assets is they're not available for the longer term, generally speaking; the nature of the business is such that value and volatility are of a short-term nature. So there's no value either to EGD or EGS to be trying to invoke these protocols for a service that's available tomorrow but not the next day. 859 MR. CASS: Thank you. And then finally, Ms. DeMarco had a lot of questions about information flow from Enbridge Gas Distribution to Enbridge Gas Services. Mr. Brennan, can you comment whether there's any cause for the Board to be concerned about this flow of information? 860 MR. BRENNAN: I would say no, not at all. I mean, we've gone to great lengths to make sure that any information that we provide to EGS is not customer-specific information. We want to make sure that no individual customer is identified in any of the material or any of the information that we provide to Enbridge Gas Services. And the only information that we are providing to Enbridge Gas Services is information that they need in order to carry out the function that they've been contracted to perform. 861 MR. CASS: And then the other side of Ms. DeMarco's questions in this area were about whether the same information was provided to marketers. Can you comment whether there is any cause for the Board to be concerned in that area. 862 MR. BRENNAN: I would say no. I mean, certainly this issue has been discussed in many hearings. I've yet to have a marketer come to me requesting information that they feel that we're providing to EGS and that they are not receiving. So, again, I take it from that that there is no concern from that group that they feel that they're not being provided with the information they feel they deserve. 863 MR. CASS: Thank you. Those are my questions in re-examination, Mr. Chair. 864 MR. BETTS: Thank you. 865 [The Board confers] 866 QUESTIONS FROM THE BOARD: 867 MR. SOMMERVILLE: Mr. Whelen, you indicated -- let me take you back to November of 2002 when the enhanced service was being designed. 868 MR. WHELEN: Yes. 869 MR. SOMMERVILLE: And you were brought into the discussions with respect to that proposal. What steps did EI take at that time in -- to accommodate this enhanced service? 870 MR. WHELEN: Well, I think the first thing that we would do is have a look at -- 871 MR. SOMMERVILLE: What did you do? 872 MR. WHELEN: Examine the counterparties that were proposed to enter into these transactions with, that would have been my primary focus, and to ensure that any transactions that were undertaken were not creating any commodity risk or market price risk itself. We would be concerned about credit risk, market price risk. We also looked at operational risk, were the systems and processes and procedures in place to manage this business. 873 MR. SOMMERVILLE: Your response at that time was to create some ground rules related to the creditworthiness, if you like, of the counterparties. 874 MR. WHELEN: Yes. 875 MR. SOMMERVILLE: That's what you focused on. 876 MR. WHELEN: That's right, to ensure that counterparties were approved and approved by our group. 877 MR. SOMMERVILLE: Thank you. 878 MR. BETTS: I'm perhaps a little confused with some things I've heard during this -- the examination of this issue, and I just want to try to clear it up with a couple of questions, and perhaps to Mr. Brennan. 879 If, in fact, your relationship with EGS with respect to these transactional services should terminate, would you get any response to an RFP in the open market for another provider of that service, the same services? 880 MR. BRENNAN: It's difficult -- I'm sorry, are you referring strictly to the one component of that agreement, being the transactional service piece, or are you talking about the whole agency agreement itself? 881 MR. BETTS: I'm not so concerned about the document as I am the services that relate to the document. Well, why don't you explain why there would be a difference there. 882 MR. BRENNAN: Well, I guess there would be a difference depending on the functions that this other party was looking to undertake. If they were looking to undertake, for example, the planning, the gas acquisition, the risk management and the transactional services, that may be one group; if they were just looking to do simply transactional services, then there may be another group that may be prepared to that. That's why I was trying to make the differentiation between whether they were going to be looking after the whole package or a piece of the package. 883 MR. BETTS: If they were looking after the whole package, would you get any responses? 884 MR. BRENNAN: Our view is based on the report that Navigant put together, the answer would be no. 885 MR. BETTS: If you were prepared to break that up into two components, would you get any respondents? 886 MR. BRENNAN: The short answer is I don't know. It would depend on how it was structured, what the expectation, I guess, is in terms of what that counterparty or that party would be looking for in terms of a return. Obviously we want to make sure that as much of the revenue that's generated from these services flows back to the ratepayer and also even Enbridge -- or at least the shareholder, obviously, wants to continue to get its fair share of that. So it's really a question of how you divy up that and if that would be satisfactory to those parties, if they were there, that would be prepared to bid. 887 MR. BETTS: If we were to accept the assumption that there are no competitive services available in the marketplace, then we would look at this as being a service provided by an affiliate which would typically be associated with a simple pass-through of costs to the -- to EGD, and I think typically that's how you have it structured now. The one thing that we seem to be looking at now is the credit costs, and I'm having a little bit of difficulty understanding why the credit costs have not been determined at this point, or there seems to be some question about how they would be determined. Have I missed something? Could you help me with that question? We're being asked to consider including a cost that seems to have no mathematical formulation. 888 MR. WHELEN: Well, I believe there certainly is a formulation for it in terms of how the cost would come about. It, however, is not necessarily an explicit out-of-pocket cost that relates to the cost of the capital that has to be maintained in order to take on the counterparty credit exposure. If the utility, for example, were to take on these transactions in its own name but there was a discomfort for some reason with the credit risk that it was adding, and I think we've said before we don't believe that that risk is material in the context of the utility, but if there was, it could pay a third party to insure away, if you will, that credit risk. There's a couple of ways it could do that. It could pay an insurance company; some of them would provide that service. It could also, in today's market, also go to financial institutions and for a fee have those financial institutions assume the risk if, in fact, there was a default. So in the event of a default, they would get paid an amount to compensate them for whatever loss was ultimately incurred. 889 That's the nature of the charge that we have been -- we've been talking about which currently is not picked up under the existing sharing arrangement. It's the charge that you would normally have to pay a third party to take that risk away. And what we've suggested earlier was the utility itself can effectively self-insure that risk on its own balance sheet and so it wouldn't incur any out-of-pocket costs other than the small amounts that we identified yesterday. 890 MR. BETTS: Okay, thank you. One more question. Ms. Nowina. 891 MS. NOWINA: Given that we've gone down that path, so you've talked about some ways that you could find a comparator, which would give us a reasonable cost, is that -- if these transactions were not to go to EGD but remain with EGS and the credit cost we discussed, we talked about the figure of $2 million, I think, is the number I saw. So can you specifically tell us what you base the $2 million on? 892 MR. WHELEN: The $2 million was an average of a number of different approaches we took. One was to try and figure out what a letter of credit cost would be for an entity that was engaged in these transactional services with commodity, so purchasing and selling the commodity. If you went to a financial institution with that and said, I need to ensure my customers, my suppliers, the people I'm buying gas from, that I will be creditworthy, but I'm essentially a business that does nothing but purchase and sell gas, they may not have any hard physical assets. What would I have to pay you by way of a letter of credit, for example, to supply that business? That was one approach which gave us a number. 893 The other approach that we have took, and we continue to work away on this, is to look at the amount of capital that a company would have to reserve on its books to mitigate against credit risk, in other words, the risk at any given point in time that one or more of its counterparties might go into default, and that work is based on some of the historical/statistical research, and I cited a couple of the statistics yesterday, not just relying on credit information but a number of other sources, where you can try to determine within a high degree of confidence or probability what amount of capital should be sufficient to weather the storm in the event that, at some point in time, one of these counterparties does go bad. And that work, it's not unlike the work that financial institutions do to try and figure out how much capital they're using in providing credit to third parties. That work came up on a preliminary basis, based on a list of counterparties and a volume of transactions that we assumed for this business and the credit-quality of those counterparties being as we have talked about, all being investment-grade counterparties, in a figure of about $10 million. And so, you know, we looked at 2 million on 10 million on an after-tax basis as being perhaps within the ballpark of a reasonable rate of return. So that number was one way of coming at it. It was also roughly the average of what we thought the credit costs were. 894 MS. NOWINA: Thank you. Can you just give me a minute to confer with my colleagues here. 895 [The Board confers] 896 MS. NOWINA: Sorry about that. That's fine, thank you. 897 MR. BETTS: Let me ask one question, again a follow-up. As you might see, we're searching for something to grab onto here in terms of what a reasonable cost of credit is. 898 MR. WHELEN: I appreciate that. 899 MR. BETTS: And I'm taking from your answer to Ms. Nowina that there was in one scenario, an assessment of how much equity capital would have to be there to back up the risk of a loss, and then you would apportion a certain reasonable return, or an expectation of return on equity to that, I assume; correct? 900 MR. WHELEN: Yes. 901 MR. BETTS: Which would typically be higher within the EI financial structure than I think the Board would expect EGD to be receiving; is that correct? 902 MR. WHELEN: I think it's fair to say that it's certainly within the context of a financial institution pricing a product this way. I think in terms of their return, they would want to see something higher than is typically seen in the utility sector, yes. 903 MR. BETTS: I think somewhere in your testimony you indicated, and I should probably know the number, but EGD had substantial equity to build -- 904 MR. WHELEN: Yes, and I was going from memory, Mr. Chairman, but I think it's in the range of $2 million on its balance sheet of shareholders' equity. 905 MR. BETTS: Am I naive in looking at this from the view of, if EGDI were prepared to consider a portion of its equity as backing up such a potential for loss, that the number would be substantially different than a Board-approved ROI, that that 2 million would be substantially less? 906 MR. WHELEN: It would be substantially different, and I think that yesterday I did point out that 10 million of incremental equity on EGDI's existing equity base is relatively diminimus. So for a program of this size, if it were to grow substantially, then we might have a practical issue with the amount of equity on the balance sheet. But if EGD was prepared to self-insure the risk at a margin of the program of this size, it would comfortably have enough equity on its balance sheet so all it would incur were its out-of-pocket costs. 907 MR. BETTS: It's always dangerous for an engineer to be wandering into these financial halls, so I think I'll stop there. 908 Mr. Cass, have you found a need to re-examine the witnesses based on the Panel's questions. 909 MR. CASS: No, sir, thank you. 910 MR. BETTS: Thank you. Then I'm going to say thank you very much to this witness panel. It's certainly a difficult subject to deal with, as we've all found, and we appreciate your efforts to help all of us present deal with that. 911 We'll break now and I'm going to try to press everybody to be back in 55 minutes, so we'll aim at 2:00, and we will resume the hearing at that time. 912 --- Luncheon recess taken at 1:05 p.m. 913 --- On resuming at 2:03 p.m. 914 PROCEDURAL MATTERS: 915 MR. BETTS: Thank you, everybody. Please be seated. 916 We certainly have a smaller group here which indicates either I didn't allow enough time for lunch or there's going to be less people involved with this topic. 917 First of all, before I begin, are there any preliminary matters that arose during the lunch break? 918 MS. PERSAD: I have none, Mr. Chairman. 919 MR. BETTS: Thank you. 920 Board Staff? 921 MS. LEA: No, I believe the revised version of the settlement document has been filed. I think that's about it. 922 MR. BETTS: Thank you. And no one else. 923 Then we will be soon swearing in a new witness panel of familiar faces, but I think all will require swearing in because they haven't appeared before us in this proceeding; am I correct, Ms. Persad? 924 MS. PERSAD: Yes, I believe that's right. 925 MR. BETTS: Was everybody present -- of everybody that's here now, was everybody present this morning first thing - I don't think everybody was - when I made a statement with respect to this issue. If those that were present will forgive me for being repetitive, I'm going to make the same statement again so everybody understands exactly where we are on this issue. 926 This Panel of the Board cannot confirm that the Board will undertake a generic proceeding dealing with utility late payment penalties. In the absence of a direction for a generic proceeding, the parties have suggested that the issue is, and I quote, "Should the Board establish a 2005 CASDA, and if so, what costs should be included therein?" 927 While the Panel agrees to consider whether to approve establishment of the requested deferral account, it will not be determining whether any of the amounts to be recorded in the deferral account would eventually be recovered from ratepayers. 928 Furthermore, the Panel expects parties to restrict their treatment of the matter to the narrow issue the Panel has to decide. The Panel presumes that any parties wanting to deal with the question of what costs should be included will be directing their examination to the type of costs to be included. It is unlikely that a detailed discussion of forecast amounts would be useful to the Board Panel. 929 With that statement having been made, Ms. Persad, are we ready to swear in the witnesses, or would you like to introduce them first? 930 MS. PERSAD: I'll give you a brief introduction and then perhaps they can be sworn in. 931 Mr. Ladanyi is the Manager of Regulatory Proceedings; Mr. Mark Boyce, Manager -- sorry, Associate General Counsel and Corporate Secretary; and Mr. Steve McGill, Manager of Strategic Projects and Market Analysis. Perhaps they could be sworn in now. 932 MR. BETTS: Thank you. Ms. Nowina will do that. 933 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON LATE PAYMENT PENALTY - LADANYI, BOYCE, McGILL: 934 T.LADANYI; Sworn. 935 M.BOYCE; Sworn. 936 S.McGILL; Sworn. 937 MR. BETTS: Thank you, Ms. Nowina. The witnesses have been sworn in, so please proceed, Ms. Persad. 938 MS. PERSAD: Thank you, Mr. Chairman. 939 As you alluded to, Mr. Chairman, this witness panel is here to speak to the unsettled portion of issue 11.2 in the settlement proposal set out at pages 37 to 39 of that exhibit regarding the 2005 class action suit deferral account, otherwise known as the 2005 CASDA or late payment penalty deferral account. 940 EXAMINATION BY MS. PERSAD: 941 MS. PERSAD: Mr. Ladanyi, was any of the evidence filed in respect of this issue prepared by you or under your direction? 942 MR. LADANYI: Actually, all of the evidence, to some degree, as I'm the Manager of Regulatory Proceedings and I'm the case manager for this case. But I assisted specifically with the preparation of the company's response to Energy Probe Interrogatory No. 117, which is filed at Exhibit I, tab 9, schedule 117. 943 MS. PERSAD: Thank you. And do you adopt this evidence for the purposes of your testimony? 944 MR. LADANYI: Yes, I do. 945 MS. PERSAD: And, Mr. McGill, I see your name is attached to several of the interrogatory responses in relation to this issue. Is the list of evidence set out at page 39 of the settlement proposal exhaustive, and was it prepared by you or under your direction? 946 MR. McGILL: Yes, and yes, it was prepared by me. 947 MS. PERSAD: And do you adopt it? 948 MR. McGILL: Yes, I do. 949 MS. PERSAD: And, Mr. McGill, what involvement have you had with the company's late payment penalty and the associated deferral account in your current and previous positions? 950 MR. McGILL: I've been either directly or indirectly involved with the billing and customer care functions of the company since 1992. Over the past four years, I have assisted the company's defence of the late payment penalty lawsuit, and in 2001, I led the project to revise the company's late payment penalty in order to make it compliant with the Supreme Court's interpretation of section 347 of the Criminal Code. 951 MS. PERSAD: If I could turn to you now, Mr. Ladanyi. Could you please describe to the Board how this issue has been framed in the settlement proposal and what exactly the Board is being asked to decide with respect to it in light of this statement that the Chairman made at the outset? 952 MR. LADANYI: As described in our evidence at Exhibit A8, tab 1, schedule 1, the company proposed establishment of the 2005 class action suit deferral account for the test year, the 2005 test year, to record the costs incurred in defending the late payment penalty action, which is called the Garland case nowadays, and the 2005 test year, including any judgment against the company. 953 It is important to note that this issue is scoped in the settlement proposal in the context of two alternatives being proposed to the Board. They are that the Board establish a funded generic Board proceeding to allow full intervenor participation to consider whether court-ordered repayment of late payment penalties by Ontario gas and electric utilities are properly recoverable in rates, and provide direction through that forum. 954 Now, considering what the Chair said this morning, we understand that you might not be able, in this proceeding, to make any decision on that, that is, how the issue was framed in the settlement proposal. 955 And secondly, in the absence of a direction from the Board before the conclusion of this proceeding, a ruling on whether the Board accepts the company's proposal to establish a 2005 class action suit deferral account and the parameters of that account. 956 Now, the company believes that the Board is aware that this issue has an impact beyond Enbridge Gas Distribution. There's a number of other utilities under the Board's jurisdiction charged similar late payment penalties and may be subject to class action as well. 957 Rather than deal with this on a utility-specific basis, Enbridge believes that the Board should establish a generic proceeding that would deal with all aspects of this issue. However, the company appreciates that this Board Panel is not in a position to guarantee that a generic proceeding would be established, or even it agreed that one ought to be. 958 It is very likely that the costs related to the late payment penalty lawsuit will be incurred by the company in the test year independent of whether a generic proceeding is called. Therefore, the company requests that the Board approve the company's request for the 2005 class action suit deferral account to allow for an appropriate accounting of costs, pending the Board's determination on how such costs will be addressed from a rate-setting standpoint. 959 MS. PERSAD: If I could turn to you, Mr. Boyce. As Associate General Counsel and Corporate Secretary, have you monitored the garland litigation? 960 MR. BOYCE: Yes, I have. I've worked closely with our external counsel on this matter since the hearing of Mr. Garland's appeal at the Ontario Court of Appeal in March of 2001. 961 MS. PERSAD: Mr. Boyce, could you provide the Board with an update of the status of that litigation since the Supreme Court of Canada's decision on April 22nd, 2004? 962 MR. BOYCE: Yes, I can. We have corresponded with Mr. Garland's counsel and expect to be meeting with him shortly to discuss procedural issues related to the next phase of the litigation. The next steps are likely to involve proceedings to determine the issues of class certification, quantification of damages and costs. At this point, however, no further proceedings have been scheduled or arranged with the court, but we do expect that at least some portions of the proceedings will occur during the test year. 963 MS. PERSAD: Okay. Thank you. And Mr. McGill, to get into more the specifics about the account that we're talking about, can you explain what the components of this account are expected to be, given the status of the litigation? 964 MR. McGILL: Yes, I can. The cost components that the company seeks to record in the class action suit deferral account fall into several categories. First, there are the legal costs of both the company and the plaintiff. Beyond these costs, the completion of the Garland action will require the company to pay for the assistance and expert advice from actuaries and there will also be a considerable effort required to gather and analyze the extensive and detailed historic billing records in order to establish amounts that may be subject to the litigation. 965 The company also seeks to record the amount of any judgement against it in this matter in the deferral account. 966 MS. PERSAD: And Mr. McGill, without getting into too many details, could you please provide the Board with a brief history of the company's application of the late payment penalty? 967 MR. McGILL: Yes, I can. In 1978, Enbridge Gas Distribution introduced the form of late payment penalty, which is the subject of the garland class action suit. This form of late payment penalty was the product of the efforts of a joint utility task force operating under the auspices of the Ministry of Energy. At the time, gas, electric and water utilities across the province operated under a myriad of billing, collection, credit and termination of service policies. The function of the task force was to review these practices and develop common guidelines that could be applied province-wide. The task force developed a set of voluntary guidelines that were introduced to the Ontario legislature in November 1978. Many utilities, including Enbridge Gas Distribution, adopted these guidelines. They were reviewed and approved by the Ontario Energy Board as part of the company's EBRO 369-2 rate proceeding. 968 The purpose of the late payment penalty has always been to encourage the prompt payment of customer accounts, reducing the company's working cash requirement. This, in turn, provides a benefit to all customers. The late payment penalty was a one-time charge equal to 5 percent of the customer's current month's gas charges. It was and continues to be a non-recurring charge and the late payment penalty is not compounded. 969 Section 347 of the Criminal Code of Canada came into effect April 1st, 1981, coincident with the repeal of the Small Loans Act. The stated purpose of this provision of the Criminal Code is to provide police with a clear signal to test in the prosecution of loan sharks. The purpose of this statute is not the protection of consumers participating in commercial transactions, but it has been extended to that venue. 970 It wasn't until October of 1998 when the Supreme Court ruled that Enbridge Gas Distribution's late payment penalty charge did constitute interest for the provision of credit and that section 347 of the Criminal Code applied to the company's late payment penalty. Following the company's second successful defence of the Garland claim and subsequent appeal, Enbridge Gas Distribution moved under the direction of the Board to reduce the late payment penalty charge so that it would be compliant with the Supreme Court's interpretation of the application of section 347. 971 In February 2002, late payment penalty was reduced to a one-time charge of 2 percent. This charge is only applicable to the customer's current month's gas charges. The late payment penalty remains a non-recurring charge that is not compounded. At the time the late payment penalty was reduced from 5 to 2 percent, the company also made several changes to the way charges are presented on the Enbridge bill. Changes were also made to the company's terms and conditions regarding billing and payment to clarify when the company's charges were due and when the late payment penalty charge would become applicable. 972 MS. PERSAD: And also, Mr. McGill, could you explain what rate treatment the company has applied to the late payment penalties? 973 MR. McGILL: Yes, I can. 974 From its inception, all Enbridge Gas Distribution late payment penalty revenues have been credited to reduce the company's cost of service on a forward test year basis. As a result, customers have benefited from the company's late payment penalty revenues in three ways: First, through direct reductions in cost of service; second, through reduced working cash requirements; and third, through lower bad debt expense. The company has recorded $74.2 million in late payment penalty revenue from 1994 through 2002, the period of time identified in the Supreme Court's April 2004 decision which a portion of late payment penalty revenues collected by the company may be subject to return to the customers that paid them. 975 The Board provides a useful summary of the late payment penalty litigation and the Board's historical involvement with approving late payment penalties on one of its fact sheets that can be found on the Board's web site. About the period of 1994 to 2002, from the commencement of the lawsuit when the late payment penalty charge was changed from 5 to 2 percent, the Board's fact sheet explains that the 5 percent penalty remained in place during this period of court proceedings and stakeholder consultations which the Ontario Court of Appeal stated was quite properly done. 976 MS. PERSAD: Mr. Chairman, I brought copies of the Board's fact sheet if we want to mark it as an exhibit in this proceeding. It's the fact sheet that Mr. McGill was quoting from. 977 MR. BETTS: Let's do that, thank you. 978 MS. LEA: K.5.4, OEB fact sheet on late payment penalties. 979 EXHIBIT NO. K.5.4: OEB FACT SHEET ON LATE PAYMENT PENALTIES 980 MS. PERSAD: Mr. Ladanyi, how long has the company had the class action suit deferral account or a similar account in place, and what has been its regulatory treatment over time? 981 MR. LADANYI: The company's response to Energy Probe Interrogatory No. 117 provides a complete history of the class action suit deferral account. And I'm not going to repeat what's in the interrogatory right now. 982 The company first approved it in -- sorry, the Board first approved it in 1995, after Mr. Garland commenced his action against the company. The description of the account has changed a number of times since then, as can be seen in the response to that interrogatory. The costs recovered to date are the legal costs of defending this action and they would have been recovered for each year since 1995 that the Board approved their clearance. And we can see the amounts cleared in the response to Consumers' Association of Canada Interrogatory No. 105. 983 MS. PERSAD: And as my last question, Mr. Ladanyi, why does the company believe that the Board ought to approve the company's proposal for establishment of the 2005 class action suit deferral account at this time? 984 MR. LADANYI: Well, the Board has allowed over time the creation of several accounts called deferral and variance accounts to deal with certain circumstances and significant inequities that can arise as a result of the forward test year rate-making process. 985 In general, the Board has allowed creation of a variance account to deal with budgeted costs, or revenues for that matter, that cannot be forecast with any degree of accuracy or that are beyond management control. Deferral accounts were created to deal with costs or revenues that are so uncertain that not even an inaccurate budget could be produced. Deferral and variance accounts are, therefore, a method of accounting for costs or revenues in a fiscal year so that the Board may deal with them in a later year when their magnitude is known with certainty. 986 I just recently went to the Board's web site and I checked the Board's uniform system of accounts which is available to all on the Board's web site, and I just want to draw your attention where these account appear in the Board's uniform system of accounts, and they appear under account 179, called "Other Deferred Charges." If I can just read into the record what a description is in this account, it's says: 987 "This account shall include expenditures that cannot be disposed of until further information is received. Expenditures of a deferred nature not provided for elsewhere are to be amortized over a future period." 988 It also says: 989 "This account shall be subdivided to accommodate the various types of deferred charges..." 990 And that's how we get the multiplicity of deferral and variance accounts. They are all subaccounts under account 179 provided for in the Board's own uniform system of accounts. 991 Now, the Board has in the past denied requests for a deferral or a variance account when such a request was seen as being premature or the Board wanted the utility or its ratepayers to be at risk for a certain cost or revenue item. One of the major drawbacks of deferral and variance accounts is that their clearance after the fiscal year which gave rise to their balances results in what is sometimes referred to as retroactive rate-making. 992 The Board is, therefore, cautious in approving such accounts and only grants them under special circumstances. The company believes that the need for a 2005 class action suit deferral account is such a special circumstance. 993 Now, certain intervenors in this proceeding may argue that a 2005 class action suit deferral account should be limited to the costs of defending the action, but that any judgment-related costs should be excluded. If the Board were to agree with their argument, it would be making its decision on a significant cost issue without knowing the magnitude of such costs. The Board would essentially be prejudging the company's case for recovery without having a complete set of facts before it. 994 Moreover, from an accounting viewpoint, the company would be forced to expense any costs stemming from a 2005 court judgment against its fiscal 2005 earnings. Expensing these costs is not appropriate because the Board has not yet ruled upon whether or not they should be recovered in rates. The effect of expensing these costs would be that the shareholder would bear the cost even though customers had benefited from late payment penalty revenues, having reduced the cost of service for many years. 995 On this point, I note that the company is not seeking recovery of the 2005 class action suit deferral account costs at this time. The Board's fact sheet, under the heading "Next Steps" - if you can turn to that, that's on page 3 of the fact sheet - explains that the recovery question is one that depends upon the outcome of a process of quantifying the amounts owing, which could take several months. The Board also explains in the last paragraph: 996 "The Board continues to study policies and practices regarding the charging of late payment penalties by both natural gas and electric utilities." 997 Clearly, there are a number of outstanding issues related to late payment penalties that the Board is still dealing with. This supports the company's position that it's premature to examine or rule on the merits of recovering repayment costs in this case. 998 Our conclusion is that establishment of the 2005 class action suit deferral account is the most appropriate accounting treatment of these costs in the interim. This is because the subject amounts are potentially significant, yet the range of these costs is large; the company cannot set a budget on this basis. Also, incurrence of these costs is imminent and may very likely materialize in the 2005 test year, giving rise to the concern about potentially having to expense these amounts prematurely. 999 MS. PERSAD: Thank you, panel. 1000 That concludes my examination-in-chief. 1001 MR. BETTS: Thank you very much. 1002 Can I have an indication as to who would want to cross-examine this witness panel? Mr. Thompson, Mr. Dingwall, Ms. Street, Ms. Girvan, and Mr. Shepherd. 1003 Is that order that I've just stated satisfactory? Is there an order that's been predetermined? 1004 MR. THOMPSON: Yes, Mr. Chairman, the order you stated is satisfactory as far as I'm concerned. I should say that the initial plan was to have Mr. Dingwall go first, but he's kindly allowed me to move up to the head of the list because I have to be out of here today to be back in Ottawa for other business, so I appreciate his accommodation in this respect. And he's done this on the basis that I won't be as long as he will be. 1005 MR. BETTS: Very well. If there's no concerns, then, we will go ahead on that basis. That would have Mr. Thompson leading off. So -- 1006 [Audio feedback] 1007 MR. BETTS: Move those microphones that are pointing upward and point them downward. There's a concern that these microphones are kind of directional in nature. I've got everything shut off right now, and if they're pointed up, they could be getting the direct feed from the speakers right above, so it's better if they don't point upward. If they're not in use, we can tuck them away. But we're getting all sorts of technical issues to deal with here. 1008 Okay. I'm going to go back on the record. Mr. Thompson, please proceed. 1009 MR. THOMPSON: Thank you very much. 1010 CROSS-EXAMINATION BY MR. THOMPSON: 1011 MR. THOMPSON: Mr. Ladanyi, let me start with you. There is an issue, as you've mentioned, about the scope of this class action deferral account that you seek in these proceedings, and if I can ask you to just turn up Exhibit -- Energy Probe, sorry, 117, Exhibit I, tab 9, schedule 117, at pages 5 and 6. This is just to get a history of the scope of this account clarified, if I might. 1012 The account dates back to what year? 1013 [Audio feedback] 1014 MR. LADANYI: Well, if we want to go back to page 2, you'll see on page 2 the company first requested that the Board approve this deferral account under an accounting order application, UA93, and that was filed on -- in 1994, September 6th. It's shown on page 2 of the response to this interrogatory. And then there was a series of proceedings since that time, and that's why I didn't want to read -- go over all of them. 1015 MR. THOMPSON: No, I understand. But at page 5 of the document, it indicates that as of 1999, I'm looking at the bullet point there, the scope of the account excluded the amount of any judgment against the company; is that correct? 1016 MR. LADANYI: That's certainly correct for 1999. 1017 MR. THOMPSON: And that situation, as I understand it, continued up to and including the 2003 test year. I'm looking at page 6 where, under the November 7, 2003 case, again it's reiterated that the scope did not extend to any judgment against the company. 1018 MR. LADANYI: That's right. 1019 MR. THOMPSON: All right. And then in the 2004 case, which was a very summary proceeding that the company applied for and wanted to get back on track, it appears that the scope was broadened to include a judgment against the company; am I correct? 1020 MR. LADANYI: Yes, you are. And I want to add here that this issue, unfortunately, did not get much attention during that case and perhaps we should have brought it more to the attention of the intervenors. 1021 MR. THOMPSON: But my understanding is you're not relying on the approval in the 2004 case with respect to this issue. 1022 MR. LADANYI: You're right, we're not, again, because the issue did not get much attention in that proceeding and we felt that perhaps it would be unfair to rely on that approval. 1023 MR. THOMPSON: Okay. And so as of -- prior -- so I can take it, then, that for the purposes of these proceedings, the approved scope in the sense of the issue being debated among the party on its merits did not include a judgment against the company. 1024 MR. LADANYI: I'm not sure I understood your question, could you rephrase it. 1025 MR. THOMPSON: The approved scope of these proceedings, are we in agreement, does not include a judgment against the company and you are, in effect, asking that that issue be addressed on its merits? 1026 MR. LADANYI: Yes, we are, we are asking that that issue be addressed as if it was brought for the first time to the Board. We're not relying on what happened in the 2004 decision. 1027 MR. THOMPSON: And within the scope of what was approved in the 2003 case and prior thereto, are what I would call the company's litigation costs; is that an apt description? 1028 MR. LADANYI: Yes, they are. They are company's litigation costs that were recorded in that account and then recovered with Board approval each year that those recoveries were approved. 1029 MR. THOMPSON: And you've mentioned that those were cleared to customers and have been cleared to customers periodically. What is the allocation factor that is used to clear them to customer classes? 1030 MR. LADANYI: Actually, for that specifically I cannot tell you what the allocation factor is. We have provided allocation factors for the late payment penalty revenue and for the bad debt expense in another interrogatory, but I do not know what the allocation factor for this one is. 1031 MR. McGILL: Well, I think in Energy Probe Interrogatory No. 118, we indicate there that the revenue from late payment penalty revenues is credited back or allocated to the rate classes based on the total customer account allocator. 1032 MR. THOMPSON: That's the revenue -- 1033 MR. McGILL: That's right. 1034 MR. THOMPSON: -- from late payment but I'm talking about the amounts in CASDA. How are they allocated to customer classes? 1035 MR. LADANYI: We'll have to take an undertaking if that's important. 1036 MR. THOMPSON: Could I have that, please. 1037 MS. LEA: J.5.5, allocation factor -- 1038 MR. THOMPSON: Applied to allocate amounts to CASDA. 1039 MS. LEA: -- for the amounts in CASDA. 1040 MR. LADANYI: These amounts, by the way, are shown in the response to CAC Interrogatory No. 105, just the allocations were never asked. 1041 UNDERTAKING NO. J.5.5: TO PROVIDE THE ALLOCATION FACTOR APPLIED TO THE AMOUNTS IN CASDA 1042 MS. LEA: That CASDA, for the reporter, is all caps, C-A-S-D-A. 1043 MR. THOMPSON: Now, with respect to the judgment, I would include within the ambit of that the costs to the plaintiff, can we agree that that falls within the ambit of the judgment against the company? 1044 MR. BOYCE: Yes, we can agree with that. 1045 MR. THOMPSON: And as I understand it, what you're asking for is some sort of Board approval to record those costs somewhere so they can be dealt with later. 1046 MR. BOYCE: Yes, that's correct. 1047 MR. THOMPSON: And when they're dealt with later, there's no certainty, as I understand the situation, that the company will get any amount of what's to be recorded in this account from ratepayers. 1048 MR. LADANYI: That's right. There is absolutely no certainty about this. All we would like is an opportunity to put our case before the Board at some future date. 1049 MR. THOMPSON: Okay. Now, to me, and to my client, the notion "deferral" -- the words "deferral account" carry with it an implication that something is going to be recoverable later from ratepayers. Would you have any objection to an account dealing with the judgment and its ancillary parts, i.e., costs to the plaintiff that was labelled a tracking account? 1050 MR. LADANYI: No, we would not, because there is already a process that the Board has and that's where I quoted the Board's uniform system of accounts. And I think I should explain to you first what is a deferral account. Deferral account is either an account receivable or an account payable and accounts receivable and accounts payable are not in rate base. So there should be no mistake about this. They're not in rate base. 1051 Therefore, there is no particular need to create some other kind of account, whether you're going to call it a tracking account or a Thompson account for that matter, that would do something else, because there's already a process to do this thing, there is the -- under the Board's uniform system of accounts, there is no account in the Board's uniform system of accounts calling a tracking account, so why would we create here on the stand a new accounting process that doesn't exist? 1052 MR. THOMPSON: Well, I'll try and help you with that. I'm not supposed to answer questions but on this occasion I will. Because there's no certainty that you're going to get anything. It's somewhat like the notional utility account that was developed for deferred income taxes. It was not labelled a deferral account. 1053 MR. LADANYI: The difference between the notional utility account and this account specifically is this account is going to actually have accounting entries in it as any deferral account has. So any payment, for example, to a law firm, would be debited to this. Any payment to some outside party would be an actual accounting debit. The notional account was an account that there were no -- there had been no accounting entries into that account. That account was created as a notional account without any specific entries into it, and that's why it's a very different type of account than what we're facing here. This is very similar, in fact identical, to all our other deferral and variance accounts. 1054 By the way, I should stress that none of those accounts imply any future recovery or the Board having made any ruling on it. The Board decides on the balances and the disposition at a future date. That's the whole position of the deferral and variance accounts and that's how they have been outlined in the Board's uniform system of accounts. 1055 MR. THOMPSON: Do you have objection to labelling it as a tracking account? 1056 MR. LADANYI: Yes, I do, because it doesn't make any sense whatsoever. 1057 MR. THOMPSON: Well, assume the Board agrees with me and labels it a tracking account to emphasize that there's no certainty of any recoveries later from ratepayers, just make that assumption, can you help me with the accounting treatment that will follow if the account is labelled in that fashion? 1058 MR. LADANYI: Accounting treatment? Well, if I can turn, for example, to our -- we were in that same exhibit so this is Energy Probe 117, and I can turn you to attachment 15, page 4 of 5. 1059 MR. THOMPSON: 15, is it? 1060 MR. LADANYI: Yeah, attachment 15, page 4 of 5. So it's Exhibit I, tab 9, schedule 117, attachment 15, page 4 of 5. 1061 MR. THOMPSON: Okay, I've got it. 1062 MR. LADANYI: If you look there, I don't know how many people have found this yet -- have you found it, Mr. Chair? 1063 MR. BETTS: Thank you, I have. 1064 MR. LADANYI: You'll see at the bottom of that page are sample accounting entries that we would have used for a 2000 fiscal year class action suit deferral account. So entries would have been: Debit 2000 class action deferral account, credit accounts payable. So in case of your proposed tracking account it would be: Debit 2005 class action suit tracking account, credit accounts payable. It would walk and talk like a deferral account except you don't want to call it a deferral account. That would be the difference, you want to give it another name. But other than that, it would do everything a deferral account does. But it doesn't make any sense to call it something that it is not. 1065 Deferral accounts don't imply any Board pre decision on recovery. They are for that purpose, they are created for the purpose to allow the Board to deal with a matter at the later date when the amounts are known. So they are -- I think that maybe perhaps in your mind, Mr. Thompson, you believe that somehow deferral account gives some kind of indication to somebody, but it doesn't. It certainly doesn't to the company. It really means that these numbers are -- these balances are to be dealt with at a later date. That's all it means. 1066 MR. THOMPSON: I wasn't so much interested in the actual postings to the account. I appreciate the judgment amount would be recorded there. What I was interested in was the evidence that you gave in-chief this afternoon where you said that if you didn't get the treatment you're seeking, the company would expense costs stemming from the judgment and including the awards of cost to the plaintiffs as they were incurred. Okay? 1067 MR. LADANYI: Yes. 1068 MR. THOMPSON: All right. And what I'm trying to get at is if it's clearly understood at the end of the day you may get nothing, does that have any implications on the manner in which these costs will be expensed in the financial statements as they're incurred? 1069 MR. LADANYI: If, in the eventuality that -- I think when you say "get nothing," I presume you mean there will be no recovery. So at some future date, if there is no recovery, then the costs would be expensed eventually; that would be exactly the case. In the year -- that would be after the Board has made a determination that they should not be recovered from anyone. But in the meantime, the costs appropriately should be sitting in a deferral account until the Board makes that decision. 1070 MR. THOMPSON: Okay. So whether it's labelled tracking or deferral, you're telling us that the accounting treatment for Enbridge Gas Distribution in 2005 and whenever these costs might be recorded will be not to expense anything. 1071 MR. LADANYI: Well, I think I want to clarify something. I have not agreed with tracking. Tracking was your proposition -- 1072 MR. THOMPSON: Right. 1073 MR. LADANYI: -- and we said, Let's pretend that I agreed to tracking, but I don't agree with tracking. I'm saying what we're asking for is a deferral account. 1074 MR. THOMPSON: I understand that, but I'm putting to you as a proposition, if it's tracking and not deferral, I understood you to be telling me, nothing will be expensed until the Board deals with the issue. Is that the accounting advice that you have? 1075 MR. LADANYI: Since I don't know what a tracking account is specifically, unless one was to define it the same way as a deferral account, I can't tell you exactly what it would do, because you are trying to create some new type of account which is like a deferral account but maybe it's not. Therefore, I can't give you an answer there. If it is a deferral account, nothing will be expensed until the Board makes a ruling; correct. 1076 MR. THOMPSON: Would you like to get some advice on what if it's a tracking account from your auditors, how it would be expensed in the years the costs are incurred? Could you do that by undertaking? 1077 MR. LADANYI: I'm not really sure that there's any point in it, but I suppose we could. I mean, I'm -- 1078 MR. THOMPSON: Well, my suggestion is it should be a tracking account, so I'll be making that in argument, and certainly I believe you should have some advice from your accountants on the record. Will you undertake to do that, as to how it will be treated? 1079 MR. LADANYI: Well, I will -- just a minute. I really feel that before we make any agreement of this kind, you will have to properly define to us what you mean by tracking account, because I wouldn't know what question to ask the auditors. 1080 MR. THOMPSON: It's an account in which the expenses will be recorded as they're incurred for tracking purposes only, and the amount recoverable from ratepayers, if any, will be determined later. 1081 MR. LADANYI: Well, if it's for tracking purposes only, then it will be equivalent to expensing. I can give you that answer; I'm an accountant myself. So if it's not going to be recorded, then it will be expensed. That's the only other choice. If they're not going to be recorded in the deferral account, then the costs would be expensed. There's no need to ask the auditors that. 1082 MR. THOMPSON: Okay. And if it's done that way and then the Board subsequently allows recovery of amounts in the tracking account, the amounts allowed would be treated as what, revenues? 1083 MR. LADANYI: Well, suppose that there are costs incurred in 2005 and there is no deferral account, then such costs would be expensed and they would be immediately -- go to the earnings -- against the earnings of the company and, therefore, the shareholder would be immediately bearing that cost. If, in subsequent years, let's say 2005 and 2007, the Board were to decide suddenly that some costs are recoverable, they would then become earnings in that year, which is a later year. 1084 MR. THOMPSON: Just reverse the process. 1085 MR. LADANYI: Well, I might be reversing it, but earnings in 2005 would definitely be hurt by any money that was expensed. 1086 MR. THOMPSON: Well, it would be hurt later if you don't get some. 1087 MR. LADANYI: Or maybe not. 1088 MR. THOMPSON: All right. Okay. I just want to understand the accounting implications. So if it's tracking, you're telling us it will be expensed. 1089 MR. LADANYI: If it's -- as far as I know, it would be expensed. I don't think there is any provision for tracking accounts in the Board's uniform system of accounts. 1090 MR. THOMPSON: Let's move on, then, just with respect to some issues pertaining to the status of what I'll call the judgment amount, and this is really just for information purposes in the context of the information you've provided to the Board. 1091 The first question I have is with respect to Energy Probe 114, Exhibit I, tab 9, schedule 114. This, as I understand it, is a record of actual late payment penalty revenues in the Garland time frame; have I got that right? 1092 MR. McGILL: That's correct. Well, in the time frame set out in the Supreme Court's April 2004 decision. 1093 MR. THOMPSON: And as I understand your evidence on this point, a portion of this pool of revenues is caught by the Garland decision; not all of it but some of it. 1094 MR. McGILL: Potentially some of it. 1095 MR. THOMPSON: All right. And is there any current estimate of that amount at this point in time? 1096 MR. McGILL: We don't have any accurate estimate of what this -- the amount of the judgment, if any, will be. We're in the process of gathering up the historic billing data, to the extent it's available, and that is a significant task. It requires us to go back through historic billing records for eight years, month by month, account by account, so in total we're examining approximately 130 million billing records that cover that period of time. So at this point in time, we're still trying to determine the exact extent to which the billing information and history is available to go back and try and reconstruct the amounts that were billed and the amounts that were paid and the timing of those payments. And those are the things we need to understand in order to attempt to quantify the amount. 1097 MR. THOMPSON: Just so the Board's aware, the Criminal Code provision that puts some of this activity offside is one that provides, in effect, if the interest rate is greater than 60 percent per annum, it's criminal. 1098 MR. McGILL: That's correct. 1099 MR. THOMPSON: And so because your penalty was a flat 5 percent amount, it's really the people that paid it quickly that would have the claim. 1100 MR. McGILL: Yes. Anyone who paid a late payment penalty 38 days or more after the due date of the receivable paid an effective annual interest rate of less than 60 percent, so it's people who paid within that 38-day period of time that would be impacted by the Supreme Court decision. 1101 MR. THOMPSON: And that's what you're trying to find out. 1102 MR. McGILL: Yes. 1103 MR. THOMPSON: Just in terms of the process to quantify the decision amount, the court is supervising this exercise, are they, or are there steps to be completed in the court process before that even starts? 1104 MR. BOYCE: Nothing's been mandated by the court yet, but we are proceeding to collect this information on the basis that it will be necessary before the next step in the court proceedings, yes. 1105 MR. THOMPSON: And then once you've come forward with the part of the pool that's caught by the decision, then I assume the court's going to address the issue how it gets distributed, because presumably some of these people may be history, so to speak. 1106 MR. McGILL: I think there's going to be two, sort of, main activities that have to be conducted in order to deal with the matter. One is the establishment of the amount and then the second one is establishing some means of distributing it. And the advice that we've got is that the court has a great degree of discretion with respect to how those amounts will be distributed. 1107 MR. THOMPSON: All right. 1108 MR. BOYCE: The one point I would add as well is that the court has not yet certified the class, so we don't yet know who will be eligible to participate. 1109 MR. THOMPSON: Right. So can you help us, then, with your current expectations as to timing with respect to these next steps? 1110 MR. BOYCE: Yes. As I said previously, we expect to be meeting with Mr. Garland's counsel to discuss the schedule. I've been advised thus far by our counsel that we are not likely to deal with the certification motion until probably early fall this year, 2004, with the possibility of the actual trial of the damages portion proceeding sometime possibly in the spring of 2005. 1111 MR. THOMPSON: Okay. 1112 MR. BOYCE: That's our best guess at this moment, but certainly nothing has is been established. 1113 MR. THOMPSON: Okay. Thanks. 1114 Now, I just wanted to turn also to some status report on matters pertaining to issues with respect to who pays any judgment amount, when that matter comes back before the Board. In your evidence both in-chief and prefiled, there's a description of who you say has benefited from the collection of late payment revenues and you assert that the ratepayers have benefited, is that you, Mr. McGill? 1115 MR. McGILL: Yes, that's correct. 1116 MR. THOMPSON: And just to nail that down if I could, the amounts that are shown in Energy Probe 114 are actual amounts collected; is that right? 1117 MR. McGILL: Yes, that's correct. Those are actual amounts billed and recorded in our conditional balance. 1118 MR. THOMPSON: And the amounts that were reflected in rates were forecasts; is that correct? 1119 MR. McGILL: That's correct. 1120 MR. THOMPSON: So do we have anywhere the forecast amounts compared to the actual amounts? 1121 MR. McGILL: The difference between the amount credited back to customers through rates over this period of time and what we show in the response to this interrogatory is between $3 million and $4 million that has been over-collected over that period of time. 1122 MR. THOMPSON: So to the extent there has been more collected than forecasted, that's benefited the shareholder? 1123 MR. McGILL: Yes, over that period of time. 1124 MR. THOMPSON: And we can't look at this in isolation in terms of who has benefited. The ROE 1994 to 2002, there's actual percentages in dollars and allowed percentages in dollars and do we have that anywhere in the record as to the extent that the actual exceeded the allowed. 1125 MR. McGILL: I'm not certain whether we've got that information on the record in this proceeding or not. 1126 MR. THOMPSON: I don't think we need it, but I just wanted to flag that as an issue. 1127 Now, there's this question of the risk management of this exposure and in the evidence, you indicate that the Supreme Court of Canada determined that section 347 of the Code applied to your late payment penalty. Your position as I understood it, up until then, had been this was not interest, it was something other than interest. 1128 MR. McGILL: Yes, that's correct. Up until October of 1998. 1129 MR. THOMPSON: Okay. Can you help me with why nothing was done after October of 1998 to mitigate the exposure? The change to the late payment penalty amount occurred about four years later, if I'm not mistaken. 1130 MR. McGILL: I think between April of 1994, when Garland initiated the action, and October of 1998, when the Supreme Court ruled that the late payment penalty mechanism was subject to section 347 of the Criminal Code, we had defended the matter successfully in the Ontario courts and again in the Ontario Court of Appeal, and we did not believe there was any reason to go forward with any changes in the form late payment penalty at the time. 1131 MR. THOMPSON: I can understand that until 1998, but after the Supreme Court says section 347 applies, no change was made until 2002. If I just look at your answer to Energy Probe 114, if you total up the amounts that were collected in the total pool for the period 1999 to 2002, they total about 37.4 million, I'd hope you'd take it subject to check, and I guess my question is, it appears to me you could have mitigated your exposure to that portion of the pool by acting sooner. 1132 MR. McGILL: Well, again, a couple of points. One, all of the late payment penalty amounts that were billed were billed in compliance with Ontario Energy Board orders throughout this period of time. 1133 The second point is when the Supreme Court determined that section 347 applied to the late payment penalty in October, the matter was returned back to the Ontario Court and again, that court found in our favour and again, on appeal, the court found in our favour. So we didn't see any need to go forward with a significant change in the late payment penalty based on that record. 1134 MR. THOMPSON: Okay. Let me just ask another question then with respect to I guess pending issues. Your belief that this charge was not interest was proven to be incorrect by the Supreme Court judgment in October of 1998. Is there any insurance coverage available to Enbridge, errors and omissions coverage that the company has examined with respect to the liability that's arisen? 1135 MR. McGILL: I'm not aware of any. I can turn to Mr. Boyce. 1136 MR. BOYCE: No, I'm not aware of any either. 1137 MR. THOMPSON: Has there been any investigation of this issue to your knowledge by the company? 1138 MR. BOYCE: To my knowledge, not since my involvement of the matter began, but it's possible that investigations could have occurred earlier. 1139 MR. THOMPSON: So there's been no -- no insurer has been put on notice for a contribution of any amounts that are payable, to your knowledge. 1140 MR. BOYCE: Not to my knowledge, no. 1141 MR. THOMPSON: In the documentation, both in the Board's fact sheet as well as in the prefiled evidence that you provided today, you indicate that the late payment penalty was a product of the efforts of a joint utility taskforce operating under the auspices of the Ministry of Energy; is that right? 1142 MR. McGILL: That's correct. 1143 MR. THOMPSON: Now, have you notified the province that you will be seeking a claim for contribution? 1144 MR. McGILL: I don't believe so, no. 1145 MR. BOYCE: No, we have not. 1146 MR. THOMPSON: Why wouldn't you look to the province for some contribution? They're partially responsible for this penalty that's offside the Code. 1147 MR. LADANYI: We're not seeking a claim for contribution in this case at all. We are asking for establishment of a class action suit deferral account. A claim for any recovery will come at a future date, if it ever comes. So we should keep clear what this issue is all about. 1148 MR. THOMPSON: But there are time limits for making claims for contribution against joint tortfeasors, has the company considered that? 1149 MR. BOYCE: I don't believe we've considered specific actions against the parties that you've identified at this point, no. We're still in early days after the Supreme Court's decision was rendered. 1150 MR. THOMPSON: Well, I encourage you to consider it, take action. 1151 Have there been any discussions with the province in terms of a contribution to any amount that is required to be paid by judgment, to your knowledge? 1152 MR. BOYCE: Not to my knowledge. 1153 MR. BETTS: Mr. Thompson, are we wandering a little bit from the issue at hand here or can you tell me -- 1154 MR. THOMPSON: We've wandered right to the end of my cross-examination. Thank you very much. Those are my questions. 1155 MR. BETTS: Thank you, Mr. Thompson. Mr. Dingwall. 1156 MR. DINGWALL: Thank you, sir. 1157 CROSS-EXAMINATION BY MR. DINGWALL: 1158 MR. DINGWALL: Mr. Boyce, one of the questions or series of questions that I have relates to what is going to be before this Board to determine versus what is going to be determined by the courts of law with respect to classes and amounts and things like that. Do you have any thoughts at this point in the other proceeding as to what may be left for this Board to determine at the end of the day? 1159 MR. BOYCE: As part of the litigation proceedings, what the courts will be considering are first of all, as we understand it, the certification of the class that Mr. Garland seeks to create; and second of all, if he is successful in having that class certified based on our reading of the Supreme Court decision, determining the amount that would be payable. 1160 Once those amounts have been determined by the courts, we will then be in a position to consider what further actions we may be in a position to bring before this Board, but I'm not sure that really at this stage it's really possible for us to draw a clear dividing line. I mean, it's, again, very early days in terms of understanding how the next steps in the proceedings are going to evolve. 1161 MR. DINGWALL: Would you agree with my characterization of the Supreme Court decision as dealing mostly with the determination of a time period during which the company was charging an illegal rate of interest? 1162 MR. BOYCE: The determination of a time -- I'm not sure I -- 1163 MR. DINGWALL: Well, being the 1994 to 2002 time frame. 1164 MR. BOYCE: Without going into too many details in terms of trying to summarize the court's decision, I believe what it says is that the trial court in Ontario will be directed to determine an amount payable in relation to Mr. Garland's claim that will be based on late payment penalties paid by Mr. Garland since 1994. 1165 We understand, and I believe the Board fact sheet speaks to this as well, that the changes to the late payment penalty in 2002 make that time frame or make that really the effective end of the time frame that we are really dealing with, while the Supreme Court decision did not mention the 2002 time frame specifically. 1166 MR. DINGWALL: On Energy Probe Interrogatory 114, there's a detailing of the revenues associated with the late payment penalty from the year 1994 to 1992 -- 2002, pardon me. Is the company also able to estimate, or has the company established what the number of individuals who would have paid the late payment penalties would have been through each of those years? 1167 MR. McGILL: No, we haven't been able to do that as of yet. 1168 MR. DINGWALL: Back in 1994, you were on a different billing system; is that correct? 1169 MR. McGILL: That's correct, yes. 1170 MR. DINGWALL: How many billing systems ago was this? 1171 MR. McGILL: Well, there's -- we have a new billing system that's in place at the moment, or another billing system that's been in place for the last four and a half years. 1172 The information within those two billing systems falls into, I guess, five categories. The first is, sort of, an online history that includes the current and 24 months of history going back, so that would get us from today back into approximately May of 2002. And then beyond that, we carry five years of tape history of billing and payment records, so that gets us back to roughly May or April of '97. 1173 The last -- when we cross over the implementation of the new billing system, the format of the data changes, so we're looking at one format for the first two years, another format for the next two years, and then from roughly mid-'99 until April of 2000 -- pardon me, 1997, we have another format in place, and then for the last two years, we have the billing history. On the last record, the April '97 record, we don't have the payment history there. 1174 So from the billing records, we believe we can reconstruct the payment history and that gets us back to April of '95, and beyond that, there's going to have to be some estimation employed. So that's what we're up against. 1175 We're basically going at the billing records in five different formats over that period of time, and again, we have to look at them month by month, because we could have a customer that maybe incurred two or three late payment penalties within any 12-month period of time, so it's a very pain-staking and long drawn out process. 1176 MR. DINGWALL: It sounds like a significant undertaking. 1177 MR. McGILL: It is. 1178 MR. DINGWALL: Is that currently being performed with utility personnel? 1179 MR. McGILL: There are some utility personnel involved and there are people have Accenture Business Services involved as well. 1180 MR. DINGWALL: And is that another cost that the company proposes to track as part of this deferral account? 1181 MR. McGILL: Yes. The cost of gathering the information and analyzing the information in order to defend the action we propose to include and book to the deferral account. 1182 MR. DINGWALL: So how would that work in the context of this year's O&M budget? 1183 MR. McGILL: These would be amounts that are not included in this year's O&M budget. 1184 MR. DINGWALL: Does that mean that the company's going to have to enter into other service agreements or other arrangements in order to complete these inquiries? 1185 MR. McGILL: The process for that kind of project would entail a written agreement with respect to the scope of the activity and the charges that would apply to the work involved as it pertains to Accenture Business Services. 1186 MR. DINGWALL: Now, with respect to the efforts that might have to be made in this line from Enbridge Gas Distribution's personnel, would there be a significant number of bodies from that side? 1187 MR. McGILL: Well, I think it will be a reprioritization of work. There's a limited number of people available in the company to participate in this kind of thing, and we are going to have to manage our priorities such that we get this job done. We're not proposing to go out and hire incremental staff in order to do this work. 1188 MR. DINGWALL: So it's conceivable, then, that you might have to allocate some of the man hours or bodies under the existing O&M budget towards this project? 1189 MR. McGILL: I guess that's one way of looking at it, yes. 1190 MR. DINGWALL: Okay. I take it that the amount of effort you would have to go to would really depend on how the class was defined, if it was defined and certified, and what method of recovery was selected by the court on certification. 1191 MR. McGILL: That's correct. Those things -- in terms of the class, those criteria will help us frame the extraction of the data from the billing records, and with respect to how any damages are to be distributed to the customers, that could have a potential impact as well. 1192 MR. DINGWALL: Now, as this action has been framed around the whole legal title of unjust enrichment, would it not seem unjust if some of the class members that might be identified were also individuals to whom the utility's bad debt had been significantly contributed by? Wouldn't it be unjust to have to pay back people who never paid you? 1193 MR. McGILL: Yes, I would agree with that. And again, these are all going to be questions that need to be considered by the court with respect to, one, how the ultimate amount is determined; and two, how it's to be distributed and who it should be distributed to. 1194 MR. DINGWALL: Maybe, Mr. Boyce, you can give me some guidance on this. Thinking out loud, it seems that the question of cost allocation, should this come back to the OEB -- 1195 [Audio feedback] 1196 MR. DINGWALL: I don't think that was me. 1197 MR. BETTS: I don't think it was either. I'm not sure I can hold anyone responsible for that. Please proceed. 1198 MR. DINGWALL: What may come back to this regulatory agency might be a question of, in the event the deferral account is created, accepted and then payments are to be made, who those costs would be allocated to at the end. Is it the company's intention that the question of cost causation with respect to bad-debt expenses be addressed in the formulation of the class in the court proceeding, or that that be a matter for consideration on the disposition of any account should such account be accepted? 1199 MR. BOYCE: I think it's too early to make a determination on that point. As I said earlier, it's still early days in terms of the formulation of our strategy and how we will approach the court proceedings, so I don't think we're really in a position to answer that question right now. 1200 MR. DINGWALL: Now, the interrogatory that I was referring you gentlemen to a while earlier sets out the total amounts collected during these times of 74.2 million, that's Energy Probe Interrogatory 114. I take it that that is considered the broadest parameter of what the potential magnitude of this account might be and liability for repayment might be. 1201 MR. McGILL: I think that would be the company's position, yes. It may not be Mr. Garland's. 1202 MR. DINGWALL: I take it the company's position is that it's not the total amount of the late payment fees collected, but rather the incremental amount over the Criminal Code amount that would be appropriate; is that correct? 1203 MR. BOYCE: Yes, I think that's a fair assessment of our position. 1204 MR. BETTS: Mr. Dingwall, just keep in mind the Panel's preference not to dwell too significantly on the amounts to be considered for this deferral account. 1205 MR. DINGWALL: Thank you, sir. 1206 I take it that the late payment penalty was a penalty established as a percentage charge on a one-time basis against the invoiced amount. 1207 MR. McGILL: The 5 percent or the 2 percent today is applied against the current month's gas charges, it doesn't apply to any balance forward on the bill and if it's not paid before the next bill is issued, it's not compounded. There's -- so if someone is billed, doesn't pay the bill -- so they're billed $100, they don't pay by the effective date of the penalty, it would have gone up to 105. Their next bill comes along, it would be $100 and we would be seeking $205 after that point, and then if they neglected to pay that before the effective date of the late payment penalty, it would have been 210. So there's no application of the percentage on late payment penalty receivable itself. And it never applied to any other amounts that were billed on the company's bill. 1208 MR. DINGWALL: But in 1994, how did that work? 1209 MR. McGILL: It worked exactly as I described it. 1210 MR. DINGWALL: So in the context of that in 1994, was the 5 percent calculated on the total amount of all items being billed a customer at the time. 1211 MR. McGILL: No, only on the customer's current month's gas charges. 1212 MR. DINGWALL: And their distribution charges? 1213 MR. McGILL: When I say "gas charges" I mean gas, distribution, and commodity charges. 1214 MR. LADANYI: Not for ancillary services, if that's what you're asking. 1215 MR. McGILL: It wouldn't have applied to a rental charge, it wouldn't have applied to a merchandise finance payment or a warranty program charge, anything of that nature. 1216 MR. DINGWALL: Was there ever a time when the 5 percent applied to the total bill including other ancillary service programs? 1217 MR. McGILL: No. 1218 MR. DINGWALL: So if a customer had other ancillary service business with the company that was reflected on their bill, the 5 percent would have been calculated on a lesser amount than the total bill so the effective rate of interest for those customers would have been less than the 5 percent? 1219 MR. McGILL: If they were -- yes. Yes. If they had other charges on the bill, the effective rate of the penalty would have been less than 5 percent. If they had a prior balance forward on the bill, the effective interest rate or amount, the percentage of the charge would have been less than 5 percent. 1220 MR. DINGWALL: And is that, Mr. Boyce, another level of detail that is going to go before the Court for determination of the -- 1221 MR. McGILL: I guess I'm a little bit concerned about setting out the strategy of our legal defence in a public forum. 1222 MR. DINGWALL: I'm trying to figure out what I don't need to ask here because it's being dealt somewhere else. 1223 MR. BOYCE: I would suggest that's a question you don't need to ask here. 1224 MR. DINGWALL: Okay. Thank you. 1225 MR. McGILL: We'll take suggestions later though. 1226 MR. DINGWALL: Mr. Thompson touched briefly on the fact that your late payment penalty revenues for rate-making purposes were actually forecasted revenues and I believe that you mentioned that the actual late-payment revenues were $3 million lower; is that correct? 1227 MR. McGILL: Yes, it's a little bit over $3 million, I guess, that was overcollected over this period of time from April of 1994 through the end of January 2002. 1228 MR. DINGWALL: So the actual amount collected is somewhere around 77 million? 1229 MR. McGILL: No, the actual amount billed was the 74.2. The actual amount -- we would have to do some kind of pro rata calculation because we've got two sort of stub periods here, the beginning and an end, but in terms of fiscal years, it's about $3 million difference. So the amount returned through rates as credits to cost of service would have been slightly in excess of $70 million. 1230 MR. DINGWALL: And the other end of that equation is the variance between forecast and actual on bed-debt expense, is it not? 1231 MR. McGILL: Well, I don't know that bad debt and the late payment penalty revenue are directly related. There is some relationship because people who tend to pay late tend to give rise to bad-debt expense, but it's not direct. 1232 MR. BETTS: Mr. Dingwall, I'm going to ask you a question and you need to give me some guidance as to where you're heading with this because I don't see it heading in the direction of why a deferral account should be -- whether or if a deferral account should be established and what type of entry should be made into it. 1233 Can you tell me whether you're heading in a direction that's going to be helpful in that way? I certainly -- I'm finding it very interesting, but I'm not sure that it's necessarily germane to the question that we have to deal with. Perhaps you can tell me how it would be. 1234 MR. DINGWALL: At page 4 -- well, you don't have this as a page, so in Mr. McGill's direct examination, the point was made that customers have benefited from the company's late payment penalty revenues under three separate categories, the first being direct reductions in cost-of-service, the second being through reduced working cash requirements and the third through lower bad-debt expenses. I'm trying to under what the actual effect of bad-debt expenses might have been. I think if we're looking at what the benefits to ratepayers have been of the late payment penalties, that might go towards argument on whether it's appropriate to even establish a deferral account for the award portion. 1235 MR. BETTS: Okay. If you're heading towards whether -- arguments whether or not the account should be established, I'm going to allow you to continue on that basis and if you could kind of head towards that, then -- I'm not certain how you're getting there, but I've learned to wait until the end is reached with you folks out there without judging in between. 1236 So you may proceed, and if you'll just keep my comments in mind, I would appreciate it. 1237 MR. DINGWALL: Certainly, sir. 1238 It is an interesting challenge trying to figure out whether or not it's appropriate to have an account that nobody knows what it looks like yet, so I appreciate the indulgence. 1239 So my question, Mr. McGill, was do you recall or do you know what the treatment, what the variance between forecast and actual on bad-debt expense has been over the same period? 1240 MR. McGILL: I'll check the interrogatory responses I brought with me because I seem to recall there was one of them that approached this question. Yes, it was Energy Probe 116, so that would be I9, 116. 1241 In that response, I indicated that we had provided bad-debt -- historic bad-debt and budget bad-debt information for the period from 1999 through 2003 in another exhibit, which was tab 4, Exhibit A -- pardon me, Exhibit A6, tab 4, schedule 1, but I don't have that with me at the moment. 1242 MR. DINGWALL: Bearing in mind the Board's concerns and the time of day, I'll move on to a couple of other areas and then I'll give my friends the opportunity. 1243 Mr. Boyce, I believe in response to Mr. Thompson earlier, asking about whether or not actions possibly involving the provincial government might have been sought, your answer at the time was specific action against the parties he identified had not been contemplated at that time? 1244 MR. BOYCE: Not to my knowledge, no. 1245 MR. DINGWALL: Have actions against any other parties been contemplated by Enbridge with respect to this matter? 1246 MR. BOYCE: At this point, I don't know how that relates to the deferral account and I would prefer not to, I guess, tip our hands too much in terms of what potential strategies we might employ. 1247 MR. DINGWALL: If I were to suggest to you that it might be a key component to whether or not the ratepayers should bear the brunt of this expense, would it not seem sensible to include any money you might get back in such a deferral account? 1248 MR. BOYCE: At the stage where we're setting up the deferral account, I don't think so; at the stage where we might be seeking recovery, certainly, I think that question would be relevant. It's just at this point, I really do believe it's too early, given the stage we are at in the specific litigation we have with Mr. Garland, to consider what types of other ancillary actions might be available to us. And certainly, you know, that would be a question that we would have to determine as a matter of strategy internally first. 1249 MR. DINGWALL: That comes back to that whole shareholder versus ratepayer question. If your shareholder has a form of indemnity which only really comes in place if they don't get the money back from the ratepayers, doesn't that leave us with kind of a chicken-and-egg situation? 1250 MR. LADANYI: We don't see actually how this has anything to do whatsoever with requesting for -- our request for a class action suit deferral account. I think the salient point here is that there's potentially a large cost that will be incurred by the company in 2005, and the company's only asking the Board's permission to record this into an account. And it will come forward, or may never come forward, who knows what the company is going to do, but it might come forward at some future date and present its case for potential recovery. There's no question, no discussion about responsibility for the costs right now. We're not discussing that at all. All we're asking is we're facing potentially a large cost and we would like to record it into a deferral account. And that's what the uniform system of accounts provides for, a creation of deferral accounts for that very purpose. 1251 MR. DINGWALL: Would it not make sense, Mr. Ladanyi, to then, if the account were to be created, also within that account, have a requirement that the company put forward any other measures that it's undertaking to recover funds from whatever insurance or other avenues it might have open to it? 1252 MR. LADANYI: Measures as you mean costs. If the company is incurring any other costs related to this matter, we're asking that they also be included in this account. So if there's going to be legal costs, if there will be some investigative costs, the company would include those costs. But that's what goes into the account is costs. There is nothing else that goes into accounts. It's simple dollars. 1253 MR. DINGWALL: Now, Mr. Boyce and Mr. McGill, I believe you were speaking to your own personal memories, not necessarily your corporate memories, in going back to the period of 1994. Can either of you make inquiries to establish whether or not Enbridge Gas Distribution, at the time of the initiation of the class action, sought any advice as to the appropriateness of its late payment penalties? 1254 MR. McGILL: Sought advice from whom? 1255 MR. DINGWALL: From anyone. 1256 MR. BOYCE: Well, clearly, we sought legal advice. Counsel was retained at the time the claim was commenced and has represented us since that point. To discuss the specific advice we sought or received from counsel I don't think would be appropriate. 1257 MR. McGILL: I think another consideration is, throughout that period of time, every year we came back before the Board to have rates approved, those rates, year in, year out, included the late payment penalty revenue in the same form. There was plenty of opportunities for people to bring forward questions with respect to that if they believed that there were valid concerns and things that should have been addressed during that period of time. 1258 MR. BETTS: I just want to make one comment. I'm reluctant, again as an engineer amongst all these lawyers, to give legal-type advice, but I do want you to know that the Board doesn't expect the witnesses to respond to questions that could jeopardize their position within the next proceeding in the courts, so just understand -- I appreciate that there's always an effort to deal in a forthright manner with matters before the Board, but I do want you to understand that. And then if I hear from the questioner that they have an issue with that position, we'll deal with it. But I'd encourage you to -- 1259 [Audio feedback] 1260 MR. BETTS: -- protect your rights in the proceeding. 1261 So just with that comment, I'll allow you to continue. 1262 MR. DINGWALL: I'll ask the question again: Why didn't the company change or review its late payment policy in 1994 when the class action came about? 1263 MS. PERSAD: Mr. Chairman, if I might interject, I don't want to do this if the Board finds this line of questioning useful, but I do question what this would have to do with establishment of the account and the types of costs that will be contained in the account. It seems to me that we're getting into questions of quantum here that the Board stated earlier that it did not want to get into. 1264 MR. DINGWALL: I would tend to disagree. The question, why did they do nothing about their late payment penalty in 1994, frankly, flows from the wording of the Supreme Court decision which established that, being the commencement of the Garland action, as the jump-off point from which the company should have known that its penalty was inappropriate, and from which time the Supreme Court said that they should be accumulating their liabilities for the purpose of calculating in Mr. Garland's case what that liability might be. 1265 So it's to the question of whether or not a deferral account is even appropriate at this time. I think the question relating to what the company had in mind and why it didn't do anything in 1994 is fairly key. It's nothing to do with quantum. 1266 MR. BETTS: I think, though, with that line, Mr. Dingwall, we would be forced to leap to a conclusion that will be rightfully made -- 1267 [Audio feedback] 1268 MR. BETTS: Mr. Schuch, would you contact the Board Secretary and ask if he can give his attention to this problem with the loudspeaker system. 1269 So yes, Mr. Dingwall -- 1270 [Audio feedback] 1271 MR. BETTS: I think we'll take a break and let things cool down for a bit. It may just be that the -- 1272 I'm going back on the air now. We'll see how long it lasts. But yes, I think that we'd rather avoid where the courts may end up in terms of the size of a judgment or if there will be a judgment against the parties, and I believe that your line of questioning would be helpful for them in that matter and it's not necessarily helpful for us in this matter of determining whether an account should be established and what types of costs should go into that account. 1273 So perhaps we can move on to a different line of questioning. 1274 MR. DINGWALL: I have to admit to some confusion at this point. 1275 MR. BETTS: I think we'll take a short break at this moment and resume in 15 minutes. 1276 --- Recess taken at 3:35 p.m. 1277 --- On resuming at 3:50 p.m. 1278 MR. BETTS: Thank you, everybody. Please be seated. 1279 I'm not sure where we were when we ended up but we're going to try and keep going and there's a hope, I think, we've had a bit of a survey done and feel that the matter may be able to be dealt with this afternoon in which case, I think it's worthwhile that we do that, rather than having the witness panel and all of you return for the same subject at a little later date. So let's try and complete this today, but I do appreciate that everybody has to get to the answers to the questions that they require. 1280 So Mr. Dingwall, please proceed. And I'm sorry, I know -- I can't even remember what I was saying last so are you in a position -- do you understand kind of where we are at this point or can you proceed with your questions? 1281 MR. DINGWALL: I think I have an understanding of where the Board is coming from. 1282 MR. BETTS: Thank you. 1283 MR. DINGWALL: The awkward question that relates to the submission for deferral account at the time when the facts surrounding the deferral account, its magnitude and its scope, presuppose to a certain extent that there can either be a discussion of the merits at the time the account is being sought or if as the company is suggesting, litigation is hampering them from discussing that, no discussion of the merits at that time, which I guess raises my final question: What difficulties would it provide the company if the company were to be directed to not seek to expand the scope of this deferral account to include damages and other awards from the lawsuit until such time as they were in a position to fully put forward what those amounts might be? 1284 MR. LADANYI: Can you define for us "fully put forward," what exactly do you mean by that? 1285 MR. DINGWALL: What I mean, Mr. Ladanyi, would be in order to, in this particular case, disclose the judgment of the lower court establishing the class, the parameters of the class, and all the additional unknown elements that would assist this process with addressing the merits. 1286 MR. LADANYI: Well, maybe if I can remind you of my examination in-chief, where I explained that we are operating here in Ontario under a forward test year form of cost-of-service regulation and therefore there is -- in this process, any cost that can be forecasted would be in the company's budget. We agree with that, don't we? And those costs that cannot be forecasted but are real costs that the company will be incurring, but they cannot forecast those costs, are appropriately accounted for in deferral accounts, that's what deferral accounts are for. 1287 So what you're saying is try to pretend that we're not operating in a forward test year and we have regulation, try to imagine some different way of regulating and give us a scenario of how that would work, and I'm having difficulty with that. 1288 Essentially, if we didn't have the account, the company would expense these costs, they would be an immediate hit to earnings, so therefore, the company's earnings would be reduced for 2005, if this event occurred in 2005, by that amount, whether it's 30 million or 50 million or one million, we cannot tell right now because we do not know what the amount is. The amount will be determined by the court and that's why we need the deferral account to record the amount that we might have to pay in 2005 and then at that time, we'll know what the amount is and we might come to the Board for its future recovery in 2006 or beyond. 1289 MR. DINGWALL: Mr. Ladanyi, is there anything preventing you from applying for a deferral account at any time? 1290 MR. LADANYI: There is nothing preventing the company applying for an accounting order, it can be applied for during the year. But the process that the OEB has followed -- and I've now been let's say as a witness or a case manager at the OEB now for about 13 years so I guess I can speak from experience here, the Board prefers to have requests for a deferral account addressed in a hearing rather than in a separate hearing outside the hearing. 1291 So that's why we're here in this hearing room today for the Board to make a determination whether this is an appropriate deferral account for 2005, sure this can always be dealt with in some other process somewhere else, but this process has been constituted for the very purpose to make this decision so why would we avoid making this decision now. 1292 MR. DINGWALL: Given the Board's concerns about what the scope of the questioning might be, those are my questions at this time. 1293 MR. BETTS: Thank you very much, Mr. Dingwall. 1294 Ms. Street. 1295 MS. STREET: We've agreed that Mr. Shepherd or Ms. Girvan is going next, I'm not sure which one. 1296 MS. GIRVAN: I just have one question. 1297 MR. BETTS: Thank you. 1298 CROSS-EXAMINATION BY MS. GIRVAN: 1299 MS. GIRVAN: This is a question in terms of the characterization of the costs that should be recorded in the account. I'd like to know the company's position as to whether or not they would be open to characterizing the costs to be recorded in this account, the costs associated with the judgment net of any mitigation costs? 1300 MR. LADANYI: Did you say mitigation or litigation? 1301 MS. GIRVAN: Mitigation. 1302 MR. LADANYI: We are actually having difficulty with the word "mitigation," we're not sure what you mean by that. I want to qualify it. You have to understand that any costs that Enbridge Gas Distribution would incur would really be costs that we would try to minimize, obviously, so in that sense, every cost is -- we attempt to mitigate all costs to keep them as low as possible because such costs obviously have impact on the rates that our customers pay. So, therefore, I'm not sure where you're getting with this mitigation section. 1303 MS. GIRVAN: I'll give you an example just to clarify and the example would be, say the judgment against the company is $50 million but, in fact, there's either some claim for insurance or there's some way that you have -- you have an ability to reduce that overall cost of $50 million, and it's just really, I guess, to ensure that the true cost that goes into that account is really the cost that you're responsible for -- that's associated net of any mitigation. 1304 Just to clarify Mr. -- 1305 MR. LADANYI: In principal, we're not against what you're proposing but we're having difficulty visualizing it, so that's why we're having difficulty with this question as such. It might be better that we can address it in argument rather than on the stand. 1306 MS. GIRVAN: I think that's fair, I think there might be some precedent in previous deferral accounts in previous cases so cost to be recorded net of any mitigation efforts the company has undertaken to reduce those costs. 1307 MR. LADANYI: Or perhaps I can suggest that we could undertake to provide an answer in writing to this question, would that be acceptable to you? 1308 MS. GIRVAN: Sure. 1309 MS. LEA: Do you prefer to do it by undertaking than in argument, Mr. Ladanyi? 1310 MR. LADANYI: Either way is fine. Maybe I -- 1311 MS. GIRVAN: I certainly would like to have the company's position on the question. 1312 MS. PERSAD: Well, Mr. Chairman, could I just ask if Ms. Girvan could maybe define "mitigation" so that we have a better idea of the parameters of the answer? 1313 MR. BETTS: Ms. Girvan, without putting words in your mouth, one other question I believe it was Mr. Dingwall, it may have been Mr. Thompson, indicated if there was some amount that was recoverable by some other party that offset a judgment, is that the kind of thing that you would be considering? 1314 MS. GIRVAN: Yes. 1315 MR. BETTS: And you're asking then, if there was an amount that was recoverable by another party that offset that judgment, would that also be reflected in the deferral account? 1316 MS. GIRVAN: Mm-hm. 1317 MR. BETTS: I think I have stated the question for Ms. Girvan. 1318 MR. LADANYI: Mr. Chairman, if I can answer now, I think, since you've clarified the question or restated it in a different way, I think the answer would be yes to that. 1319 MR. BETTS: Ms. Girvan, did you catch that then, the answer would be yes to that. 1320 MS. GIRVAN: Okay. Thank you very much. Those are my questions. 1321 MR. BETTS: Mr. Shepherd. 1322 MR. SHEPHERD: Ms. Girvan has answered one of the questions I wanted to ask so I just have one other. 1323 CROSS-EXAMINATION BY MR. SHEPHERD: 1324 MR. SHEPHERD: The criteria for setting up a deferral account, Mr. Ladanyi, as I understand it, are basically that you have some amount that you haven't decided yet what to do with, or the Board hasn't yet decided what to do with it; right? 1325 MR. LADANYI: Right. 1326 MR. SHEPHERD: And so in order to determine whether to set up the account, the Board has three choices, correct me if I am wrong: It can say no, under no circumstances would you be able to recover this, there's no point in setting up the account; right? 1327 MR. LADANYI: Generally, the Board wouldn't say that. In my experience, the Board would say this particular cost is something that the company can manage on its own and, therefore, as an incentive to the company management to control the cost, the Board would say there will be no deferral account for this and you try to live within your budget. So that would be a typical reason why the Board would turn down a deferral account. 1328 I can't think right now of a situation whereby the Board turned down a deferral account request by prejudging an outcome. 1329 MR. SHEPHERD: The Board could say today, if they wanted, We've heard the evidence and we've decided that you can't recover the judgment in this from the ratepayers. They can decide that today, can't they? 1330 MR. LADANYI: I suppose they could, although we haven't really put our case before the Board about recovery of any costs, so the Board doesn't know whether we are going to be asking for any -- on what basis we would be asking. So I would think, in my mind, it would be very unusual for the Board, not having evidence about the amount of money involved or what the company's case would be or how these costs would be recovered and from which customer class, that the Board would suddenly jump to the -- 1331 MR. SHEPHERD: Excuse me, Mr. Ladanyi -- 1332 MR. LADANYI: -- conclusion and turn it down. 1333 MR. SHEPHERD: -- that's not where I was going. I was just asking the general question: The Board can say, You can't recover it, no point in a deferral account; right? They can say that. 1334 MR. LADANYI: Well, I think the Board can within its rights make decisions whichever way it likes. 1335 MR. SHEPHERD: Okay. 1336 MR. LADANYI: You've asked me a question about what my opinion was and I think I've given it to you. I think it would be a very unusual type of decision on the part of the Board. 1337 MS. LEA: It may assist parties to recall that in its opening statement the Board said that it will not be determining whether any of the amounts to be recorded in a deferral account would eventually be recovered from ratepayers. They made that statement today on the record. 1338 MR. SHEPHERD: Okay. There's three possibilities, Mr. Ladanyi, correct me if I am wrong: One is the Board can say, No, you can't recover this; therefore, there's no deferral account. The second is, Yes, you are going to be able to recover this, in principle at least; we have to look at the amount - for example, the regulatory variance account is like that - and so therefore we will set up the deferral account and we'll look at the amount later. Or third, the Board can say, We're not going to decide in principle whether or not this is a recoverable amount, but we want you to record it and we'll decide it later. Isn't that right? 1339 MR. LADANYI: No, it's completely wrong. And if I can show you -- lead you to our evidence at Exhibit A8, tab 1, schedule 1, page 16, where we put out the criteria for establishment of deferral of variance accounts. That's our position for the criteria, so I don't accept any of your propositions. 1340 MR. SHEPHERD: So you don't think that the Board can decide setting up an account because it's not recoverable, the amount is not recoverable. 1341 MR. LADANYI: I've never heard of that situation being done, and I don't accept your proposition. The Board at this point in time would not be making that kind of a ruling. The Board would only make that kind of a ruling when there was an application for recovery. And the criteria, I don't want to read them into the record; they're available in evidence and you can refer to them, Mr. Shepherd. 1342 MR. SHEPHERD: I'm trying very hard to get you to say the right things so we can support the company on this, and I'm having some difficulty. 1343 MR. LADANYI: I'm not sure what the right thing is. 1344 MR. SHEPHERD: Is it correct -- I'm only going to try one more time. Is it correct that the Board can determine today that it is not going to decide in principle or in amount whether the amounts that go into this account are recoverable or not? Set up the deferral account, but it's only to track the amounts with no implication that they will be recoverable at all; true? 1345 MR. LADANYI: That's absolutely right. The Board can decide that the account, and that's what we're asking for, that the account be set up to record the costs. 1346 MR. SHEPHERD: I have no other questions, Mr. Chairman. 1347 MR. BETTS: Thank you, Mr. Shepherd. 1348 Ms. Street. 1349 MS. STREET: Thank you, Mr. Chair. 1350 CROSS-EXAMINATION BY MS. STREET: 1351 MS. STREET: Mr. Ladanyi, in the information given -- to summarize the evidence that was going to be put forward on this issue, you've said that one of the major drawbacks of deferral accounts is that the clearance after the fiscal year which gave rise to the balances results in what's sometimes referred to as retroactive rate-making. Now, I assume that's exactly what's going to happen in this case, or could happen. 1352 MR. LADANYI: That's something that certainly could happen, yes, that we would be -- we might be asking for recovery of costs of revenues that would have been passed on to customers in past years. That's a possibility. And there could be questions of retroactivity. That's the nature of operating in a forward test year. When you operate in a forward test year, you don't know, as I explained, what all the costs are and therefore some of the costs which are going to be -- which are unknown or not known with some accuracy are in deferral and variance accounts and are recovered after the fiscal year is over. That's the nature of the form of regulation that's being practised by this Board. 1353 MS. STREET: And in this case, how much certainty do we have that this issue will come to a final resolution in the calendar year 2005? Maybe, Mr. Boyce, you can address that. 1354 MR. BOYCE: I don't know that we can say that with certainty, but I certainly believe there is a probability that it will come to a conclusion in terms of a decision by the trial court in 2005. 1355 MS. STREET: So there's a good possibility of that. 1356 MR. BOYCE: I think that's a fair assessment, yes. 1357 MS. STREET: But in any case, the retroactive rate-making that we're talking about is, in effect, going to go back to 1994. That's really what we're talking about if we're talking about the costs of the judgment itself. 1358 MR. BOYCE: Well, certainly based on the Supreme Court's decision, as we understand it, the possibility exists that the trial court in Ontario will make a damages award as it relates to late payment penalties collected since 1994. 1359 MS. STREET: Do I -- Mr. Ladanyi, from that comment that you made about deferral accounts being criticized as retroactive rate-making, is that because deferral accounts typically, it's implicit that some part of those accounts will be passed on to ratepayers? 1360 MR. LADANYI: Well, when they are criticized, they are essentially criticized because of the recovery or charges that will go through the deferral account as the deferral account is being cleared, so it's the, if you like, the disposition of the deferral accounts that may give rise to retroactive rate-making. 1361 MS. STREET: I wonder if maybe, Mr. McGill, you can help me with this. I don't want to spend a lot of time in light of the Panel's comments about this, but Energy Probe's Interrogatory No. 114 which we've looked at has yearly figures of LPP revenue and a total, and then there's another chart at Energy Probe's Interrogatory No. 118, and they seem to be slightly different numbers and I'm just wondering if you can help me understand why there is the difference. 1362 For example, No. 118, the chart, which is page 2 of 3, do you have that? 1363 MR. McGILL: I'm still trying to locate that interrogatory. This is the table entitled "Historical Allocation of Late Payment Penalties by Rate Class"? 1364 MS. STREET: Yes, table 1, "Historical Allocation of Late Payment," do you have that now? 1365 MR. McGILL: Yes, I have that. 1366 MS. STREET: For example, 1996, at the bottom of that chart, shows a total of 7.6 million in late payment penalties, but the 114 interrogatory tells us it was 8.3 and so on throughout the years, so there's a different total. I'm just wondering why that is. 1367 MR. McGILL: Yes, I think the difference is that in the response to Energy Probe 118, the figures are the amounts that were either set out in the regulatory budget or the regulatory accounts for the year, and the numbers I've included in the response to Energy Probe 114 are the billed late payment penalty revenue dollars that flow through our billing system into our general ledger through the condition of balance. So those numbers won't always jibe 100 percent. 1368 MS. STREET: So do I understand that 118 is the projected and 114 is the actual? 1369 MR. McGILL: That's my understanding, and I can undertake to confirm that. 1370 MS. STREET: If you wouldn't mind. 1371 MR. McGILL: I can do that. 1372 MS. LEA: J.5.6, confirmation of whether Exhibit I, tab 9, schedule 118 are projected numbers. 1373 UNDERTAKING NO. J.5.6: TO CONFIRM WHETHER EXHIBIT I, TAB 9, SCHEDULE 118, ARE PROJECTED NUMBERS 1374 MR. McGILL: Yes. That's fair enough. 1375 MS. STREET: Just a couple of other questions. 1376 MR. BETTS: Ms. Street, can I just interrupt and it's your undertaking, but I think your original question was directed more at the matter of what caused the difference between 114 and 118 and worded this undertaking to simply to confirm whether one is projected or not. Can you tell me exactly what you would like done to make certain? 1377 MS. STREET: I think you've clarified my question, Mr. Chair, that the -- I'm interested in knowing why the discrepancy exists between the two tables and I understand from the witness he believes it's because one is projected and one is actual. If that's not the case then he could perhaps explain the discrepancy. 1378 MR. BETTS: So what causes the difference. 1379 MS. STREET: Yes. 1380 And just so that I'm completely clear and perhaps sort of by way of summary, what you're proposing, I take it, is that the existing deferral account would now include in addition to the company's own legal costs, it would also include the costs of the judgment firstly; is that correct? 1381 MR. LADANYI: Yes. 1382 MS. STREET: And the costs of the judgment would include the legal costs of the plaintiff. 1383 MR. McGILL: That's correct. 1384 MS. STREET: And it would also include the expert or actuarial costs that you expect to incur as you deal with resolving this judgment. 1385 MR. McGILL: Yes. 1386 MS. STREET: Is there anything else that you can anticipate that will go into this account? 1387 MR. McGILL: I think I indicated earlier that there will be costs associated with developing a summary of the historic billing and payment records and analyzing that information to determine amounts that will be subject of the court proceeding. 1388 MS. STREET: And am I correct in understanding that those are both internal and external costs? 1389 MR. McGILL: That's correct. 1390 MS. STREET: And then in response to Ms. Girvan, it would also include any mitigating amounts? 1391 MR. McGILL: I think that's what we agreed to earlier based on Mr. Betts' definition of mitigating amounts. 1392 MS. STREET: Generally in prior years, you've had this deferral account with your legal costs put into it and then cleared out; is that correct? 1393 MR. LADANYI: That's right. 1394 MS. STREET: And in prior years, you haven't generally asked that the costs of the judgment be included in that deferral account with one exception I think; is that right? 1395 MR. McGILL: There's more than one exception, but it has been both in and out. 1396 MS. STREET: So you haven't consistently asked, if I can put it that way, then? 1397 MR. LADANYI: Right. 1398 MS. STREET: Now, even after the 1998 Supreme Court of Canada decision, I don't believe that you immediately asked that the cost of the judgment be included; am I correct in that? 1399 MR. LADANYI: You're correct in that. 1400 MS. STREET: Why, then, now are you asking that it be included? 1401 MR. McGILL: I think we believe that the cost impacts are more imminent today than they were in prior years. Another factor, without going into ADR discussions or historic ADR discussions, I think in a number of instances, the deferral account and the definition of the account was agreed to in ADR and not set through a rate hearing process. 1402 MS. STREET: I have no further questions. Thank you, Mr. Chair. 1403 MR. BETTS: Thank you, Ms. Street. 1404 Board counsel. 1405 MS. LEA: Thank you. 1406 CROSS-EXAMINATION BY MS. LEA: 1407 MS. LEA: Gentlemen, I have a few basic questions, I hope you will excuse their simplicity in some cases. 1408 I guess this would be for Mr. Ladanyi. We may receive an argument that the account could be established but that it only contain your own, that is, Enbridge's own litigation costs and exclude the costs of the judgment and the legal costs of the plaintiff. If the Board accepted that argument, would you rather have an account which included your own legal costs or no account at all? 1409 MR. LADANYI: That's a very loaded question. 1410 MS. LEA: I'm afraid it is, sir. 1411 MR. LADANYI: It's better to have some account than no account, obviously. However, I should point out that if there is a judgment against the company, for example, and the Board rules that we cannot, at this time, include any costs of the judgment into the class action suit deferral account, then we would, I guess, still have the option of applying separately for a class action suit deferral account through a separate written proceeding, that's been done in the past, or we would have to be forced to take this charge against earnings. And this is a very large amount, it's going to have a very significant impact on Enbridge's 2005 earnings. 1412 So because this is a real cost that would be faced by the company and these costs cannot be accounted in some other way, we really require a deferral account to record these costs and retain them there as an account receivable until the Board makes a determination of what is the proper treatment for such costs. 1413 MS. LEA: If no account is established, and you've partially answered this in the answer you just gave, but if no account is established is all hope of recovery of those costs that are excluded gone forever? 1414 MR. LADANYI: I don't think it's gone forever but certainly the impact on 2005 earnings would be very significant if it is a large cost. Now, it could be the determination from the court is the cost is small, I can't tell right now. In fact, that's why we're asking for a deferral account because we cannot tell what the costs are. But if these are large costs, there would be a charge against the 2005 earnings. If at some future fiscal periods, 2006 or beyond, the Board were to allow recovery, then those earnings would obviously be increased by the recovery that would happen in that year, but in 2005, if there was no account there would be a charge against the 2005 earnings. 1415 MS. LEA: I guess that's what I was trying to determine. If you have to record amounts against earnings in 2005, in theory, you could be allowed recovery at a future time and have an extraordinary gain to put towards earnings in another year, is that not the case? 1416 MR. LADANYI: I'm not a financial expert, but I think that most companies try to avoid having losses in one financial period and gains in another one. I mean, that affects the company's ability to raise debt and as you know, Enbridge is a company that requires a lot of debt refinancing to keep making investments and, for example, in plant for Enbridge Gas Distribution for mains and services to provide service to an additional, let's say, 50,000 customers each year. So there is a lot of demands on the company to keep raising money and having a large fluctuations in earnings would be a very, very serious consequence and we would -- I think the Board would like to avoid that. 1417 MS. LEA: Thank you. 1418 Just a couple of points from your earlier evidence in-chief. You have indicated repeatedly -- well, in-chief at first and repeatedly since, that you would be forced to expense the costs. That is not because it's part of a Board order to expense them for regulatory purposes but because it is an accounting requirement; is that correct? 1419 MR. LADANYI: That's right because there would be no account to record these costs. There would be no receivable account to put them in. So if it's not an expense, how else would it be treated? The only way the cost could be treated is to create a receivable, which is essentially an asset that would sit on the company's balance sheet until it was disposed of. And that is what a deferral account is, a deferral account is an account receivable. 1420 MS. LEA: Because the auditors classify it as an account receivable is there an assumption on their part or on the shareholder's part or on the company's part that a recovery is likely. 1421 MR. LADANYI: Not that it is likely, but there is a possibility of recovery and that I think is a big difference, because "likely" would indicate that the Board has told the utility that there is some likelihood of recovery. No, the only thing that's required is that there is an opportunity for recovery and that is sufficient. 1422 MS. LEA: One moment, please. 1423 Thank you very much. Those are my questions. Thank you, Mr. Chair. 1424 MR. BETTS: Thank you, Ms. Persad. Are there any questions that you have at this point in redirect? 1425 MS. PERSAD: The one question I had has been asked. 1426 [The Board confers] 1427 QUESTIONS FROM THE BOARD: 1428 MS. NOWINA: I think this is to Mr. Ladanyi as well and in spite of following up on Board counsel's questions, so if we go forward and we allow the account and then in a later decision don't allow the recovery of the decision, then the loss would be taken by Enbridge in some future year. 1429 MR. LADANYI: That's right. 1430 MS. NOWINA: As opposed to the scenario, if we don't allow the account, then there would be a gain in a future year. So in your experience, you said you have 13 years' experience doing this -- 1431 MR. LADANYI: Yes. 1432 MS. NOWINA: -- in your experience, how often has one of these accounts not allowed any recovery? 1433 MR. LADANYI: To be recovered? Not often, I would say, but it's a -- and I think I want to, let's say, couch it in such a way that the company is usually quite careful in what it asks for. 1434 Now, there have been situations, even in something related to this issue, in 2001, for example, we asked for a late payment penalty variance account, because when we reduced our late payment penalty charge from 5 percent to 2 percent, the company was concerned that our bad-debt expense would increase. And we asked for a variance account to deal with that and the Board denied that variance account because the Board felt that the company should be, I guess, at risk to manage the bad-debt expense, and did not give us this variance account. That's my recollection. I'd have to actually read the actual words of the decision, but that's my recollection right now. So I'm giving you an example here where a variance account was not allowed, and these do come up from time to time. 1435 Now, when an account has been allowed and the Board has disallowed costs from the account, I'm having some difficulty recalling one, but I'm sure there was some. 1436 MS. NOWINA: So I guess the question is, really, this is recorded as an accounts receivable -- 1437 MR. LADANYI: That's right, yeah. 1438 MS. NOWINA: -- that the -- but you don't think that it being recorded as an accounts receivable sets the expectation by stakeholders that it will be recovered. 1439 MR. LADANYI: No, it doesn't. I believe that it allows the company to put its case to the Board when the amount is known. I think this is the advantage of having a deferral account, is that the company, when it does come to the Board can say to the Board, The amount that we're asking to recover is 3 million or 5 million, or whatever it may be, 10 million, rather than saying, We want to recover some money but we don't know what it is. And this is where the situation we would be facing if one didn't have deferral accounts. But there's no expectation of recovery. 1440 The company then, for example, in some future period, would know what the amount of money is in question and would also therefore be able to put together an appropriate case for the recovery on how the money should be recovered and how it should be dealt with. And I think in this particular case we've got a situation whereby the courts still have to make a determination about the cost responsibility and how it would be dealt with. So really the matter is very uncertain, but it's likely to happen in 2005. 1441 MS. NOWINA: I think the way you answered the question, really, is kind of the basis of my questions, because at any times that we've talked about these deferral accounts, including your reference to the criteria, it talks about amounts; right? So what's -- the uncertainty is about amounts. The question here, there's an uncertainty about an amount, certainly. There's also uncertainty about the validity of the claim at all, I guess, for ratepayers. So it isn't just an amount; it's the validity of the claim. So we want to make sure that, in the recording of the accounts receivable, we're not just talking about the amount, but it's unclear whether or not the claim would be made at all. 1442 MR. LADANYI: Ms. Nowina, did you want me to speak about the validity in some way? I'm having -- 1443 MS. NOWINA: Well, just to make it clear that we're not just talking about the amounts here in a future decision. 1444 MR. LADANYI: In a future decision, whenever the future decision does come, we will be not discussing the amount, no. The Board would then consider whether there's any validity to it. 1445 And in this particular case, I think that we have to keep in mind that the amounts that were collected from late-paying customers were then credited back to all of the customers, including the customers who were late-paying. So everybody got their money back; the company did not, on a forecast basis, keep anything. To the extent that the company overcollected from the late-paying customers, it also overcredited it back to all customers. So this is the kind of equity that's going on here. 1446 So in some ways, fairness would really require the Board to consider that, because from the company's point of view, the company did everything that the Board wanted it to do all these years. And then suddenly for the Board to say, No, we want to completely forget about the past -- 1447 MS. NOWINA: I don't want to get into the argument at this point or else everyone else is going to ask to provide counterarguments. It's just recognition that in future decisions, it's an amount against the validity which has to be discussed at this time. 1448 MR. BETTS: Thank you. 1449 I have -- I guess it isn't one question but one line of questioning, too, and perhaps to Mr. Boyce first. 1450 Mr. Boyce, is it possible that the courts could, in their judgment of this matter, actually determine how the recovery should be managed, even so far as to say whether some should be attributable to ratepayers or all or none? 1451 MR. BOYCE: It's certainly possible that the court would provide direction as to how the repayment would be managed. I suppose it's possible that it could even direct this Board to be involved in some sense. I don't know that we've considered yet, though, whether it would include any element in its decision as to whether or not there could or could not be a recovery in that decision. 1452 MR. BETTS: Is it possible that they could deal with that? Could a court deal with that in its decision? 1453 MR. BOYCE: I don't think it's likely, but I suppose -- I can't rule out the possibility. 1454 MR. BETTS: And if I look at now the five things that are -- that may be included in this deferral account, the four that originally Mr. McGill spoke of and the one that's been added, I see three that probably would exist based on the structure of the account in the past; and they would be the legal costs, the costs for evidence or experts to support the defence, and the costs of any other research or labour required to build a defence. The ones that seem to be uncertain are the amount of a judgment and now perhaps amounts that might be recoverable by some other mechanism. 1455 If, and this one perhaps is best directed to Mr. Ladanyi, if the Board concluded that it was premature to establish any form of a deferral account for the judgment or for amounts recoverable based on the insufficient knowledge of where that may go, since it is within the ambit of a court proceeding, there was a question asked of you some time ago about the possibility of bringing forward an application for an accounting order, what would prevent or what would be the downside of the company just bringing forward an accounting order at the time that it becomes aware of more detail associated with the judgment? And the accounting order would be, obviously, to request a deferral account. 1456 MR. LADANYI: That's a very difficult question. I would say that procedurally, probably there would not be any roadblock in front of asking -- in asking for an accounting order at a later date. What I pointed out when I think that similar question was asked before was that the normal practice of the Board, at least in my experience, has been that when an accounting order like this was requested, that the Board preferred to deal with these matters in a rate case rather than outside a rate case, and we're here in a rate case right now. 1457 And really the purpose of the deferral accounts are to be there to record certain costs. It doesn't imply that one has to know exactly what those costs are. I mean, later on, when the company would come around to the Board and file evidence in support of possible recovery or justifying the costs in accounts, then we would know what these costs are. 1458 The idea is that we don't want to lose track of these costs; we don't want to be expensing these costs during the year. We would like to keep them in a deferral account from the start of the fiscal year, that's all, so that all of the costs that we might be having -- that we might be discussing, none of them have gone through the company -- through the company's earnings and all have been recorded and are there in a deferral account for the Board to make a determination. Nothing would be really lost. 1459 MR. BETTS: I appreciate that. I don't want to interrupt. We're not talking about whether a deferral account is appropriate or not; we're talking about the timing of establishing one, whether it's appropriate now or whether it might be more appropriate when there's more knowledge of what the account may involve. 1460 MR. LADANYI: Well, I -- 1461 MR. BETTS: And that may be a judgment for the Board, so I'm not looking for you to help us on that decision, but I think I have heard your answer to that. And certainly you did indicate the norm, which I would accept, being that it would be best to deal with this within the framework of a rate proceeding. I'm not sure that this particular matter falls within the definition of the norm, and it may have to be dealt with with some other thoughts in mind, and that's why I'm investigating those with you. 1462 Let me just see if any other questions arise from that. No, I think that concludes it. 1463 Ms. Persad, did that cause any need for any further questions in redirect? 1464 MS. PERSAD: No, it didn't. Thank you, Mr. Chairman. 1465 PROCEDURAL MATTERS: 1466 MR. BETTS: Then that concludes -- I see some hands arising there. 1467 MR. SHEPHERD: Mr. Chairman, just before you call a halt to the day, a number of intervenors have wondered when the issue of confidentiality for deferred taxes will be dealt with. I think there was some indication that it might be dealt with on Friday. Is it possible for the Board to confirm whether that's the case? 1468 MR. BETTS: Thank you. I certainly don't mind the reminder, but you beat me to the punch by a couple of seconds. We were going to address that and the Panel has had an opportunity to consider it and we will set Friday morning aside to get into that matter. We would still like to deal with, if we can, the evidentiary portion of that day, depending how long the issue of confidentiality arises. 1469 I think I would entertain any ideas on how we might proceed, but the Panel has in mind that -- I'm going to assume that matters relating to the merits of the evidence, let's say, it's -- yes, whether the evidence is material and relevant is not a question that needs to come before us at this point. The only question relates to whether it should be kept confidential or not. That's all I've heard so far. I don't see anyone objecting to that statement. 1470 Then my preference, our preference as a Panel, would be to go into an in-camera session first thing on Friday morning and hear submissions from all parties respecting the issue of confidentiality of the four documents that were specified by Mr. Thompson. The Board would then make a decision on those four documents and their status as confidential documents as soon as possible after that. 1471 Any submissions with respect to that approach by the panel? Ms. Persad. 1472 MS. PERSAD: Sorry, Mr. Chairman, because Mr. Cass is not here, and that is his issue, would it be possible for me to just reserve his right to respond to the question of whether we have any position on materiality or relevance for Friday morning? 1473 MS. LEA: Perhaps it would be of assistance. Is he going to be here Thursday? 1474 MS. PERSAD: Oh, yes, he will be here Thursday. Could he address that on Thursday? 1475 MR. BETTS: Yes. If we are going to hear anything with respect to that, I'd like to hear it first thing on Thursday so everybody has the appropriate time to deal with it. 1476 MS. PERSAD: Thank you very much. 1477 MR. BETTS: Thank you. Thank you for bringing that up, Mr. Shepherd. 1478 [The Board confers] 1479 MR. BETTS: Mr. Sommerville has rightfully asked to just clarify that on Thursday, if Mr. Cass does have an issue with the materiality and relevance of the items that he only needs to identify his issue at that time but we will actually receive submissions on that on Friday along with submissions on confidentiality. So we're not looking for any submissions relative to the evidence on Thursday. 1480 MS. PERSAD: Thank you. 1481 MR. BETTS: I think with that bit of procedural work out of the way, I think we can conclude the activities for the day and I'd like to thank our witness panel for helping us with this matter. It certainly is a difficult one. We wish the company and all parties well and trust that it will come to an appropriate conclusion as soon as possible anyway, but we will deal with it in our decision. 1482 Thank you all once again and we will adjourn at this point and reconvene at 9:30 on Thursday morning. 1483 --- Whereupon the hearing was adjourned at 4:36 p.m.