Rep: OEB Doc: 12YPM Rev: 0 ONTARIO ENERGY BOARD Volume: 6 24 JUNE 2004 BEFORE: R. BETTS PRESIDING MEMBER P. NOWINA MEMBER P. SOMMERVILLE MEMBER 1 RP-2003-0203 2 IN THE MATTER OF a hearing held on Thursday, 24 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 24 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 JULIE GIRVAN 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 JACK GIBBONS 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: [18] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DSM BOILER ISSUE - CLINESMITH, RYCKMAN: [63] EXAMINATION BY MR. O'LEARY: [72] CROSS-EXAMINATION BY MR. KLIPPENSTEIN: [101] CROSS-EXAMINATION BY MR. SHEPHERD: [329] QUESTIONS FROM THE BOARD: [374] PRELIMINARY MATTERS: [419] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RATE DESIGN - GIRIDHAR, COLLIER: [432] EXAMINATION BY MS. PERSAD: [438] CROSS-EXAMINATION BY MR. SHEPHERD: [488] CROSS-EXAMINATION BY MR. JANIGAN: [505] CROSS-EXAMINATION BY MS. GIRVAN: [576] CROSS-EXAMINATION BY MR. POCH: [607] CROSS-EXAMINATION BY MR. DINGWALL: [778] PROCEDURAL MATTERS: [815] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RATE DESIGN - GIRIDHAR, COLLIER: [844] CROSS-EXAMINATION BY MR. KLIPPENSTEIN: [847] 10 EXHIBITS 11 EXHIBIT NO. K.6.1: POLLUTION PROBE CROSS-EXAMINATION REFERENCE BOOK: DE-SEASONALIZATION [107] EXHIBIT NO. K.6.2: EXCERPTS FROM DECISIONS EBRO 492 AND 495, DATED SEPTEMBER 10TH, 1996 [615] EXHIBIT NO. K.6.3: POLLUTION PROBE CROSS-EXAMINATION REFERENCE BOOK - DESEASONALIZATION [843] 12 UNDERTAKINGS 13 14 --- Upon commencing at 9:35 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. Today is day 6 of the hearing of application RP-2003-0203. The hearing plan indicates that we're scheduled to examine issue 10.1 and 10.2 on demand-side management, more specifically, on a proposal regarding the large boiler market DSM program. That will be followed by the rate design issues, which are issues 15.15 and 15.2. 17 Before we begin, there are a few housekeeping matters that the Board will provide first, and then we'll invite any submissions with respect to preliminary matters from parties. 18 PRELIMINARY MATTERS: 19 MR. BETTS: First of all, the Board would like to inform everybody that its decision on the July 1st, 2004 QRAM application will be issued during the course of the business day today, so you can -- in fact, I'll ask Staff if they can, when it is issued, to bring additional copies and place them at the back for anybody that's present here. 20 The Board would also like to inform parties at this point about its proposed method of dealing with arguments in this proceeding, and hopefully anybody that's not here today will have the opportunity to read the transcripts or perhaps get a phone call from a friend to indicate that they should be looking at this. 21 The Board wishes to receive only oral arguments in this proceeding. That is a change from how we have dealt with the Enbridge rate applications in the past. Based on the latest schedule showing the evidentiary portion of the hearing completed on July 7th, assuming that we are consistent with that schedule, we would expect to receive oral arguments in chief on July 9th, intervenors' responses during the period of July 14, 15, and 16, final reply arguments from the applicant August 3rd. The schedule has been established to accommodate some previously scheduled commitments made by Board Members, if you're wondering why those dates particularly were chosen. Please consider the proposal among yourself and provide the Board with your comments if any are necessary. 22 A third item of information, the Board did receive a revised settlement proposal dated June 17, 2004 at the Board offices on June 22nd. I believe there may be some changes to that. But I do want to put everybody on notice that if no comments are received from parties concerning the revised version by 12:00 noon tomorrow, that's June 25th, the Board will assume that the revisions are approved by all parties. 23 The final item was brought to my attention yesterday when, in presenting the Board's position on handling the confidentiality issues on Friday, I stated on behalf of the Panel that the assumption was that there were no issues with respect to the materiality and relevance of the items in question. Ms. Persad indicated that she would ask the Board to allow Mr. Cass the opportunity to consider that and come back to us. I don't see Mr. Cass in the audience, but if there -- if anyone could help me with that, that would be great. If not, perhaps we could have Mr. Cass address that question. 24 MR. O'LEARY: I will attempt to do that, sir. 25 MR. BETTS: Thank you. And those are all the preliminary matters from the Board's point of view. Are there any preliminary matters out there? 26 MR. O'LEARY: Several, sir. First, in respect of the Board's proposal that the settlement document, if I can use the word, be deemed final if it doesn't receive any responses, and while I don't want to jinx the discussions that are ongoing, I want to alert the Panel to the fact that there are attempts being made by parties to deal with some of the outstanding issues and we may, and I accent the word "may," invite the Panel to, once again, amend the settlement proposal if we can reach an agreement on one or several of the outstanding items. I just thought I would alert you to that. I don't know if that affects matters because presumably the document could be amended and finalized at that point. 27 MR. BETTS: Just let me ask a question or two about that. Are these, then, items that are currently on the schedule list of items to hear? 28 MR. O'LEARY: Yes, sir. 29 MR. BETTS: Okay. 30 MR. O'LEARY: They have not yet been dealt with in terms of oral evidence. 31 MR. BETTS: Very well. And I assume that if we do get to a point that we're dealing with them, that the Board could conclude that the opportunity for settlement has passed by? 32 MR. O'LEARY: I'm presuming that, and again I'm looking forward into the future, but I believe it's a safe assumption that if a panel is introduced and there's cross-examination, that there's not likely to be a settlement with respect to that issue. 33 MR. BETTS: Well, then, I think what I would like to do is to get a regular report, if I can, on progress, not necessarily who said what or even what issues they are, so that the Board can, in an effort to try and have some control over the direction of these issues, know where we're heading and how we're going to get there. 34 MR. O'LEARY: Certainly, sir. And of course we wouldn't want you to spend unnecessary time on an issue if the matter is potentially settled. 35 MR. BETTS: Very good. And by the way, we certainly don't object to having the parties settling matters or coming to the Board with the settlement for our consideration. That always seems to be the best approach, so we encourage that. 36 Is there anything else, Mr. O'Leary? 37 MR. O'LEARY: Yes, sir, there are three undertakings that the company wishes to file its responses to. They are listed as J.4.2, J.4.5, and J.4.6, and I have provided copies to Board Staff. 38 MR. BETTS: Now, I have those as being received already. 39 MS. LEA: Yes. They were passed up to the dais already. 40 MR. BETTS: Oh, I had them being received before that. Maybe it was a premonition. Thank you very much. 41 MR. O'LEARY: The only other preliminary matter, Mr. Chair, that the company has relates to your question which I understood arose with Mr. Persad the other day, and Mr. Cass is unavailable today so I will attempt to articulate the company's position in respect of the question asked about -- the argument about relevancy or materiality. Mr. Cass will be arguing tomorrow in respect of the matter and I'm simply going to try and indicate the company's position at this time. 42 Essentially it is this: That the company believes that the intervenors are pursuing a number of arguments in relation to deferred taxes, and in relation to those arguments, a number of areas of factual inquiry that are not relevant. However, the company does not want to stand in the way of the intervenors attempting to pursue those areas and attempting to persuade the Board that the Board ought to take them into account. So notwithstanding the company's position that these areas are not relevant, we have produced documents and we have allowed intervenors to pursue those inquiries. So indeed, on cross-examination, the intervenors will undoubtedly continue to pursue those areas. And although the company does not accept them as necessarily being relevant, we will not contest the cross-examination. 43 What the company proposes to do is, in final argument, when intervenors pursue their argument based upon these documents and on those areas of factual inquiry which the company submits are irrelevant, the company will argue at that time that they are not relevant to the Board's determination. This being the case, in connection with the argument over the production of the documents and their confidentiality, although we don't accept that there is necessarily relevance in respect of all of the documents, we are not arguing that issue at that point, so we will not, on the confidentiality motion tomorrow, be arguing the company's concerns about the relevance of the documents themselves, nor the relevance of the areas of factual inquiry. And that's the company's position, Mr. Chair. 44 MR. BETTS: Thank you. That has assisted the Board. 45 Any further preliminary matters? 46 MR. POCH: Mr. Chairman, if I may. With respect to the argument schedule, I assume the Board's interest there is that we receive early and concise argument. I have a personal conflict, I'll be a few thousand kilometres away at that time. I wonder if I can commit to file brief written argument on or before the date set for oral argument. Would that be acceptable to the Board? I would only be addressing a couple of topics at most. 47 MR. BETTS: Let us confer for a moment. 48 [The Board confers] 49 MR. BETTS: Thank you, Mr. Poch. Yes, that will be acceptable. The Board's preference clearly is to receive oral arguments, but in the event that a party cannot attend to do that, we will accept written arguments. We would rather avoid the situation where we receive a written argument that is spoken to, in other words, two different contexts related to an argument, one in transcript and one that is written. But thank you. And if there are any other parties that are in that situation, perhaps they could advise the Board Panel before we get too far into it. 50 MR. POCH: Thank you very much, Mr. Chairman. 51 MR. SHEPHERD: Mr. Chairman, I'm in a similar position, I'll be actually 20,000 kilometres away, so I'll have an even more difficult time. But we'd be pleased to file written argument, if that is acceptable. 52 MR. BETTS: That will be quite satisfactory, thank you. 53 MS. STREET: Mr. Chair, I'm afraid in the same position in that I'm committed to teach at Osgoode on those days. I'll see what I can do about rearranging my schedule, but if not, we will be filing written argument as well prior to those dates. 54 MR. BETTS: And that would be a suitable reason as well, Ms. Street. So wherever possible, we'll be asking people to present that orally. If that's not possible, it is understood that we will accept these kinds of reasons for written arguments. 55 Anything further? 56 I think, then, we're ready to move to the evidentiary portion of today's activities, and the first panel will be called by who? 57 MR. O'LEARY: The panel being called is by the company. 58 MR. BETTS: Thank you. 59 MR. O'LEARY: And perhaps I could introduce the two panel members. 60 MR. BETTS: I recognize some faces and I recognize that they shouldn't be here representing the intervenors, so please proceed. 61 MR. O'LEARY: Closest to the panel is Susan Clinesmith, and to her right is Norman Ryckman, if I could ask for these witnesses to both be sworn. 62 MR. BETTS: Thank you. Ms. Nowina will do that. 63 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DSM BOILER ISSUE - CLINESMITH, RYCKMAN: 64 S.CLINESMITH; Sworn. 65 N.RYCKMAN; Sworn. 66 MR. BETTS: Thank you. The panel has been sworn in. 67 MR. O'LEARY: Thank you, Mr. Chair. I should before starting to ask any questions and to have the evidence adopted, indicate why this panel is here, perhaps, in response to your initial inquiry. The settlement proposal deals with the DSM plan for fiscal 2005 at pages 32 through 34 of the settlement agreement which was accepted by the Board. Specifically remaining is the item raised by Pollution Probe, and it's set out at page 33 of the settlement proposal, which states as follows: 68 "Pollution Probe accepts the above terms but seeks a Board direction for the following additional items: 69 "That the company propose and obtain approval for a commercial, institutional and industrial large boiler market transformation program and shareholder incentive prior to January 1st, 2005; and that a budget increase or deferral account be created for the costs associated with any such direction." 70 The panel, sir, is here to assist the Board in respect of any questions it may have or intervenors may have with respect of the sole remaining issue, and I guess there really are two issues; one is the program itself and the second is whether there's an incentive mechanism that's attached to this additional program. 71 The company's evidence in respect of DSM is filed at the A7 series of documents, and if I could first turn to Mr. Ryckman. 72 EXAMINATION BY MR. O'LEARY: 73 MR. O'LEARY: Can you tell me, Mr. Ryckman, whether the company's prefiled evidence and related interrogatory responses were prepared by you or under your direction and supervision? 74 MR. RYCKMAN: Yes, they were. 75 MR. O'LEARY: And do you adopt same for purposes of your testimony here today? 76 MR. RYCKMAN: Yes, I do. 77 MR. O'LEARY: Similarly, Ms. Clinesmith, can you tell me whether or not the evidence filed by the company and the interrogatory responses that the company has filed were prepared by you or under your direction and authorization? 78 MS. CLINESMITH: Yes, they were. 79 MR. O'LEARY: And do you adopt same for your testimony today? 80 MS. CLINESMITH: Yes, I do. 81 MR. O'LEARY: Thank you. I just have several very short questions to ask in chief. 82 First, could I ask each of you to describe what your role is with the company's DSM group, starting with Mr. Ryckman. 83 MR. RYCKMAN: Sure. My area of responsibility applies to planning and evaluation of DSM, so we look after the monitoring, the planning, facilitating the evaluation reports and also the audit aspects of DSM. 84 MS. CLINESMITH: My area of responsibility is my group looks after the design and development of programs to serve as the DSM requirements of our industrial, commercial and institutional customers. 85 MR. O'LEARY: Thank you. At page 33 of the settlement agreement, the position that the company took in respect of the Pollution Probe proposal in respect of this boiler market transformation program is set out, and it reads: 86 "Enbridge takes the position that the Pollution Probe proposal would require additional funding to overcome budget constraints, market barriers, and to pay for additional evaluation work." 87 The company also states that: 88 "If additional monies are to be expended for this program, they should be added to the budget and not recorded in a deferral account. Certain intervenors," and then they're listed, "oppose a further increase in the budget." 89 Could you please expand on what the company means by this particular position, and particularly the reference to the use of a deferral account. 90 MR. RYCKMAN: Yes. The company's position on this is that, while we're a signatory to the settlement agreement and we support that agreement, what we feel is that for this particular type of initiative, if it were to go forward, it would be appropriate to add it to the -- add it to the budget. Including it in a deferral account, I think, would create some uncertainty for the company as to the ability to recover those amounts. So what we'd like to do is have the initiative vetted in advance, if you will, and added to the budget if it's deemed appropriate to go forward with such an initiative. 91 MR. O'LEARY: Thank you. And should the Board approve a boiler market transformation program, can you give us an indication of how long the company believes it will require, in weeks or months, subsequent to the Board rendering a decision in this proceeding, to come up with and provide the Board and intervenors with a draft proposed market transformation program for boilers as requested by Pollution Probe. 92 MS. CLINESMITH: Subsequent to the Board rendering a decision to proceed with this, the company would require four months to develop a program with targets and time lines and an implementation strategy, and this would be developed in cooperation, conjunction, and consultation with the various intervenors, manufacturers, distributors, consulting engineers that are active in this market. And that time will be presented to the consultative group for further refinement. 93 MR. O'LEARY: Thank you, Ms. Clinesmith. 94 Mr. Chair, that's all the evidence in chief we have for this panel. It's now open for cross-examination. 95 MR. BETTS: Thank you, Mr. O'Leary. 96 Mr. Klippenstein, would you like to lead off cross-examination, or would you prefer that others do that? 97 MR. KLIPPENSTEIN: I'm happy to proceed at this time. 98 MR. BETTS: Please do. 99 MR. KLIPPENSTEIN: It may be helpful to have Pollution Probe's position on the table, so I'm happy to proceed now. 100 MR. BETTS: Thank you. 101 CROSS-EXAMINATION BY MR. KLIPPENSTEIN: 102 MR. KLIPPENSTEIN: Thank you, Mr. Chair. 103 Practicalities, first, I have preferred a cross-examination reference book, which I believe you have on the table before you, which collects, for convenience, documents that I propose to refer to, and some of that is already on the record and other pieces of it are not. But so far my understanding is that it's not controversial and that there's no objection to having this received for purposes of cross-examination. And unless there is such an objection, I might suggest that it be marked as an exhibit. 104 MR. BETTS: Thank you. That appears to be satisfactory to everybody? 105 Mr. Schuch. 106 MR. SCHUCH: Mr. Chair, that would be Exhibit K.6.1, Pollution Probe Cross-examination Reference Book: Large Boiler Market Transformation Program. 107 EXHIBIT NO. K.6.1: POLLUTION PROBE CROSS-EXAMINATION REFERENCE BOOK: DE-SEASONALIZATION 108 MR. SHEPHERD: Mr. Chairman, are there copies of this exhibit for other parties? 109 MR. KLIPPENSTEIN: Mr. Chairman, I made quite a few copies, but I suspect I don't have enough for everybody. Perhaps I can loan another -- oh, there are some extras appearing. Thank you. 110 MR. BETTS: I'd like to make sure that everyone feels they need one has access to one. Who is in the situation of not having a copy of that that feels they should have one? Just one party at this point. 111 MR. SCHUCH: Mr. Chair, I think there's an extra copy here for loan. 112 MR. BETTS: Okay. Let's do that. I'd ask you, Mr. Klippenstein, to ensure that everybody gets a copy of that as soon as practical. 113 MR. KLIPPENSTEIN: Certainly. If anyone would like one, please let me know and I'll make some more available. 114 MR. BETTS: Thank you. You may proceed. 115 MR. KLIPPENSTEIN: Thank you. 116 Mr. Ryckman and Ms. Clinesmith, thank you for your opening comments about the -- some of the implications of what Pollution Probe will be proposing. Just for clarification, you mentioned that if, in fact, the Board saw fit to direct the company to consider the idea Pollution Probe is tabling, that there to be a time span, I think four months was mentioned, in order to have it in draft form, in other words, a large boiler market transformation program. And as I understand it, during that time period, you've suggested you would, for example, work with the DSM consultative that's already in place to assist you in getting ideas and fine tuning such a proposing. Was that what you were thinking of? 117 MS. CLINESMITH: Yes, that's part of the plan. 118 MR. KLIPPENSTEIN: And you mentioned also, I think, manufacturers and other stakeholders, that you would want to talk to for getting input for making the program in a presentable form for the Board. Is that what you had in mind when you mentioned that? 119 MS. CLINESMITH: Yes. 120 MR. KLIPPENSTEIN: Thank you. That was just for clarification purposes. Just so my hidden agenda is perfectly clear, what I propose to question about this morning is this program that Pollution Probe is suggesting would be worthwhile for the Board to consider, notwithstanding the settlement agreement for reasons I'll get into in cross-examination, and I'll be asking about the possibility of additional large bill savings for commercial and industrial and institutional customers as something that is available on top of the existing settlement proposal. 121 If you could retrieve the document book I had put before you, which is Exhibit K.6.1, and for starters turn to tab 1, which is entitled "Remarks by the Honourable Dwight Duncan, Minister of Energy to the Ontario Energy Association, Energy Management, DSM Management Forum and Trade Show," on April 26th, 2004. If you could turn to page 16 of that document. I'd like to direct your attention to several aspects of these remarks as a context for the questions that I will follow with. 122 At the top of page 16, in the first paragraph, the last two sentences say this: 123 "We will be looking at all options. One thing I do know for sure is that conservation is central to the McGuinty government's energy policy." 124 Now, I'm going to look at several other parts of this presentation, but would you agree with me that in reviewing the present DSM proposal and Pollution Probe's additional proposal, it would be useful for the Board to consider this kind of statement of government policy? Would you agree that that's a useful context? 125 MR. RYCKMAN: Yes. 126 MR. KLIPPENSTEIN: Turn with me also, if you would, to page 5 of the same document. The second paragraph is one sentence, and it says: 127 "We are the first government ever to put demand-side management and new generation on an equal footing." 128 Do you see that? 129 MR. RYCKMAN: Yes. 130 MS. CLINESMITH: Mm-hm. 131 MR. KLIPPENSTEIN: Before I ask a specific question, I'd also ask you to turn to page 6, and the bottom paragraph of that page says: 132 "It is the belief of this Minister, and of the McGuinty government, that conservation, including energy efficiency and demand-side management, is one of the single most important things we can do over the long term with respect to our power supply." 133 And finally, if you would turn to page 9 of those remarks, to the top of the page, the Minister says: 134 "Our government is taking bold action to help make Ontario a world leader in conservation." 135 Now, I point those out to you because, as the company's counsel has made clear, there is a settlement proposal on the table which the Board has accepted and Pollution Probe is asking for something that's additional to that. Would you agree with me that, given the government's expressed and serious concern about conservation and DSM as in the comments I've just put forward, that it's reasonable for the Energy Board in this hearing to take a close look to see whether there are any further conservation opportunities that would be sensible and desirable? 136 MR. RYCKMAN: Yes, I would agree that there are opportunities that exist outside of the DSM plan that's been approved and they're worthwhile to investigate, absolutely. 137 MR. KLIPPENSTEIN: And presumably if this Board in this hearing sees fit, in addition to what's in the settlement proposal, to make specific direction for a proposal that the Board deems desirable and sensible, Enbridge would willingly cooperate with that, I would presume? 138 MR. RYCKMAN: Yes, we're supportive of exploring this option further, and certainly we're in the Board's hands in terms of the direction they would like to take. 139 MR. KLIPPENSTEIN: Thank you. If you could turn to tab 3 of the document book, which is a report prepared by Chris Neme, and if you could turn to page 3 of that report -- sorry, page 9 first. I would just like to draw your attention and the Board's attention to one of the comments which I've highlighted on page 9 under the heading "Industrial Custom Projects." The second and third sentences say: 140 "The company has about 7,200 industrial customers. Fewer than 10 percent of those customers have participated in Enbridge's DSM programs since it began DSM efforts a decade ago." 141 Would you accept that statement as approximately accurate in terms of the numbers in the percentage? 142 MS. CLINESMITH: Those are the numbers that have been filed in evidence, yes. 143 MR. KLIPPENSTEIN: Okay. And to compare that to the other non-industrial sectors, turn to page 3 of the same document, at tab 3. And at the paragraph at the top of the page, the last few sentences say: 144 "Even if there have been small increases in rates, any such increases have been mitigated, at least in the residential sector, by the fact that a large majority of at least some of Enbridge customer classes, for example, probably between 85 percent and 95 percent, have participated in at least one of its DSM programs." 145 Do you accept that approximation of 85 to 95 as a fairly accurate description of the percentage of residential customers who have participated in DSM? 146 MR. RYCKMAN: Yes. 147 MR. KLIPPENSTEIN: So when I take those two numbers, it seems to me that the level of participation in the industrial sector of something like 10 percent is far lower than the level of participation in the residential sector of something like 85 to 95; is that fair? 148 MS. CLINESMITH: Yes, that's fair. 149 MR. KLIPPENSTEIN: And the reason I raise that is that would seem to suggest that there's some prima facie possibility that those participation rates would be open to some increase in the industrial sector given the large difference; and I say that without ignoring that there may be problems there, but it looks like there's some possible room to grow there; is that fair? 150 MS. CLINESMITH: That's a fair assumption. 151 MR. KLIPPENSTEIN: If you could turn to tab 5 of the document book, which contains an information request from the Pollution Probe consultant, and Enbridge was asked: "What is the volume consumption of large boilers in Enbridge's franchise area?" 152 And the answer on the document -- or that we received, was a total of 3.3 billion cubic metres. Do you see that answer? 153 MR. RYCKMAN: Yes. 154 MR. KLIPPENSTEIN: Is that accurate as far as you know, approximately? 155 MS. CLINESMITH: Yes. 156 MR. KLIPPENSTEIN: And if I compare that to Enbridge's forecast total gas throughput in fiscal 2005, and that's at tab 2, page 11 of the ADR agreement, about the middle of the page: 157 "The parties agree that a volume budget of approximately 12.3 billion cubic metres is appropriate for fiscal 2005." 158 Is that right? 159 MR. RYCKMAN: Yes. 160 MR. KLIPPENSTEIN: And if I take those two numbers, the 3.3 billion cubic metres as a percentage of this overall volume budget, my math says that large boilers are responsible for approximately 27 percent of the gas consumption in Enbridge's franchise area; is that fair? 161 MR. RYCKMAN: Yes. 162 MR. KLIPPENSTEIN: So what we have here is approximately a quarter of all gas used being used by large boilers and the participation rate in DSM programs in that sector is dramatically lower than what Enbridge has been able to achieve in other sectors; is that fair? 163 MS. CLINESMITH: Yes, that's fair. 164 MR. KLIPPENSTEIN: If you could turn, then, to Mr. Neme's evidence again, which was at tab 3 and page 3, the paragraph that I've also marked under the heading -- under heading D says: 165 "As I have noted in previous testimony before the OEB, to date the company has focused its DSM efforts very heavily on retrofit savings opportunities. Put another away, with very few exceptions, the company has historically invested very little in key lost opportunity markets, such as new construction and equipment replacement. Moreover, they have historically not made long-term market transformation an important goal of their efforts." 166 I don't raise this to be critical of the company but to focus on the reference there to key lost opportunity markets, such as new construction and equipment replacement. Now, would you agree that it's possible to have programs for large boilers that fit within that category that would involve the company assisting players out there in industrial and commercial and institutional markets to adopt high-efficiency, large boilers at those key times when there's new construction or equipment replacement, so that a large boiler program could fit within that description; is that fair? 167 MS. CLINESMITH: Yes, that is fair. 168 MR. KLIPPENSTEIN: And -- 169 MR. RYCKMAN: I'd just like to add to that if I can, though, because the company has included amounts in budgets in previous plans for market transformation, but certainly not a significant amount in effort. So it's not to say that it's been ignored, but there certainly has been pressure to deliver short-term volumetric savings as opposed to longer-term market transformation initiatives. 170 MR. KLIPPENSTEIN: Is it fair to say that - and you've mentioned the term "long-term market transformation" which appears here as well - what we're talking about is, in one sense, grabbing a large opportunity when it presents itself because these large boilers, which consume a quarter of all the gas, aren't replaced every few years; they're a long-term thing and large scale and often a little bit tricky and expensive. So it's a thing that has to be seized when it's there; is that fair? 171 MS. CLINESMITH: Yes, that is fair. The average life of a boiler is somewhere between 25 and 30 years, and we have been active in replacing boilers over the past few years. But when -- and the occasion has arisen when we're working with our customers. For example, this year we have a very aggressive target of boilers, whether they be replacement boilers or new boilers, that are energy efficient. 172 MR. KLIPPENSTEIN: It's a little sobering to think I'm arguing here this morning for boilers that will be around after I'm dead, but hopefully we put good ones in. 173 You've mentioned that the long-term market transformation idea that appears here is a little bit different than some of the programs you've tried so far, largely; is that fair? 174 MR. RYCKMAN: Yes, I think that's fair. 175 MR. KLIPPENSTEIN: And let me just ask a bit about those differences between the programs. High-efficiency boilers, large boilers, would be a very expensive item and a company would want to be careful about choosing a high-efficiency boiler when the technology is a little bit newer than the same old basic boilers that have been used for a while; is that fair? 176 MS. CLINESMITH: I think that depends upon which market you're particularly talking about, because there is a difference between an industrial boiler, which is steam, and a commercial boiler, which is hydronic. So the investments are great in both of them, but they are larger in the industrial area. 177 MR. KLIPPENSTEIN: In that situation, is it fair to say that a market transformation program can work because the company can benefit greatly from a program by Enbridge that would help provide information and put them at ease about this large investment they're making that hopefully will pay off in high efficiency, but they might look to the company for some credible focused information; is that fair? 178 MS. CLINESMITH: Yes, that's fair. 179 MR. KLIPPENSTEIN: If I can ask you to turning to page 4 of Mr. Neme's testimony. The fourth bullet point on that page 4 says: 180 "Although they are often more expensive to address in the first year or two because of the effort required to build a program infrastructure and acquire the interest and trust of trade allies, in the medium and long term, at least, some lost opportunities markets offer very inexpensive savings, particularly through market transformation, potentially even less expensive than the cheapest retrofit savings." 181 Would you agree with that description by Mr. Neme? 182 MR. RYCKMAN: Yes, I would, in terms of lost opportunity markets. If you think of it in the context of a residential home, it's probably less expensive to upgrade the insulation at the time of construction, rather than trying to do it much later. 183 MR. KLIPPENSTEIN: Thank you. If I can ask you to comment a little bit on some of the more specifics, if you would turn to tab 4 of the document book, which is a report prepared by Jacques Whitford Environment Ltd. and others. As I understand it, this report was prepared for Enbridge and Union Gas; is that right? 184 MR. RYCKMAN: Yes. 185 MS. CLINESMITH: Yes. 186 MR. KLIPPENSTEIN: If you could turn to page 45, which I've excerpted there. 187 Now, this page deals only with one subsegment, I would think, of the large boiler market because it talks about commercial boilers for space heating; is that fair? 188 MS. CLINESMITH: Yes, that's correct. 189 MR. KLIPPENSTEIN: And under the heading in the middle of the page which says "Baseline Reference Case and Efficiently Assumptions," the first bullet point that says it's referring to "Baseline reference case is for a typical average commercial multiresidential or industrial building using hot water for space heating." 190 The third bullet point says: 191 "Base case technology is an atmospheric boiler or boiler operating at less than 84 percent combustion efficiency or less than 80 percent thermal efficiency." 192 Now, do you accept that number as an approximation -- a reasonable approximation of a baseline scenario; in other words, boilers in that setting working at something less than 80 percent thermal efficiency? Is that a fair kind of summary? 193 MS. CLINESMITH: Yes, we accept that. 194 MR. KLIPPENSTEIN: Then the next bullet point describes an alternative type of boiler, and that's just one type of boiler, I don't imagine it's the only one or suitable for all applications, but at the end of that bullet point, it says: 195 "Condensing boilers typically operate at combustion efficiency levels greater than 90 percent." 196 Is that accurate, in your understanding? 197 MS. CLINESMITH: Yes, that is. 198 MR. KLIPPENSTEIN: Now -- 199 MR. BETTS: Mr. Klippenstein, would you forgive me if I just asked a question so I can understand. 200 MR. KLIPPENSTEIN: Please. 201 MR. BETTS: I would just like someone to define for me what you're meaning by the term "baseline case," or perhaps the witnesses can answer that. But I would like to get a definition of that. 202 MR. KLIPPENSTEIN: Sure. 203 If the witnesses can elaborate on that. 204 MS. CLINESMITH: In this study, the baseline was referred to as what is the market standard practice at the time that the study was conducted, and baseline was determined to be your typical atmospheric equipment. So in 1999, the average was atmospheric equipment. 205 MR. BETTS: Would that suggest that there were units in operation that were less efficient than that? This doesn't necessarily establish the least efficient. 206 MS. CLINESMITH: No, it does not establish the least efficient, and for sure that there are -- there were then still boilers that were less efficient than 80 percent. 207 MR. BETTS: Okay. Thank you for that clarification. I apologize for the interruption. 208 MR. KLIPPENSTEIN: Thank you. That's very helpful. 209 And to follow that thought perhaps one step further, I would imagine that at that time, and indeed now, given the lifetime of boilers of 20 or 30 years, there are probably some boilers still out there operating on somewhat less efficiency than that and probably getting near the end of their life; is that fair? 210 MS. CLINESMITH: Yes, that's fair. 211 MR. KLIPPENSTEIN: So some of those would be running at quite a bit less efficiency even in that percentage; is that fair? 212 MS. CLINESMITH: Yes. 213 MR. KLIPPENSTEIN: If you turn to page 48 of that same report, at tab 4, near the bottom there's a paragraph entitled "Percentage of Sales by Type," and the last sentence says: 214 "Condensing units make up less than 5 percent of the market and continue to face the challenge of high capital cost." 215 Now, I understand that to say that these higher-efficiency large boilers that we were looking at, the condensing type of some having in excess of 90 percent efficiency, make up less than 5 percent of the market at the time of this report. Does that sound reasonable, according to your knowledge? 216 MS. CLINESMITH: Yes. Referring to condensing boilers making up about 5 percent of the market is reasonable; however, there are other high-efficiency boilers that are not condensing boilers. 217 MR. KLIPPENSTEIN: So as I said when I picked the condensing boiler example, that's just one type of higher-efficiency -- 218 MS. CLINESMITH: High-efficiency boiler, yes. 219 MR. KLIPPENSTEIN: But the 5 percent figure would reasonably suggest that there's room to grow there, and would identify here one of the problems which is the high upfront cost; is that fair? 220 MS. CLINESMITH: Yes, there is room to grow, and it does have a high upfront cost. It must be designed into a new facility. 221 MR. KLIPPENSTEIN: And when you say "designed into a new facility," does that mean that there's room for a program in which the company, and probably you're already doing some this, assists upfront at the very beginning when a company is planning a new plant or a major upgrade, and a high-efficiently boiler requires -- I think condensing boilers require a different kind of pipe because the condensing process corrodes copper so you need plastic instead, or stuff like that. That would require some upfront design considerations; is that right? 222 MS. CLINESMITH: That's correct. And the company does have a high-efficiency boiler program where we do assist our customers that are going to condensing boilers through an incentive plan and through the expertise of our energy solution consultants. 223 MR. KLIPPENSTEIN: Was I right about the copper pipe? 224 MS. CLINESMITH: Yes, you were. 225 MR. KLIPPENSTEIN: Okay, good. So that, if I may suggest to you, would be an area that would be right for a market transformation program, in other words, the condensing boiler option for institutions and industries and commercial settings; is that fair? 226 MS. CLINESMITH: Yes. That has a lot of opportunity. 227 MR. KLIPPENSTEIN: Now, the ADR agreement right now does have a market transformation program built in, but that's with respect to windows; right? 228 MS. CLINESMITH: Yes, it is. 229 MR. KLIPPENSTEIN: And that one, I can turn you to it if you wish, but the goal of that program is to increase the market share of high-efficiency windows by 10 percentage points; do you recall that? 230 MS. CLINESMITH: Yes. 231 MR. RYCKMAN: Yes. 232 MR. KLIPPENSTEIN: So it's not as if the company is saying, We don't like market transformation programs, we're unwilling to do them. The opposite is true. You're prepared and interested in doing one in the windows sector, for example; is that right? 233 MR. RYCKMAN: Yes, that's true. I think market transformation can be a very good complement to our existing portfolio of programs. 234 MR. KLIPPENSTEIN: Now, would it be reasonable to suggest, if indeed the Board is willing to consider or direct such a program, that the goal of such a large boiler market transformation program could, for example, be to raise the market share of high-efficiency large boilers in the commercial and institutional and industrial boiler replacement markets by something like 10 percentage points or 20 percentage points over a couple of years? Would that be sort of the type of goal that would be a way to focus such a program? 235 MS. CLINESMITH: That would be one way of focusing the program, although I might not want to restrict it to replacement boilers. I'd like to also focus on new boilers in new facilities. 236 MR. KLIPPENSTEIN: Right. 237 MR. RYCKMAN: And I think any plan would have to assess the reasonableness of that change. 238 MR. KLIPPENSTEIN: Of course. But impressionistically, from your experience, it doesn't seem unreasonable to aim for a 10 or 20 percent increase in that market as a sort of an initial target to be looked at, obviously? 239 All I'm saying is we're not looking at half a percentage point or 1 percent here. We're talking a little more bit ambitious as the realistic possibility, is that fair? 240 MS. CLINESMITH: A realistic possibility, but we would really like, as part of the plan, if the Board so directs us, to evaluate the potential, whether 10 percent is a reasonable, doable, achievable goal within a period of time, given the fact that planning for replacement of boilers and the actual manufacture, installation, and commissioning of a boiler sometimes takes more than a year. So we would really want to consider the amount of transformation. 241 MR. KLIPPENSTEIN: Now, is it fair to say that a well-designed, large boiler program could likely offer significant bill savings for those commercial and institutional and industrial customers? 242 MS. CLINESMITH: Yes, that's a fair statement. 243 MR. KLIPPENSTEIN: And that would decrease the operation costs of some of these large institutions and industries and businesses; is that fair? 244 MS. CLINESMITH: Yes. 245 MR. KLIPPENSTEIN: And essentially would help preserve jobs in Ontario, for example. Is that part of the spin-off effects? 246 MS. CLINESMITH: Yes, it would contribute to their productivity. 247 MR. KLIPPENSTEIN: And when we talk about this sector, is it fair to say that this would include schools, for instance? 248 MS. CLINESMITH: Yes. 249 MR. KLIPPENSTEIN: And universities? 250 MS. CLINESMITH: Yes. 251 MR. KLIPPENSTEIN: And hospitals? 252 MS. CLINESMITH: Yes. 253 MR. KLIPPENSTEIN: And social housing apartments? 254 MS. CLINESMITH: Yes. 255 MR. KLIPPENSTEIN: And public libraries, for instance? 256 MS. CLINESMITH: All municipal buildings. 257 MR. KLIPPENSTEIN: Other municipal buildings as well? 258 MS. CLINESMITH: Yes. 259 MR. KLIPPENSTEIN: Now, I just read to you a comment from the Ontario Minister of Energy which says that the government -- let me read it again, that: 260 "The government is taking bold action to help make Ontario a world leader in conservation." 261 Would you agree with me that a carefully thought out large boiler transformation program is consistent and supportive of that because it does help move towards leading edge conservation; is that fair? 262 MS. CLINESMITH: Yes, that's a fair statement. 263 MR. KLIPPENSTEIN: Let me direct some questions to some of the budget context, for instance, for the possibility of such a program. 264 If you turn to tab 3 of the reference book, again, this is the evidence of Chris Neme, at page 8 there's a number of bullet points, and this question is directed specifically to the idea that what Pollution Probe is asking for would, in the company's opinion, require an addition to the budget. 265 The second bullet point says: 266 "Enbridge's proposed 2005 budget represents only about .5 percent of its projected revenues." 267 I think that's the DSM budget represents half of 1 percent. Do you agree that that's approximately correct? 268 MR. RYCKMAN: Yes. 269 MR. KLIPPENSTEIN: And then Mr. Neme says: 270 "In contrast, a study commissioned by Enbridge suggests that DSM funding levels for gas DSM average 1 percent." 271 And I understand that to refer to the general North American average; is that your accurate in your understanding? 272 MR. RYCKMAN: Yes. 273 MR. KLIPPENSTEIN: And indeed, he continues: 274 "Moreover, the same study makes clear that the most aggressive gas DSM efforts in Vermont, New Hampshire and Massachusetts, spend three to four times what Enbridge has proposed to spend." 275 Does that sound accurate to you? 276 MR. RYCKMAN: I'm not sure on the calculations he did to support that, but if you gross up the spending proportionately, it would be in line with that statement, yes. 277 MR. KLIPPENSTEIN: So if the program that Pollution Probe is suggesting the Board consider does require some additional budget, it is not likely to push Enbridge's DSM budget out of whack from what's happening elsewhere; is that fair? 278 MR. RYCKMAN: Yeah, I think that's fair. The one word I guess I picked up on is, if it required budget. I mean, this type of initiative would require a budget. 279 MR. KLIPPENSTEIN: But in fact, if you look at those numbers in the context of the current government's efforts on conservation and leadership, there would appear to be quite a bit of room in the DSM budget proportion to move Enbridge farther towards a leadership position; is that fair? 280 MR. RYCKMAN: In the terms of those parameters, yes. 281 MR. KLIPPENSTEIN: Now, just by comparison, if you look on the same page at the third bullet point, I refer to the sentence: 282 "The 225 million allocated by the provincial government for the first year of electric DSM in Ontario represents approximately 2 percent of annual electric utility revenues." 283 So even in Ontario here, in the electricity side, the DSM budget proportion is around 2 percent there. First of all, do you accept that as reasonable based on your knowledge, that it's probable a correct number? 284 MR. RYCKMAN: From everything I've seen and read, that appears to be a correct number. What I don't have a strong sense for is what that money would be allocated towards. That is, is it an annual operating budget or is there a portion of start-up costs, plus an operating budget. Those are the numbers that I'm familiar with, yes. 285 MR. KLIPPENSTEIN: Even given that qualification, would you agree that it's reasonable for the Board to review a possible additional budget allocation for a large boiler program given that in the rest of Ontario, in the electricity side, the DSM proportion seems to be higher than is present for Enbridge? 286 MR. RYCKMAN: It would be reasonable to review a proposal, yes. 287 MR. KLIPPENSTEIN: And indeed, probably reasonable to allocate some additional funds, would you agree, given that context and the government's statements? 288 MR. RYCKMAN: Yes, I mean, based on everything we know at this time, absolutely. 289 MR. KLIPPENSTEIN: Finally, if you could turn to tab 6 of the reference book. Not quite finally. We lawyers sometimes think that we can keep up the flagging interests of the Board if we say, and for my last point, and keep saying for my last point, for my last point. 290 This document is a Province of Ontario news release, and let me read the first sentence of it. It says: 291 "Minister of Education, Gerard Kennedy, today announced the Ontario government will help fund $2.1 billion worth of essential major repairs and renovations to Ontario's publicly-funded schools." 292 And the release is dated May 25, 2004. I've also highlighted a couple of paragraphs further down. 293 "'Our students need school that will help them to learn,' Premier Dalton McGuinty said. 'Too many students have been left in crumbling buildings that do not meet the proper standards of safety and comfort. We are going to fix that. Boards will be notified of their allocations shortly. Funds will flow in the 2005-2006 school year to permit the significant planning required for such a major renovation of school space.'" 294 Now, would you agree with me that those kinds of major renovations are likely to include new large boilers for some of these schools? 295 MS. CLINESMITH: Yes, I would agree with that. 296 MR. KLIPPENSTEIN: And therefore an Enbridge large boiler market transformation program that gets moving quickly could dovetail very nicely and very importantly with these billions of dollars being allocated to schools who will now be in a position of studying, among other things, new boilers; is that fair? 297 MS. CLINESMITH: That's fair. 298 MR. KLIPPENSTEIN: And indeed, if Enbridge doesn't move quickly, this will be a classic example of very large amounts of money being spent probably without high-efficiency large boilers being adequately studied or considered; is that fair? 299 MS. CLINESMITH: We are actively involved with the School Energy Coalition and several school boards already to ensure that things like that are on the table. 300 MR. KLIPPENSTEIN: And would you agree that a large boiler market transformation program would only help that process? 301 MS. CLINESMITH: It would definitely help the process. 302 MR. KLIPPENSTEIN: Now, what Pollution Probe is proposing is that the Board direct the company to develop a proposed commercial and institutional and industrial large boiler market transformation program which can be implemented beginning January 1st, 2005, and as part of that, Pollution Probe is suggesting that the company seek approval in the fall of this year for such a proposed program and a budget for that. And what I've just put to you is one rationale and one reason for moving somewhat quickly and taking this opportunity. Is it possible, in a general way, for the company to do that, in other words, to prepare such a program to put forward to the Board this fall, leaving aside for a moment, and I'll get into them, the procedural questions? 303 MS. CLINESMITH: That is possible, if we were directed to do so immediately -- starting immediately. 304 MR. KLIPPENSTEIN: And by immediately, you don't mean this afternoon. 305 MS. CLINESMITH: Yes. No. 306 MR. KLIPPENSTEIN: Although that's a possibility, too, I would imagine. 307 And Pollution Probe is also suggesting that in order to maximize the benefit of such a possible program, that it would include a shareholder incentive. And am I right in thinking that if Enbridge is looking at the other parts of the program, it could also study a possible shareholder incentive as part of that? 308 MS. CLINESMITH: Yes. 309 MR. KLIPPENSTEIN: Now, one scenario procedurally that Pollution Probe has thought about is that if the Board directs such a proposal be prepared, that Enbridge could consult with the DSM consultative and the other parties you mentioned, and that there maybe be a half-day ADR held and then subsequently a hearing in writing, for example, is one possible procedural approach. Would that be a workable system as far as you can see, procedurally? 310 MR. RYCKMAN: I'm not familiar with what the procedure would be. I haven't experienced this type of, I guess, issue coming forward in this way. Whatever the process is, I mean, we're in the Board's hands on that issue as well. One thing that I would hope is that it would be an effective and efficient process, so those are really my concerns. 311 MR. KLIPPENSTEIN: But I understand you're not either the decision-maker on the Board's procedures or, you know, experts in the Board procedures, although you may well be. But what I've just suggested sounds practically workable, from your point of view, in other words, have a consultation including the consultative, and then a half-day ADR and then a written hearing? From your practical point of view, does that sound like it would get you what you need; is that fair? 312 MR. RYCKMAN: It could work. That would entertain other opportunities as well. 313 MR. KLIPPENSTEIN: Finally, if you look at tab 5, a question was put to Mr. Poff of the company about the additional costs that might be involved in such a program, and his answer was that the program costs associated with the large boiler program would not be assigned to residential customers. Am I correct in understanding that a program such as this wouldn't be paid for by residential customers? 314 MR. RYCKMAN: Correct. 315 MR. KLIPPENSTEIN: Those are all my questions, Mr. Chair, subject to any clarifications the Board might seek. 316 MR. BETTS: Thank you. 317 Are there any intervenors that would -- I'd like to sort out who's taking what position with respect to this in advance, if I could, so that we can get -- we can get questions following a certain theme. So are there parties that would like to follow the same line of questioning as Mr. Klippenstein, which would be in support of the Board's consideration of this question? 318 MR. POCH: Mr. Chairman, clearly we're supportive of the whole notion, but we have no other questions. 319 MR. BETTS: Okay. Anyone else in that position? 320 MR. SHEPHERD: Mr. Chairman, we're sort of in the middle. 321 MR. BETTS: Okay, I'll accept that. Anybody else in support or on the middle position? 322 MR. DINGWALL: Regardless of our position, we'll have no questions. 323 MR. BETTS: Thank you. 324 MR. JANIGAN: We have no questions, Mr. Chair. 325 MS. STREET: I have no questions, Mr. Chair. 326 MR. BETTS: So, Mr. Shepherd, in the middle position you're taking, do you have questions? 327 MR. SHEPHERD: Briefly, Mr. Chair. 328 MR. BETTS: Then I think you're in a position to proceed. 329 CROSS-EXAMINATION BY MR. SHEPHERD: 330 MR. SHEPHERD: Does the test year, except for the discussion with respect to schools and other public sector replacement programs, does the test year -- do you expect in the test year to have an unusually large number of large boiler replacements in the province? 331 MS. CLINESMITH: With the exception of? 332 MR. SHEPHERD: With the exception of schools and other public infrastructure initiatives that we know about. 333 MS. CLINESMITH: We did increase our boiler participants, and it probably mostly be targeted towards the multi-res and commercial, not to the school and institutional sector. 334 MR. SHEPHERD: Sorry, that's not my question. 335 MS. CLINESMITH: I'm sorry. 336 MR. SHEPHERD: I'm going in a different direction. 337 MS. CLINESMITH: Okay. 338 MR. SHEPHERD: You have how many large boilers in the province, roughly? 339 MS. CLINESMITH: There's probably about -- in the province? 340 MR. SHEPHERD: In the Enbridge area, sorry. 341 MS. CLINESMITH: Well, in the -- in Enbridge area, there's probably around 1,300 to 1,400 large industrial boilers. I do not know how many boilers in the commercial, multi-res, institutional sector. 342 MR. SHEPHERD: Now, you would normally expect around 3.5 to 4 percent of them being replaced every year; is that -- 343 MS. CLINESMITH: That's a reasonable average, yes. 344 MR. SHEPHERD: is there any reason to think that the test year would be different from that 3.5 to 4 percent? 345 MS. CLINESMITH: Pardon me? 346 MR. SHEPHERD: Is there any reason to think that in the test year the number of replacements will be different from that 3.5 to 4 percent? 347 MS. CLINESMITH: No, there's no reason to think that. 348 MR. SHEPHERD: With the one exception that Mr. Klippenstein has pointed out, that there is a provincial government program to replace boilers, for example, in schools; right? 349 MS. CLINESMITH: Yes. 350 MR. SHEPHERD: Okay. So now that's a very special lost opportunity that arises in the test year that may not be available the next year; right? 351 MS. CLINESMITH: Yes. 352 MR. SHEPHERD: Okay. Now, what's being proposed is a market transformation program and that's not the same as an incentive program; right? 353 MR. RYCKMAN: Correct. 354 MR. SHEPHERD: In a market-transformation program, you try to raise people's awareness of the option available without actually handing them money to do it; right? 355 MR. RYCKMAN: Not necessarily. There can be cases where incentives can work in conjunction with a market- transformation program. So when you look at market transformation, you're not just looking at awareness; you might look at contractor skill sets, you might look at barriers around costs, you might look at some of the risks that contractors may face trying to embrace new technologies if they need new equipment to facilitate that. So there is a lot of things that come into play in market transformation other than just awareness. 356 MR. SHEPHERD: If you look at financial barriers, i.e., you deliver incentives, then that's an incentive program, it's not a market-transformation program; right? 357 MR. RYCKMAN: From my awareness, there are instances where incentive programs have worked in conjunction with market transformation, and certainly market transformation could occur as a result of incentive-type programs, so where, over time, they do change the market to a level where that is sustained once the incentives are withdrawn. 358 MR. SHEPHERD: If you just had a market-transformation program in this area, you wouldn't be giving anybody any money; right? Because then it would be an incentive program. 359 MR. RYCKMAN: I can't say that with great certainty. I think that would have to be part of the proposal that comes forward because rebates can serve a purpose of elevating market awareness and creating some interest out there. So whether that would be play a role in the final proposal, I couldn't say at this point. 360 MR. SHEPHERD: Ms. Clinesmith, it's true, isn't it, that the schools are generally very aware of what their options are in this sort of area, what their choices are between efficiency levels, et cetera. They have expertise in that area, isn't that true? 361 MS. CLINESMITH: To the best of my knowledge, they are very much aware. 362 MR. SHEPHERD: But their constraint generally is their own budget; isn't that true? 363 MS. CLINESMITH: Yes, they have competing demands for capital. 364 MR. SHEPHERD: And so why would a market transformation program be helpful in the particular example of school rehabilitation as opposed to an incentive program? 365 MS. CLINESMITH: To Mr. Ryckman's point, I don't think the two are mutually exclusive, and I think any proposal that we developed would have to take into consideration the significant role that incentives can play in accelerating a market transformation. 366 MR. SHEPHERD: Those are my questions, Mr. Chairman. 367 MR. BETTS: Thank you, Mr. Shepherd. Am I correct, then, that those are all the questions in cross-examination? We'll turn, then, to Board Staff. Any questions from Board Staff? 368 MR. SCHUCH: Board Staff has no questions, Mr. Chair. 369 MR. BETTS: And any questions in redirect, Mr. O'Leary? 370 MR. O'LEARY: No, Mr. Chair. 371 MR. BETTS: Thank you. 372 [The Board confers] 373 MR. BETTS: Mr. Sommerville. 374 QUESTIONS FROM THE BOARD: 375 MR. SOMMERVILLE: I just want to explore the subject matter that Mr. Shepherd raised with you, and that was the difference between a market-transformation program and an incentive program. Is it my understanding that you really recognize no difference between those two programs? 376 MS. CLINESMITH: I think we do recognize a difference in that we have been focussing on incentive programs in the past and have not really had a true theoretical market- transformation program. Moving forward, in looking at if we are directed to develop a market-transformation program for boilers, it is reasonable to assume that there would be an incentive portion of it. We do have incentive programs currently in place that address boilers, and to abruptly stop those might not be in the best interest of our customers. 377 MR. SOMMERVILLE: Right. So the plan that you would be developing would be one that had a market-transformation slant -- if you were directed by the Board, as sought by Pollution Probe, you would be developing a market-transformation program, and attendant to that would be the existing incentive programs or some new incentive programs that you would develop in connection with that; is that right? 378 MS. CLINESMITH: Yes. All of those items would be on the table when we start to develop a plan. 379 MR. RYCKMAN: I think that would have to be fleshed out. I mean, with market transformation you're trying to address market barriers, if you will, and what you hope to accomplish is to remove or reduce those barriers to the point where it's a sustained change in the marketplace or the way the market's behaving. So once you withdraw that intervention, if you will, that that change is sustained, once again, if that intervention is reduced, changed or withdrawn. So when you look at market transformation, you try to have that sustained impact, if you will. With the rebate program, quite often what you're trying to do is change the decision at that point in time and capitalise on that opportunity. 380 MR. SOMMERVILLE: In that connection, are you engaged in the marketing activity with respect to these boilers today, the two of you? 381 MS. CLINESMITH: The marketing activity by the manufacturers, no, we are not. But when our energy consultants meet with our customers, they do discuss high-efficiency boilers. 382 MR. SOMMERVILLE: And is that sort of a normal part of your interaction with those customers at times of replacement or refurbishment? 383 MS. CLINESMITH: Yes, we do offer them the more efficient choices and try to guide them in that direction. 384 MR. SOMMERVILLE: Thank you. Those are my questions. 385 MR. BETTS: Thank you. I have a couple as well. I'll follow up on Mr. Sommerville's line as well. 386 There was a reference to the fact that, I think it was in Mr. Neme's information, that 10 percent of the industrial customers participate in Enbridge's DSM program. I think I'm correct in saying that that doesn't suggest that those customers -- the remaining customers are not involved in a DSM program of some sort. 387 MS. CLINESMITH: The remaining customers are probably looking at energy efficiency measures without the involvement of the utility. 388 MR. BETTS: Okay, thank you. And that would either, I'm assuming, be with their own internal expertise or through other parties that are in the energy efficiency business; is that correct? 389 MS. CLINESMITH: That could be correct. 390 MR. BETTS: There was a point made about the amount of spending that will be done in terms of improving the nature and -- the nature of our schools right now, and I'm looking at the news release which was in tab 6 of Mr. Klippenstein's package. It does refer to $2.1 billion worth of essential major repairs and renovations. Mr. Shepherd said that the province has - and he may have been paraphrasing - but the province has established a program for the replacement of boilers at schools. Have you taken this statement of spending at the schools to be focused on boilers? 391 MS. CLINESMITH: No, we have not. Mr. Shepherd may have more knowledge of this program at this time than we do. 392 MR. BETTS: The third and final question: We've been asked to direct Enbridge to take action with respect to this opportunity. If no direction was provided, is it reasonable to assume that Enbridge would not pursue the opportunity or would not bring it forward in another DSM consultative? 393 MR. RYCKMAN: No, I don't think it's reasonable to assume that. One of the things that we've committed to in the settlement agreement is to come forward with a strategic plan, so a longer-term strategic plan for DSM, and I definitely would see something like this being included in that strategic plan if it didn't go forward sooner. 394 MR. BETTS: Can you help me remember when that plan was supposed to be presented? 395 MR. RYCKMAN: The plan was to be completed by January 1st of 2005, and we still have to work with the consultative on what we do with that plan once it's developed. The worst-case scenario would be the output of that would be incorporated into the 2006 rate case. 396 MR. BETTS: At this point, you feel it would be reasonable that there would be consideration of this program in that plan? 397 MR. RYCKMAN: There would be consideration, and then what would happen is that plan, if it was adopted, would require resources and funding that would have to be included in a proceeding so that we would have the resources to move forward with it. 398 MR. BETTS: Thank you. Those are all my questions. 399 Ms. Nowina. 400 MS. NOWINA: The last question prompted a question for me. Just for clarification, if we were not to give you a direction, then it might be or probably would be in the plan that's being discussed, the impact of that might be a year's delay in the implementation; is that fair to say? 401 MR. RYCKMAN: Yes. 402 MS. NOWINA: Which would miss the opportunity for the infrastructure improvements in the schools. 403 MR. RYCKMAN: There would be some lost opportunities as a result of that, yes. 404 MS. NOWINA: Thank you. 405 MR. BETTS: Thank you. 406 Mr. O'Leary, did that give rise to any need for redirect? 407 MR. O'LEARY: No, it did not, sir. 408 MR. BETTS: Thank you. Then we will excuse the panel. Thank you very much for your assistance and you, again, have helped us understand this more thoroughly. 409 Mr. Klippenstein, is there any intent to call a witness panel? 410 MR. KLIPPENSTEIN: No, that's the extent of Pollution Probe's evidentiary information at this time. 411 MR. BETTS: Thank you. So that, in fact, will conclude the Board's examination of the DSM matter, and it's, I think, an appropriate time to take a break so that we can allow the parties an opportunity to bring the next panel forward when we return. 412 We will recess now and return at 20 minutes past 11. 413 --- Recess taken at 11:00 a.m. 414 --- On resuming at 11:25 a.m. 415 MR. BETTS: Thank you, everybody. Please be seated. 416 Were there any preliminary matters that arose during our break? 417 MS. PERSAD: The only preliminary matter that I have, Mr. Chairman, is an undertaking response. 418 MR. BETTS: Thank you. 419 PRELIMINARY MATTERS: 420 MS. PERSAD: Undertaking J.5.2, the company was asked to provide documentation from the stakeholder meetings last fall regarding the sale and use of commodity in transactional services. 421 MR. BETTS: Thank you, Ms. Persad. Anything else? That was the only preliminary matter? 422 MS. PERSAD: That's the only one I had. 423 MR. BETTS: Okay. 424 MR. JANIGAN: Mr. Chairman, to follow up on that, I wonder if Enbridge is going to be putting out a CD with all the undertakings on it at the conclusion of the proceeding. 425 MS. PERSAD: Yes, we can do that, Mr. Chairman. 426 MR. BETTS: Thank you. 427 MR. JANIGAN: Thanks very much. 428 MR. BETTS: I believe, then, we're ready to begin the examination of the issues relating to rate design, and I believe they were in the 15s, 15.1 and 15.2. Ms. Persad, are you ready to proceed with that? 429 MS. PERSAD: Yes, we are, Mr. Chairman. 430 We have two witnesses to speak to these issues, Malani Giridhar, the Manager of Rate Research and Design, and Jackie Collier, Manager of Rate Design. I believe Ms. Collier is the only one that hasn't been sworn. 431 MR. BETTS: Thank you. Ms. Nowina will do that now. 432 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RATE DESIGN - GIRIDHAR, COLLIER: 433 M.GIRIDHAR; Previously Sworn. 434 J.COLLIER; Sworn. 435 MR. BETTS: Thank you. 436 MS. PERSAD: As you noted, Mr. Chairman, this panel is here to address the two rate design issues, issue 15.1 and 15.2, that did not result in a complete settlement at the settlement conference. I do note, however, that we did reach a partial settlement on those issues as the settlement proposal notes at pages 49 and 50 of the updated settlement proposal that was filed on June 22nd. 437 The first of these issues is 15.1, rate seasonality, and I do have a few questions in examination-in-chief. 438 EXAMINATION BY MS. PERSAD: 439 MS. PERSAD: Ms. Giridhar, was the evidence with respect to rate seasonality, set out at page 49 of the updated settlement proposal, prepared by you or under your direction? 440 MS. GIRIDHAR: Yes, it was. 441 MS. PERSAD: And do you adopt it for the purposes of your testimony? 442 MS. GIRIDHAR: Yes, I do. 443 MS. PERSAD: Could you please describe to the Board what the company's proposal is with respect to rate seasonality. 444 MS. GIRIDHAR: Sure. The company's delivery charges are currently seasonal in nature, by which I mean that they vary between two seasons, the winter and the summer, so we have higher delivery charges from the period December to March and lower delivery charges from the period April to November. The company's proposal in this proceeding is to eliminate that seasonal differential, which would mean that we would have uniform delivery charges applicable for the entire 12 months. And this evidence is described at Exhibit H1, tab 1, schedule 3, pages 1 to 3. 445 MS. PERSAD: And why are you proposing to eliminate seasonality in rates, and why should the Board approve of this change, in your view? 446 MS. GIRIDHAR: In our view, the benefits of eliminating seasonality outweigh any perceived advantages of keeping it, so if I could address the benefits first. 447 We have a quarterly rate-change mechanism due to which we have rate changes at least four times a year, sometimes five, and we produce two sets of rates for each such rate class, there are actually eight such rate classes, that many times of year. In effect, in three out of those four quarters, we only use one of those two sets rates because either these quarters fall entirely in the summer period or the winter period. There's only one quarter, the October quarter, where we actually have the summer rates apply for two months and then the winter rate apply for one month. 448 Essentially we go through the motions of designing two sets of rates four or five times a year but we only ever use them in that October quarter. 449 What this also means is that from a customer perspective, with every rate change notice that they receive every quarter, there's two sets of rates on that rate notice, and one of those is likely going to be superseded without being used at all, and this has been the case ever since the QRAM was instituted, so that also causes a certain level of confusion for some customers. So from a rate implementation perspective, we do believe that eliminating seasonality makes it easier for us. 450 Also, we happen to be the only Canadian gas utility, in our opinion, that still has rate seasonality in its delivery charges. We did a survey a little while ago and that was our conclusion from that survey. So these are the benefits from eliminating seasonality. 451 Going through the perceived advantages of keeping rate seasonality, the primary advantage that's perceived is that it aids conservation efforts, and the reason it's supposed to do so is because it sends a price signal that consuming in the wintertime is more expensive than consuming in the summertime, and that's also supposed to translate in terms of a bill impact on customers such that if they consume more in the wintertime, they end up paying more than otherwise. 452 Let's look at the materiality issue of this price signal. Rate seasonality was instituted in the late 1980s, and as mentioned in my evidence, that was in an era of fixed commodity prices. So essentially the natural gas commodity price was fixed and did not reflect market indices at that time. So one could argue that in that environment, having a seasonalized delivery charge was a material price signal. 453 It might also have been material in the context of the costs of the molecule itself. The commodity price was approximately 6 to 8 cents per cubic metre at various points in the '90s, and the seasonal differential for residential customers was 2 cents per cubic metre in 1991. Today, the seasonal differential for rate 1 is 2.5 cents per cubic metres, and the commodity charge in our latest QRAM application is 28 cents per cubic metre. 454 So I would suggest that from the point of view of materiality, things are quite different today than they were in the '80s and the '90s. 455 In addition, not only are we reflecting market prices for the commodity, we also update them four times a year, which means that we have more frequent reflection of market price changes in the way we cost and price our commodity. So then that, again, asks the question: Does rate seasonality with delivery charge necessarily communicate as effectively as changes in the commodity charge which reflect the market? 456 Finally, let's look at bill impacts from eliminating rate seasonality, and these were also provided at table 1, at Exhibit H1, tab 1, schedule 3. If you see that table, you'll see that there's a small bill impact on a percentage basis. On an annual dollar basis, I mean, if I were to translate those percentage impacts, what this amounts to for different load profiles in the residential rate class is as follows: If you were a water heater only customer, you would see an increase in your bill of 50 cents per month, and that constitutes actually approximately 1 percent of our residential customer base, that is, customers that only have a water heater and no other gas appliance. 457 If you look at a typical customer, that would be a customer that has a water heater and a furnace using natural gas, you would see an impact of 7 cents per month, so that's 7 cents on any one bill. And that would lead me to believe that if you were prompted to be conserving less gas or to use gas less wisely, in fact, you'd consume only one quarter of a cubic metre more before the 28 cent commodity charge would ensure that your price -- that your bill is actually higher. So from a bill impact perspective as well, I think that eliminating seasonality does not have a material impact from the conservation point of view. 458 We've also got -- answered some interrogatories -- one interrogatory that attests to the fact that eliminating rate seasonality does not make a big difference from the point of view making conservation choices in terms of whether you go for a mid-efficiency or high-efficiency furnace as well. 459 For all of these reasons, we think the perceived advantage of keeping rate seasonality in our delivery charge is just that, it's a perception, it's not really material. But on the other hand, from a rate implementation perspective, it makes life easier for us. 460 MS. PERSAD: Mr. Chairman, at this time I could proceed one of two ways. I do have a few questions for the panel on the second issue on the customer charge, but if you'd prefer to hear the cross-examination on that issue before I do the examination-in-chief, we could do that, or I could just ask the questions now and we could deal with the questions together. 461 [The Board confers] 462 MR. BETTS: Yes, please proceed and ask those questions and we'll allow the cross-examiners to deal with it in the same manner. 463 MS. PERSAD: Okay, thank you. 464 So the second issue is issue 15.2 and that is the company's proposed changes to the rate 1 monthly customer charge. 465 Ms. Collier, was the evidence in relation to this issue elicited on page 50 of the settlement proposal updated prepared by you or under your direction? 466 MS. COLLIER: Yes, it was. 467 MS. PERSAD: And do you adopt it? 468 MS. COLLIER: Yes, I do. 469 MS. PERSAD: Would you please explain to the Board, then, the company's proposal in this regard, and why you believe the Board ought to approve it in this case. 470 MS. COLLIER: Sure. As part of our 2005 rate case, the company undertook an extensive review of its cost allocation and rate design, and one of the elements that we looked at was the existing level of the residential monthly customer charge, our rate 1 monthly customer charge. 471 The company is proposing to increase the monthly customer charge for its rate 1 customers from -- currently it's at $10 per month and we're proposing to increase it to $11.25 per month. As our evidence states at Exhibit H1, tab 1, schedules 1 and 3, the existing monthly customer charge of $10 has been in place since the 2000 test year, so it has not been reviewed for a good five years. 472 Our monthly customer charge is designed to recover fixed costs which include customer-related costs, plant items, things like meters, meter-reading costs, as well as customer-related operating and maintenance costs, which include some customer care costs, billing, credit in question, et cetera. 473 When the customer charge is set at $10 per month, we recover approximately 50 percent of these customer-related costs, and it looks as though there is some intraclass cross-subsidization that occurs, because our customers in the rate 1 class are very homogeneous in the way that they take gas and incur the costs that we incur. Therefore, recovering these costs on a fixed basis is more appropriate. 474 The company's proposal to increase the charge to $11.25 a month results in approximately 60 percent of our customer-related costs being recovered through this charge, and this better reflects the manner in which these costs are incurred. Similar to the company's proposal to eliminate rate seasonality, our proposal is revenue neutral to the company in that the impacts are only impacting the customers in the rate 1 residential rate class. 475 MS. PERSAD: Ms. Collier, what is the expected bill impact on customers from the proposed customer charge increase? 476 MS. COLLIER: This can be found in our evidence at Exhibit H1, tab 1, schedule 3, page 4, and here we say that the bill impact varies depending on the amount that the customer consumes. 477 To the extent that we increase the amount recovered through the monthly customer charge, there's a corresponding decrease to the delivery charge of our rates, and that's how we stay revenue neutral within the rate class. Our delivery rates for our rate 1 customers are a declining block structure rate and it's recovered on a volumetric basis. 478 So therefore, for a high-volume customer within the rate class, they will actually see a decrease in their annual bill, while a small-volume customer would see a small increase in their bill. In most instances, you'll see, though, that the annual impact is very modest and, in fact, most times negligible. 479 To give some examples, for instance, a sales service customer, using natural gas with several applications, fire, water, heating, et cetera, and consuming approximately 5,048 cubic metres a year, would see a decrease of 0.5 percent, or about $9.80 a year. Customers on the small end who consume much less natural gas because perhaps they're only using it for water-heating purposes, they would -- on this example, it was a customer who consumes 1,081 cubic metres per year, they would see an increase of $9.48 per year which translates to about 79 cents per month. 480 And finally, for our typical residential which is also the benchmark on which we discuss rate increases or decreases, these customers consume about 3,064 cubic metres a year, and they will see a decrease in their annual bill of about 74 cents a year, or 6 cents a month. All of these impacts are displayed in a chart at interrogatory response -- or Exhibit, I should say, I, tab 9, schedule 88, part C. 481 MS. PERSAD: Thank you, panel. Those are all the questions I have. 482 MR. BETTS: Thank you. 483 Could I have an indication from parties who would like to cross-examine this panel in the supportive mode for the company position? Mr. Shepherd. Are there any other parties? Mr. Janigan? 484 MR. JANIGAN: I'm sorry, I misheard your question. 485 MR. BETTS: Okay. So I believe Mr. Shepherd first and then we will have cross-examination by parties who oppose that position. 486 MR. SHEPHERD: Mr. Chairman, Mr. Janigan and Mr. Poch have asked me if they can precede me because of other commitments. I'm happy for them to do that. I only have a short cross, about 15 or 20 minutes. Go ahead? Okay. 487 MR. BETTS: Thank you, gentlemen, for working that out. Please proceed, Mr. Shepherd. 488 CROSS-EXAMINATION BY MR. SHEPHERD: 489 MR. SHEPHERD: I only have questions on the seasonality issue. 490 Can you tell us, Ms. Giridhar, what the actual incremental cost to serve in the winter as opposed to the summer is? Do you know what it is? 491 MS. GIRIDHAR: I can tell you the costs that drive meeting demand -- higher demand in the winter time. They would include costs such as storage, they would include costs such as peaking supplies -- sorry, peaking supplies to meet winter demand, so on and so forth. 492 Now, in terms of storage costs alone, on an annualized basis they are approximately 1 cent per cubic metre. 493 MR. SHEPHERD: Now, some of these costs are not in the distribution charge; right? They are in the load -- 494 MS. GIRIDHAR: That's right. Anything that's gas-cost-related is recovered through the commodity charge if it's gas supply related, and the load balancing charge if it relates to load balancing. So any discretionary supplies, delivered supplies, peaking supplies, would be recovered in the load balancing charge, as also as the carrying costs of storing gas for the wintertime. 495 MR. SHEPHERD: In fact, the load balancing charge is largely the way that you charge for seasonality, isn't it? 496 MS. GIRIDHAR: Yes, and there's also the recovery of some storage-related cost in the delivery charge. But the bulk of it is load-balancing related. 497 MR. SHEPHERD: This isn't a large amount of money that's in the delivery charge, is it? 498 MS. GIRIDHAR: The storage costs in the delivery charge are approximately, I think, $120 million. Our annualized gas costs are, of course it varies depending on the commodity price assumption, but the commodity cost would account for probably 60 percent of that annual gas cost. If you assume it's $1.6 billion, I would say approximately 1 billion would be commodity -- these are obviously numbers that change every time -- that would be commodity related and the rest would be transportation and load-balancing related. So in comparison, I would suggest that gas costs are quite significant relative to the cost of storing the gas. I don't know if that's helpful. 499 MR. SHEPHERD: I have no further questions, Mr. Chairman. 500 MR. BETTS: Thank you, Mr. Shepherd. 501 Is there any preferred order? And I would assume that it's either Mr. Poch or Mr. Janigan that would -- 502 MR. POCH: You've got it Mr. Chairman, and Mr. Janigan first. 503 MR. BETTS: Thank you. Please proceed. 504 MR. JANIGAN: Thank you. 505 CROSS-EXAMINATION BY MR. JANIGAN: 506 MR. JANIGAN: I wonder if you could turn up VECC Interrogatory No. 117, that's Exhibit I, tab 18, schedule 117. I'd like you to look briefly at part E of that answer where you've provided a table that indicates the percentage of recovery of customer-related costs from a fixed monthly charge per rate class. Now, as I understood you to say, Ms. Collier, in sort of summarizing what you've said, that in effect, customer-related costs are those costs that a customer causes that will occur regardless of whether or not they consume any gas. Is that an appropriate summary of the -- 507 MS. COLLIER: That's fair to say. They're costs that don't vary with the amount of gas consumed. 508 MR. JANIGAN: Okay. And according to this table, all rate classes do not recover the customer-related costs from a fixed monthly charge and do so in different percentages. 509 MS. COLLIER: That's correct. 510 MR. JANIGAN: And there are rate classes that have a lower rate of recovery of their fixed costs by way of the fixed monthly charge than the residential class; is that correct? 511 MS. COLLIER: Yes. 512 MR. JANIGAN: And I note rate 6, rate 100, rate 115, 135, 145, 170, 305, in general, those are larger-volume users; would that be correct in saying? 513 MS. COLLIER: Yes. 514 MR. JANIGAN: And is the cost of a meter for larger customers higher than the cost of a meter for smaller residential customers? 515 MS. GIRIDHAR: Are you referring to metering costs? 516 MS. COLLIER: The cost of the meter? 517 MR. JANIGAN: Yes. 518 MS. COLLIER: Yes. 519 MS. GIRIDHAR: Yes. 520 MR. JANIGAN: Now, I believe we covered in chief that this rate-design change is going to be effectively revenue neutral for Enbridge; is that correct? 521 MS. COLLIER: Yes. 522 MR. JANIGAN: And I believe that's confirmed in IR -- this IR response, number 117, in part J. But as I understand it, and from your example in chief, that while the -- there will be revenue neutrality from a standpoint of the class, there will be customers in the particular rate class that will be paying more. 523 MS. COLLIER: Yes. 524 MR. JANIGAN: And that is essentially because of the fact that they will not have enough -- not be consuming enough volumes at the lower commodity rate to offset the increase in the fixed monthly charge; is that correct? 525 MS. COLLIER: Yes. The reason that they see the increase is because there's a higher recovery of the fixed charge and therefore less is recovered through the commodity or the volumetric charge. 526 MR. JANIGAN: So small-volume customers are the ones that will be -- suffer the detriment in this change. 527 MS. COLLIER: Yes. As I indicated, small-volume customers who, on average, consume approximately 1,000 cubic metres a year would see a bill impact of roughly $10, $9.70, so -- on an annual basis, so ... 528 MR. JANIGAN: Now, in telecommunications, there is a high degree of correlation between the income of the customer and the amount of telecommunication services that he or she consumes. Is there any such correlation in natural gas? 529 MS. COLLIER: Not -- I'm not aware of that. We haven't performed such a study to say that low-income earners are low-volume users. I think it would depend on the amount of appliances they have in their dwelling and other factors such as that, but we haven't performed any such analysis to determine that. 530 MR. JANIGAN: Or more particular, whether low-income customers tend to be low-volume customers; you wouldn't be able to say? 531 MS. GIRIDHAR: Well, as Ms. Collier said, we haven't done a study. But intuitively, low-income customer would presumably live in a smaller home, but I would also question whether they would have, perhaps, the same level of insulation as a newer home or a larger home. So I think it's difficult to conclude on that basis that a small-volume customer is necessarily -- or the low-income customer is necessarily a small-volume customer. 532 MR. JANIGAN: Now, in response to A of this same interrogatory, VECC Interrogatory No. 117, we asked whether Enbridge was considering increasing the fixed monthly customer charge to recover 100 percent of the customer-related costs on a fixed basis, and the answer was no. I take it there are no current plans to slowly increase this fee over a period of years as well? 533 MS. GIRIDHAR: That is correct. We don't currently have a plan to do so. 534 MR. JANIGAN: And one of the reasons that Enbridge wouldn't be increasing the fixed monthly charge to recover 100 percent would be customer resistance; would I be correct on that? 535 MS. GIRIDHAR: We did do a study several years ago and at point the question was posed to customers, If the customer charge were to go up from $7 per month, which was the charge at that time, to $20 a month, would there be resistance, and at that level of increase there was an indication that there would be resistance. So I'm -- so we would -- we could presume that if we were to recover 100 percent of the customer-related costs, we would actually be at that $20 mark, so I presume that that level of recovery could result in some customer resistance based on that study. 536 MR. JANIGAN: Was that the study that was appended to Interrogatory 117? 537 MS. GIRIDHAR: Yes, it was. 538 MS. COLLIER: Yes. 539 MR. JANIGAN: And when we look at the study, it would appear that customers were not only not receptive to 100 percent recovery, they didn't seem to be receptive to any further increases in the fixed monthly charge; would you agree with that? 540 MS. GIRIDHAR: I'm not sure I agree totally. I can read this again, but I did think that there were customers that thought it was fair. 541 MR. JANIGAN: Maybe we can turn up page 1 of that study. I'm using the study's numbering here. I'm looking at, in bold, about a third of the way down the page, it indicates generally, and this is part of the executive summary and conclusions: 542 "Generally speaking, customers were not positively disposed to the perceived effects of the proposed changes to the monthly fixed customer charge on their gas bill. Many customers were uncertain and others suspicious of Consumers Gas and regulators' motive behind the changes." 543 If you look down one bullet: 544 "Raising fixed charges to the level of full-cost recovery was not a well-received scenario particularly among small commercial/industrial customers. The absolute magnitude of the increase would seem to be prohibitive, not so much from a financial perspective but from the standpoint of perceived severity of the change relative to the current fixed charge level." 545 I believe the bullet point is the scenario we indicated, in terms of increasing to the full cost recovery -- 546 MS. GIRIDHAR: Yes. 547 MR. JANIGAN: -- but in general, it would appear that the proposed changes, which at this time I think were at the level of about $3, was it, that was considered by this study, there was opposition to that as well. 548 MS. GIRIDHAR: I'm sorry, $3? I thought based on what was appended to the study, they were really looking at either phasing -- if I could point you to chart G at the end of that study. At that point in time, they were looking at two options. One would have been an increase from $7 to $20 all at once and the other one would have been a three-year phase-in with $3 in the first year, $5 the next year, and another $5 the third year, bringing it up to $20 over three years. So I would suggest that the changes we are suggesting at this point are a lot milder than what was contemplated and what underpinned that study. So I would keep that in context when I review the comments. 549 MR. JANIGAN: Just following up on the following page, just at the top of the page: 550 "The impact of the proposed changes on both low-volume and high-volume gas customers was perceived negatively by customers." 551 So even the winners seem to be against this proposal; would that be correct? 552 MS. GIRIDHAR: Again, I would point to the impact that would have stemmed from an increase in the customer charge by that amount, and I think if you were to look at -- if I could point you to chart D and then chart E, you have different levels of comparison. 553 MR. JANIGAN: Yes. 554 MS. GIRIDHAR: And you would see that the dollar impacts that we were looking at in those scenarios were a lot higher than what we're seeing now. For example, if you were to look at what was called a low-volume user, of 2,500 cubic metres per year, the full range of impact would have taken you from $560 to $600, like, a $40 increase. I don't believe you have a single scenario in this instance that makes it a $40 increase. And that was for a low-volume user. 555 MR. JANIGAN: So you think the overall magnitude of the changes was a contributing factor to that degree of negativity that was expressed by both high-volume and low-volume customers. 556 MS. GIRIDHAR: Yes, I do, yes. 557 MR. JANIGAN: And I take it that there would be little reason to believe that the attitudes of customers have changed since the date of this study; would you agree with that? 558 MS. GIRIDHAR: If we were contemplating an increase of more than double the customer charge? 559 MR. JANIGAN: Yes. 560 MS. GIRIDHAR: I would agree with that. 561 MR. JANIGAN: And one of the other changes that you're proposing is the proposal to remove seasonality from rates. Would you agree with me that customers, on the whole, view seasonal rate differential in a negative manner? 562 MS. GIRIDHAR: Could you explain that? 563 MR. JANIGAN: What do you believe the customers' attitude is towards the seasonal rate differential at the current time? 564 MS. GIRIDHAR: The current differential of 2.5 cents, I think, to the extent that they are aware of it, and the fact that the differential itself is not very large, but I think what we believe is that having frequent rate changes as we do, to then have multiple sets of rates that are presented to them every quarter is a source of confusion to customers. 565 MR. JANIGAN: And the customer reaction or the perception by customers is a motivating factor for Enbridge changing these rates? 566 MS. GIRIDHAR: It's one of the reasons. 567 MR. JANIGAN: Okay. Now, does Enbridge have any customers which disconnect from Enbridge in the warmer months and then reconnect in the colder months to avoid payment of the fixed monthly customer charge? 568 MS. GIRIDHAR: I'm not aware of that. I think we might actually have a charge that would dissuade that kind of -- 569 MS. COLLIER: There's a connection/reconnection fee. 570 MS. GIRIDHAR: And you might see that at -- it's something we file with every rate change. It would be rider G which has service charges, and I believe there is a reconnection fee that will dissuade that kind of behaviour. 571 MR. JANIGAN: Thank you, Mr. Chair. Those are all my questions at this time. 572 MR. BETTS: Thank you, Mr. Janigan. Mr. Poch. 573 MR. POCH: Thank you, Mr. Chairman. Ms. Girvan has only a couple of minutes and has asked to precede me, I don't mind that. 574 MR. BETTS: Thank you. Ms. Girvan. 575 MS. GIRVAN: Thank you, Mr. Chair. 576 CROSS-EXAMINATION BY MS. GIRVAN: 577 MS. GIRVAN: Just a few questions. Have you undertaken any efforts to inform your customers that the customer charge may well be increasing in fiscal 2005? 578 MS. GIRIDHAR: Not at this point. 579 MS. GIRVAN: Why not? 580 MS. GIRIDHAR: In the first place, we did not view the change as being very material, and if approved by the Board, we would take steps to provide a letter perhaps that might precede the actual rate change to inform them that the customer charge would be going up by $1.25 a month and the consequential impacts of that. 581 MS. COLLIER: I think the fact that it's not always a rate increase for the customer as well. I mean, some customers will be seeing an overall decrease on their bill as well, and we thought given the size of the magnitude of the change, that at this point we really didn't see that there would be a lot of customer resistance to the $1.25 increase. 582 MS. GIRVAN: Okay. So without some sort of letter, then, the first indication your customers will get will be on their bill? 583 MS. COLLIER: Well, there's a customer notice that is sent each time we have a rate change, so as we implement the fiscal 2005 year rates, we'll send out a customer rate notice at that time indicating which elements of their bill are changing and why. 584 MS. GIRVAN: So you will, in fact, in your customer notice, put wording in there to the effect that the customer charge will be changing? I guess my question really is, I think in some cases, sometimes certain explicit changes aren't necessarily noted on the notice. 585 MS. GIRIDHAR: This would definitely be noted. 586 MS. GIRVAN: Okay. Have you considered moving forward with a smaller increment in terms of the increase to the customer charge, say, to $10.50; and if not, why not? 587 MS. GIRIDHAR: We believe that the $1.25 increase is not a very large increase. It's not very material. And certainly in terms of bill impact, it's not very material because it's revenue neutral, and increasing the customer charge causes a reduction in the delivery charges. So at this point I thought it was -- it made more sense to have a discrete increase in the customer charge, and so I thought bringing it up from $10 to 11.25 was certainly defendable. 588 It also represents a discrete increase in the level of customer charge -- customer cost recovery. We're going up to 50 percent recovery to close to 60 percent recovery, so that would attain, in that sense, the aim of better aligning fixed charges with fixed cost recovery. So for all of those reasons, I did not really consider an increase that was less than a dollar a month. And 11.25 brought us to 60 percent of customer cost recovery. 589 As well, we should note that Union Gas has increased its customer charge from $10 to $12, which is higher than the 11.25 we're looking at. Toronto Hydro has a $14 customer charge. Again, 11.25 is a lot lower than $14. So I did not think the absolute level of the charge itself required a further incremental step. 590 MS. GIRVAN: So does the company have any -- is there any really -- is there a downside from the company's perspective to potentially moving with a smaller increment, other than what you've just described? Is there anything from the company's perspective that you see in terms of a down side, in terms of moving with a smaller increment? 591 MS. GIRIDHAR: To the extent that we have a target, we've established a target of recovering 60 percent of the customer costs through the customer charge, a smaller increase would prevent us from doing that. 592 MS. GIRVAN: Can you just explain to me what the magic in recovering 50 percent versus 60 percent really is, from the company's perspective. 593 MS. GIRIDHAR: I don't think there's any magic in any of our rate-design objectives. There's always a trade-off between different objectives. So I don't attach any magical status to the 60 percent number. We think it's a reasonable cost recovery. We also note that Union Gas's changes bring them to that range. Overall, the residential rate class is fairly homogeneous, but we do have some extremes at either end where you've got either very low-volume customers such as water-heater-only customers or gas-stove-only customers, and it is important to reduce the level of intraclass subsidies that result. And we think that bringing it up to that level provides an enhanced level of costs. So while it's certainly not a magical number, we think it's a reasonable number, and certainly in terms of impact, it's also reasonable. 594 MS. GIRVAN: You indicated earlier, I believe, that your last increase to the customer charge was in 2000. 595 MS. GIRIDHAR: Mm-hm. 596 MS. GIRVAN: What was the increase in that year? 597 MS. COLLIER: It was a dollar. At that time, it had gone from $9 to $10. 598 MS. GIRVAN: And have you gone back and looked to what extent your customer call centre saw increases over that period due to that particular change? 599 MS. GIRIDHAR: No, I haven't gone back. I do have some anecdotal recollections that -- of responding to one or two customer letters that explained the increase and the fact that it was revenue neutral at the time. 600 MS. GIRVAN: But you haven't gone back and assessed the potential increase in customer calls around that period? 601 MS. GIRIDHAR: No. 602 MS. COLLIER: I think as well, Julie, back at that point, from 1996 to 2000, we actually had a dollar increase in the monthly customer charge each year. So the fact that we haven't changed it in five years, it's quite a long time to not review a certain element of our cost allocation or rate design. But I think at that point, there was sort of annual increases that we're seeing, so perhaps the level of customer resistance -- they were aware that the change -- or they were aware about the monthly customer charge and that it had been increasing on an annual basis. 603 MS. GIRVAN: Thank you. Those are my questions. 604 MR. BETTS: Thank you. 605 Mr. Poch. 606 MR. POCH: Thank you, Mr. Chairman. 607 CROSS-EXAMINATION BY MR. POCH: 608 MR. POCH: Mr. Chairman, I place before you, and I don't know if the witnesses actually have it yet, excerpts from two Board decisions, EBRO 492 and 495. I have extra copies here if anybody didn't receive them. It's just a corner staple -- 609 MR. BETTS: If we can just get one more copy up here. 610 MR. POCH: Sure. 611 MR. BETTS: Thank you. 612 MR. SCHUCH: Mr. Chair, we should assign an exhibit number to that. 613 MR. BETTS: Absolutely, thank you. 614 MR. SCHUCH: That would be Exhibit K.6.2, excerpts from decision EBRO 492 dated September 10th, 1996. 615 EXHIBIT NO. K.6.2: EXCERPTS FROM DECISIONS EBRO 492 AND 495, DATED SEPTEMBER 10TH, 1996 616 MR. BETTS: Thank you. Mr. Poch, you may proceed. 617 MR. POCH: Thank you, Mr. Chairman. Mr. Chairman, I'll start with questions on seasonality. 618 Panel, I'm going to ask you to turn up the evidence -- your prefiled evidence, H1, tab 1, schedule 3, and in particular at paragraph 3. 619 I'm just trying to understand your reference here. In this paragraph, you explain that there are seasonal differentials in your costs, in the overall cost bundle that arise in a number of ways, some of which are reflected in commodity charges, some of which you've been reflecting in the seasonal differential and delivery charges; correct? 620 MS. GIRIDHAR: Some of which are reflected in the load balancing elements. 621 MR. POCH: Load balancing, excuse me. And I'm just really trying to understand the last sentence in paragraph 3, and let me just hazard a guess and see, you can tell me if I'm right, that you have not been able to fully reflect seasonality in the commodity charge because of the lag in your QRAM process. It would be out of step with the seasonality. 622 MS. GIRIDHAR: Actually, I don't know if we're saying the same thing. 623 MR. POCH: Okay. 624 MS. GIRIDHAR: But what I had intended through that sentence was to convey that, in terms of our QRAM process, we revise our rates every quarter because we revise our PGVA reference price, and embedded in that is recognition of various costs, such as peaking and discretionary supplies. And if those costs were to be seasonalized and recovered only through the winter period, then we would only be able to recover them over two quarters, which would be the October quarter and then the January quarter, which means that any changes in costs that occurred, say, in the summer months would not be passed on to customers, and they could be increases or decreases. 625 To give you an example, our load-balancing charges recover the carrying costs of gas and storage, so the commodity price changes every quarter which means that the carrying cost of that gas changes every quarter. So potentially in the summer months when you are storing or beginning to store a large amount of gas, if your commodity charge were to go down, then the cost of storing that gas would go down. If I had seasonalized the recovery of those costs through the winter charges, that would mean that I would not be able to pass on to customers the reduction of the cost. So because of the QRAM mechanism, commodity-related elements that change every quarter need to be recovered or passed through to customers in a manner that they can be collected or reimbursed every quarter. If we recover them through seasonal charges, or specifically winter charges, then you lose the opportunity to fully reflect changes that happen in three QRAMs in the year back to customers. 626 And we did have an interrogatory response to address that. 627 MR. POCH: If I may make sure I understand you. All you're really saying here is, increasing the seasonality of commodity charges as opposed to -- if we want to keep seasonality intact, is not a good option for the reasons you've just said. 628 MS. GIRIDHAR: That's right, because we need -- with respect to these upstream costs, we want to reflect cost incurrence, and to do that, we need to charge them rates as we incur them. And if those costs change every quarter, then we need to be able to reflect that recovery every quarter. 629 MR. POCH: I think I understand that. So the seasonality that you do reflect in your delivery charges doesn't suffer from that concern. You are able to match up seasonally-incurred costs and provide a price signal that's contemporaneous; correct? 630 MS. GIRIDHAR: The differential that we currently reflect in our delivery charges reflects the costs -- storage-related costs, which would be the costs of, you know, the deliverability costs, the costs of storage space, those sorts of things, which don't necessarily change with the same volatility as commodity-related elements, and that's what we currently reflect. So the intent being that those don't change every quarter to the same extent as commodity-related costs. 631 MR. POCH: I guess all this was to try to understand the beginning of paragraph 4 where you say "Given the partial recovery at best from winter rates," and you go on. When I read that, and perhaps I'm still not understanding you, what you're saying is you can't fully recover seasonality, pass-through seasonality price signals in the commodity charge. So the fact that you can't do that in the commodity charge, why would that diminish the need to do it in the delivery charge? 632 MS. GIRIDHAR: In the context of everything else that I have said, I think what I'm trying to say is that the seasonal differential that we can reflect is approximately 1 cent on an annualized basis are 2 cents or 2.5 cents to be recovered through just the winter charges. And I've also stated that I don't believe eliminating the 2.5 cent differential has a material impact. So at best, you've got a partial reflection of seasonality, and that reflection is not material in terms of its impact. On the other hand, it does make for more complex rate- making, something that other gas utilities don't do. 633 MR. POCH: Okay. So I think I did understand you correctly, and what you're saying is for simplicity, and because you don't think it's a particularly strong conservation signal anyway, you'd just as soon eliminate it? 634 MS. GIRIDHAR: Mm-hm. 635 MR. POCH: Can you agree with me that in principle, if seasonal differential is large enough, it would tend to foster conservation. 636 MS. GIRIDHAR: I would agree with that. If you've got materially different reflections, it should ... 637 MR. POCH: Now, you do, in paragraph 5 of your evidence say that the impact of removing seasonality on a decision to invest in an efficient furnace would be a difference in payback of about one month compared to the previous approximate two-year payback on that decision, that incremental investment. 638 MS. GIRIDHAR: Yes. It would add less than a month to a two-year payback period. 639 MR. POCH: I take it you haven't done any price elasticity study to see how significant that is. 640 MS. GIRIDHAR: Well, I think the comment I made earlier that if you were -- based on total bill impacts, I think what I was able to demonstrate was that if you are a typical residential customer, having a water heater and a furnace, the removal of seasonality in the delivery charge would increase -- sorry, reduce your monthly bill by 6 cents per cubic metre -- sorry, by 6 cents per bill, which in the context of a 28-cent commodity charge indicates that the impact on demand should be close to zero because there are other elements that vary with consumption that would cause your bill to go up. So from a price elasticity perspective, I don't think that the reduction coming from a delivery charge is going to cause an increase in consumption. 641 MR. POCH: Well, just to be clear, indeed, if you turn up VECC Interrogatory 115, which is Exhibit I, tab 18, schedule 115, you were explicitly asked whether you did any analysis, and you give your answer which refers to the analysis you've just provided. 642 I take it implicit in that response is you did not do any price elasticity study? 643 MS. GIRIDHAR: No, I did not do price elasticity per se. I think what I was indicating is that the numbers I show now seem to indicate that there would not be a significant impact on price elasticity. 644 MR. POCH: You're assuming that because the impact is relatively small it won't be significant. 645 MS. GIRIDHAR: That's right. 646 MR. POCH: Because the differential is relatively small, it won't be significant. 647 MS. GIRIDHAR: That's right. 648 MR. POCH: Now, you're aware that the company has expressed concern about getting uncompetitive in the water heater market, compared to electricity. That is, it appears to be losing water-heater load to electricity; is that correct? 649 MS. GIRIDHAR: Yes. 650 MR. POCH: And you're aware that there's some general consensus that gas water heating is more environmentally attractive than electric water heating? 651 MS. GIRIDHAR: Yes. 652 MR. POCH: Water heaters run year-round; correct? 653 MS. GIRIDHAR: Yes. 654 MR. POCH: A fairly flat load. 655 MS. GIRIDHAR: Mm-hm. 656 MR. POCH: The mechanism here of how water heaters will be affected is, if I'm correct, and please correct me if I'm wrong, removing seasonality will tend to raise summer rates more than it will lower winter rates because there's more units of gas sold in the winter. 657 MS. GIRIDHAR: That's correct. 658 MR. POCH: So a flat load like water heating, the effect is not revenue neutral for that load -- a group of customers for that load and that load alone. It raises the annual water heating costs; is that correct? 659 MS. GIRIDHAR: I think we also indicated the extent of that impact. 660 MR. POCH: Yes. 661 MS. GIRIDHAR: If you were to see table 1 in our evidence, so that would be H1 -- sorry, H1, tab 1, schedule 3. 662 MR. POCH: Right. And that's the 1.3 percent impact? 663 MS. GIRIDHAR: That's right. 664 MR. POCH: And so in this -- for this particular load, which has environmental significance and for which the company has indicated it has a problem at the margin, it's losing this load, and which, you've indicated that it has the highest impact, still admittedly 1.3 percent, but the highest of all the impacts, you haven't gone out and studied the price elasticity of that particular fragile load; is that correct? 665 MS. GIRIDHAR: That is correct. And if I could just expand on that. That 1.3 percent impact is, in fact, in dollar terms, $6.75 for the whole year, so that would be 56 cents per bill, per month. So again, in terms of materiality, I did not think that necessarily warranted a study. 666 MR. POCH: Thank you. Turning to customer charge, then. Now, this is where the document I distributed earlier may be of assistance, Exhibit K.6.2. This issue has some history, Mr. Chairman, I'm sure the Board is aware. 667 The Board recites the situation back in 1996 in EBRO 492, starting in section 7.5, and if you turn to 7.5.2 on page 169 of that decision, the Board's understanding is reflected there, and I'm going to make sure you agree, that the fixed monthly charge, the second sentence there, "is intended to cover the customer-related allocated costs such as hardware, meter-reading, billing and accounting, and a percentage of the corporate overhead." 668 Is that correct? 669 MS. COLLIER: Yes, it is. 670 MS. GIRIDHAR: Yes. 671 MR. POCH: Now, at the time, we see in 7.5.3, classes 1 and 6 were undercollecting -- you were undercollecting revenue in those -- from those rate classes to the tune of about $19 million, and so raising the customer charge had a double advantage there, did it not? It helped you address that problem at that time? 672 MS. GIRIDHAR: I believe it was revenue neutral at that time as well so -- 673 MR. POCH: In any event, the current proposal isn't complicated by that added factor. It's revenue neutral class-wise? 674 MS. GIRIDHAR: That's right. 675 MR. POCH: At 7.5.6, a little of the history here is presented, and you note at the bottom of there that -- the Board notes, excuse me, that the anticipated moving of the percent of what you -- moving from 31 percent to 50 percent of allocated fixed costs to be recovered in that fixed charge; is that correct? 676 MS. COLLIER: Yes. 677 MR. POCH: And those percentages, then, were referring to the portion of that basket of costs which the Board listed and we noted a moment ago at 7.5.2, including some corporate overheads? 678 MS. COLLIER: That's right. 679 MR. POCH: Now, I won't take you through it, but it's there for all to read about the debate that was ensuing at the time, in particular Energy Probe and, I think, Pollution Probe were most active on that issue, and there was a debate about whether this charge should just be short-run incremental costs or long-run incremental costs and whether it should bear overheads. The current proposal, when you talk about 50 percent or 60-odd percent, the 100 percent number you're talking about includes some corporate overheads? 680 MS. GIRIDHAR: Mm-hm. 681 MS. COLLIER: Mm-hm. 682 MR. BETTS: You have to say yes or no for the reporter. 683 MS. GIRIDHAR: Yes. 684 MS. COLLIER: Yes. 685 MR. POCH: And then finally the Board recites the company's defence of its proposal at the time to move to 50 percent, and the company -- and I can paraphrase, that the company was saying it's a balancing of concerns. And I take it that is still the case today, there's a balancing of concerns here? 686 MS. GIRIDHAR: Yes, it is. 687 MS. COLLIER: Yes. 688 MR. POCH: And I take it that the impact on conservation and the impact on water-heater load, fuel-switching and water-heater load, these would be proper considerations in that balancing? 689 MS. GIRIDHAR: Mm-hm. Yes. 690 MR. POCH: Can you tell me, historically, why were you collecting, in your view, some of the fixed costs in the variable rates? 691 MS. GIRIDHAR: I think historically there has been a recognition that there's a certain threshold of acceptance in terms of the level of the customer charge, and the perception of that threshold, I think, has varied over time. But clearly, I mean, it hasn't remained static. We've been increasing that charge from approximately $6, I think, in the early '90s to its current level. So there is recognition that to collect 100 percent of those customer-related costs through the customer charge might not be acceptable to customers, but that perhaps a phasing in or a gradual increase in that collection over time would be acceptable. So I think that has really dictated how we've viewed changes in the customer charge. 692 MR. POCH: I'm trying to understand why, for so many years, you felt you were starting from a point where there was more of these charges that you believe are fixed charges were in the variable charge to begin with, apart from your -- you've given your reason why you've slowed your advance towards putting it into the -- into the customer charge. Why was that the starting point? Was there some -- was it not a consideration of these concerns, like fairness, perception of fairness? 693 MS. GIRIDHAR: To tell you the truth, that's going way back in history and I wouldn't be able to comment on that. 694 MR. POCH: Let me ask you this: The relationship of corporate overheads to gas throughput is not a simple linear one, is it? 695 MS. GIRIDHAR: No, it's not. 696 MR. POCH: But there is some, presumably, complex relationship there. In general, as volumes have gone up over the years, your overheads have gone up. Not lock step, not one to one, but there's some. 697 MS. COLLIER: I would say more with customer attachment and therefore increased volume but not volume alone. As we add more customers, there's added fixed costs as well as natural variable costs that come with that. 698 MR. POCH: Right. And that relationship between customer -- the number of customers you have and your overhead, that's not a one-to-one either, it's not simple linear; right? 699 MS. COLLIER: No. 700 MR. POCH: And certainly at the margin, one customer joining or leaving a system doesn't affect corporate overheads at all, does it? 701 MS. GIRIDHAR: That's right. 702 MR. POCH: Now, at the time, back in '96, the Board asked you to review the matter and come back with a timetable for moving in the direction you wanted to move and information about customer acceptance and so on, and that you did do. And if you go further in the bundle I've provided, we get to the EBRO 495 decision in 1997 for 1998 rates, and you can see the earlier direction from the Board is repeated there. And I'll just read this in for the transcript to be easier to read. 703 "In response, the Company filed the results of focus group research conducted by Schiappa Research Dynamics. The Company proposed to increase the Rate 1 current monthly charge of $7 by $2 in each of the next three test years which would bring the charge in the third year to approximately 50% of the customer allocated fixed costs. For Rate 6..." 704 It goes on to talk about increasing it for rate 6 as well. 705 That reflects what I think you've said earlier, that you were seeing charges for each year for about three years there; is that correct? 706 MS. COLLIER: Yes. 707 MR. POCH: And that was for about three years. 708 MS. COLLIER: That's correct. 709 MR. POCH: Now, OCAP, which is a member of VECC and the predecessor intervenor to VECC, at that time filed evidence of the famous, if not infamous, Mr. Todd, which challenged the idea of including corporate overheads in the fixed charge, and it's recited there at paragraph 7.2.3. The concerns that he had documented with respect to disproportionate income -- impact on low-income households, that it would reduce the incentive to conservation, and he raised a concern about impact on the company's risk profile, something which I add the Board, in this decision later, found was a diminimus impact. 710 Again, I'm just going to skip ahead, this is all by way of background, there was a debate at the time that we joined in, parties objecting to the potential anti-conservation impact and on the other hand, favouring fully-allocated costs and so on. Let's jump to the Board's conclusions after having a more fullsome debate on the record and having the benefit of evidence. That's at 7.2.9, and let's see if you agree with their findings. I'm sure you'll honour their findings, but whether you agree with them. First of all: 711 "Other than the recovery of direct costs associated with adding a customer, the Board recognizes that there will always be controversy as to the appropriate level of recovery of the total fixed customer related costs in the monthly fixed charge." 712 Do you agree with that observation of the Board's? 713 MS. GIRIDHAR: Yes. 714 MR. POCH: And they go on to say: 715 "Clearly, there's no easy answer to this issue. It's largely a judgmental exercise of balancing these concerns." 716 Correct? 717 MS. GIRIDHAR: Yes. 718 MS. COLLIER: Yes. 719 MR. POCH: And then they said basically -- they specifically went on to say they were making no finding on the question of price elasticity, which of course impacts the conservation argument, and they said, Go ahead but we don't want to hear about this for a few more years while you're implementing this. And then we find ourselves here today. Have I got the history correct, there's nothing intervening in the intervening years? 720 MS. GIRIDHAR: Yes, I would agree with that except to point out that we are in 2004 and this was in 1996. 721 MR. POCH: Yes. And I'm saying nothing has happened in the intervening years; this was the last time the Board considered this matter. 722 Just pausing there, in this rate case in the ADR, you settled a similar issue with respect to rate 6, did you not, that there would be no change. 723 MS. GIRIDHAR: Yes. 724 MR. POCH: All right. And the Board has accepted that as a reasonable settlement. Can I ask you, why is the status quo situation for rate 6 acceptable to the company? 725 MS. GIRIDHAR: We gave that some considerable thought, and the issue with rate 6 is that there is a wider range of consumption levels within rate 6. It's a commercial/industrial general-service rate which means technically volumes could vary from a small doctor's office in a mall to a bakery or an industrial user. Therefore, there is more heterogeneity in the kinds of capital costs within that rate class. So intuitively, even if I think that a 60 percent customer cost recovery in the customer charge is a desirable goal, in rate 1 there is a lot more homogeneity. I would be very surprised if a water heater-only customer has a different meter from a water heater and furnace customer. So there's a lot more homogeneity, so therefore I could pin that customer cost down to a better level. 726 From an equity perspective, I felt that for rate 6, that an increase was not necessary -- necessary at this point, particularly given the fact that we redesigned rate 6 last year and took into account a lot of these considerations as well as the blocking structure. 727 MR. POCH: All right. I think you may have already agreed, but let me ask the general proposition to be clear. Can we agree that if there is price elasticity of demand at all, decreasing the variable component of rates reduces the conservation signal. 728 MS. GIRIDHAR: From a theoretical perspective, I would agree. 729 MR. POCH: And if you turn to another VECC interrogatory, that would be Exhibit I, 18, schedule 117, at page 2, I'm sorry, page 2 of the attachment, which was the focus group studies. The third bullet there reads: 730 "The focus groups tell you that many customers believed they would be much less concerned about controlling the amount of natural gas they consume," and if you go to page 4, before I ask for your comment, the second last bullet: 731 "Furthermore, the proposed changes do not lend themselves to encouragement of energy-conservation oriented thinking among customers which runs counter to another key tenet of Consumers Gas's mission, the promise to be a socially and environmentally friendly entity which fosters these practices." 732 Is it fair to say that the research that you have done at least on the customer's perception of the conservation implications are that it doesn't bode well for conservation? 733 MS. GIRIDHAR: I would again suggest that we keep in mind that the nature of the changes that were being contemplated when this survey was done, we were looking at a much larger increase in the customer charge, and therefore, a greater reduction in the delivery charge. Plus, in that same context, the cost of the commodity in that time frame was a lot lower than the delivery charges and we had the exact reverse situation now. So I would keep those issues in mind when I reviewed these comments. 734 MR. POCH: Let me ask you this: Have customers been calling up and complaining that you should raise the fixed customer charge? 735 MS. GIRIDHAR: No, they have not. 736 MR. POCH: Didn't think so. And you've indicated that the largest adverse impact will be, and this is at H1, tab 1, schedule 3, page 4, table 2, you've already taken us there, I just put that in for the record, but that the largest impact will be on water-heating-only customers; is that correct? 737 MS. COLLIER: That's correct. 738 MR. POCH: Again, this is the very load you are worried about losing, and I know we've heard about that and I know Mr. Klippenstein has some further information on that. Correct? 739 MS. GIRIDHAR: That is correct. 740 MS. COLLIER: Yes. 741 MS. GIRIDHAR: And again, we did look at the overall amount of the impact, the dollar impact, which was I think 50 cents. 742 MS. COLLIER: 74 cents. 743 MS. GIRIDHAR: 74 cents. 744 MR. POCH: But you'd agree that all these changes that move in one direction with respect to water heaters, they all add up, and indeed the historical changes to these things all add up, and whatever future changes you might make could add to this problem that you're having with water heaters; correct? It's all cumulative. 745 MS. GIRIDHAR: I would tend to view it in terms of materiality at any point in time. 746 MR. POCH: Is it fair to say that any one change may not be material but overall a number of changes could be material? 747 MS. GIRIDHAR: I think in and of themselves the fact of the capital cost for gas water heater compared to an electric water heater is a material issue, you can't take away from it. The cost of the commodity in and of itself is a material issue. By itself, I don't view this as a material issue, and in fact in combination with other factors as well, I don't view this as a material issue. 748 MR. POCH: We've seen the history -- I'm sorry, did you want to add something? 749 MS. COLLIER: I was going to say, in the back of all of this of course is the underlying principles of cost allocation and rate design and those who cause the cost should ultimately pay for it. And while there are many other causes out there, environmental groups and other issues, that's always the principle that we have to go with as well. So even though the company would obviously have liked to attach those water heaters and keep those customers, I mean, we can't stray from principles of who should pay for these costs. 750 MR. POCH: Sure. But you have, I think, already agreed that this is a matter of judgment. Something like allocating corporate overheads is a matter of judgment. 751 MS. COLLIER: True. There is flexibility there and that's why we charge rates through to cost ratios. But I think ultimately those who cause the costs should pay for them and this is an instance of that. 752 MR. POCH: But there's debate about who caused the cost, is what I'm suggesting. Is that a yes? 753 MS. COLLIER: Yes. There could always be a debate over that. 754 MS. GIRIDHAR: Well, we use Board-approved cost allocation -- 755 MR. POCH: If only life were that simple. 756 Finally, you were already asked that -- it was already pointed out, you've indicated you're not proposing to move to 100 percent collection -- 757 MS. GIRIDHAR: That's correct. 758 MR. POCH: -- and I think we saw in the history here that you've previously said your target was 50 percent, and we're back here asking for more than that now. So what about it? Are you planning to move beyond this now to somewhere short of 100 percent, but yet further than you're proposing in this case? 759 MS. GIRIDHAR: We haven't really thought in terms of increasing it beyond 60 percent. I would really want to review other factors. This was a good year in terms of making the change in the context of certain other cost-allocation changes that would actually reduce costs for rate 1 customers overall. I speak of the issue that was settled, the changes to transportation and upstream cost allocation. So this did make sense in that context as well. So I don't know that I have any thoughts at this point in terms of another target that I want to reach a couple years from now. 760 MR. POCH: Can I just take you back to one -- tying this all together, then. You've said you're not ready to accept that cumulatively there's a concern here that's impacting on your water heater -- the attractiveness of gas water heating. It seems to me, just off the top of my head, that if over a number of years you're moving your fixed charge from, say, $7 to perhaps twice that, so $7 a month more, and we -- times 12, $84 a year, $84 a year, if someone is doing a discounted cash-flow analysis, if they have that skill or get that advice, could certainly -- it's in the same scale as the differential and capital cost between electric and gas water heating, is it not? 761 MS. GIRIDHAR: Well, it's not the total impact on the bill though, because it's a revenue neutral change. Even if that $84 increase had happened over one year or ten years, you've got a reduction in delivery charge that offsets that amount, so the net impact is something that's considerably smaller than that number. 762 MR. POCH: Fair enough. 763 Thank you, Mr. Chairman. Those are my questions. 764 MR. BETTS: Thank you, Mr. Poch. 765 Can I have an indication of who will be cross-examining this panel? 766 MR. KLIPPENSTEIN: I will, sir. 767 MR. BETTS: Mr. Klippenstein. Anyone else? 768 MR. DINGWALL: I expect to as well, sir. 769 MR. BETTS: Thank you, Mr. Dingwall. 770 Can you tell me how long you might be? I'm just trying to plan the day's activities. 771 MR. KLIPPENSTEIN: I will probably be three-quarters of an hour. 772 MR. BETTS: And Mr. Dingwall? 773 MR. DINGWALL: I will be one-third of Mr. Klippenstein's time. 774 MR. BETTS: So based on that prediction, if we move ahead with Mr. Dingwall, we should be able to get your cross-examination in and then break for lunch, or break anyway. Am I correct? You said one-third of three-quarters? Did I get that math? 775 MR. DINGWALL: I said one-third of his estimated time. I may have some variance with the actual. 776 MR. BETTS: Okay. We're not going to be too finite. If it's okay with the parties, Mr. Dingwall, we'll ask you to proceed and you can give some thought -- it may be beneficial -- no, we'll decide that later. I'm thinking and speaking at the same time and that's always a mistake. 777 Please go ahead, Mr. Dingwall. 778 CROSS-EXAMINATION BY MR. DINGWALL: 779 MR. DINGWALL: In order to focus my questions, let me preface that I'll be dealing separately with the two issues and I'll be beginning with the fixed customer charge issue. 780 Would you agree with me that one of the significant risks that Enbridge, as a company, faces with the existing rate structures is that when fixed costs are recovered in commodity rates, that the fluctuations in consumption expose the company to a significant risk of underrecovery? 781 MS. GIRIDHAR: I would agree. 782 MR. DINGWALL: And is this change in the customer charge intended on reducing that risk? 783 MS. GIRIDHAR: I did, in fact, receive an interrogatory and I believe it might have been Energy Probe, and I'd like to point to that. I think it was Exhibit I, tab 9, schedule 88. It's item D and I can just read out the question. I think it addresses the same question, viewed it from the point of stabilizing the costs for the customer, and that's obviously the flip-side of stabilizing revenue for the company. The question that was asked was: 784 "Would an increase in the monthly fixed charge and a corresponding decrease in the variable delivery charges help to stabilize the annual costs to residential customers?" 785 In that response, we pointed out that for a typical rate 1 heating and water heating customer, which, by the way, constitutes almost 99 percent of our residential base, the increase in the bill, if your winter volume went up by 10 percent, would be $17.50 under the higher customer charge scenarios. In other words, if the customer charge were to go up to $11.25, and if the winter ended up being 10 percent colder, the typical residential customer would pay $17.50 more than as a result of the colder weather. If the customer charge remained at $10, the customer would have paid $18.48, so that would be a difference of approximately 98 cents or a buck in terms of stabilizing the cost of gas for residential customers. So I don't think that you're looking at a material impact either way. If it's a buck for a residential customer, it's approximately $1.5 million for the company on a revenue base in excess of 2 billion. Again, I don't think this is a material ... 786 MR. DINGWALL: But I take it every little bit helps. 787 MS. GIRIDHAR: Sure. 788 MR. DINGWALL: Okay. In the ideal world, if all the fixed costs were charged on a fixed basis, I take it that would reduce the company's potential exposure to volumetric risk significantly. 789 MS. GIRIDHAR: Yes, it would. 790 MR. DINGWALL: And would you agree with me that under that scenario as well, that would put customers likely in a situation where they would move more towards having an understanding about what the implications of consumption are on costs? 791 MS. GIRIDHAR: They would be better cost correlation, I think, is that what your question is? 792 MR. DINGWALL: Yes. Those are my questions with respect to the customer charge. Now I'm going to move on to the question of seasonality. 793 There's an exercise coming up, is there not, which will be looking at what the future state of system gas supply might be; is that correct? 794 MS. GIRIDHAR: Were you referring to the Natural Gas Forum? 795 MR. DINGWALL: Yes, I'm not sure it's got a name yet or what its parentage is, but I assume there's an animal out there of that nature. 796 MS. GIRIDHAR: Yes. 797 MR. DINGWALL: Now, there are many theories with respect to rate design that could be chosen from, are there not? 798 MS. GIRIDHAR: There are many objectives of rate design, and to the extent that these theories address one or more of those objectives differently, yes, you could have different theories. 799 MR. DINGWALL: Would you agree with me that one of the prevailing objectives this year for Enbridge has been trying to attach costs to those customers that incur those costs? 800 MS. GIRIDHAR: That is correct. 801 MR. DINGWALL: And does not seasonality, in its most ideal and pure form, go that one step further, of not just attaching costs to customers but also to time periods? 802 MS. GIRIDHAR: I would agree with that from a theoretical basis, and again I think we have pointed out that from a material -- from a materiality perspective, we don't believe that the current differential makes a big difference. So theoretically, yes, that's correct. 803 MR. DINGWALL: I'm not going to cover the question of incremental versus material. 804 One of the comments that I believe you made earlier in response to one of the questions was that there did not appear to be a significant customer understanding of seasonality; would you agree with that statement? 805 MS. GIRIDHAR: I think what I was saying was that having multiple sets of rates that change in a quarter and not some of these rates applying during those quarter was what I believe what causes the confusion to the customers. I don't know that I would say that the concept of seasonality causes confusion as much as the fact that the frequency of rate changes combined with seasonal rates that don't actually end up being used for bill calculation purposes could cause confusion. 806 MR. DINGWALL: If seasonality were to be expanded, if utilities were to be directed at some point in the future to try and apply costs on not just a cost-incurrence basis but also a time-sensitive basis, what would that look like, going forward? 807 MS. GIRIDHAR: Again, the reflection of that time-sensitive basis, presuming it's possible for natural gas, I don't know if natural gas meters can measure time of hour of use, and time of use, but if that were to happen, I think what that would indicate would be a different commodity price-setting mechanism than what we have today, because we have quarterly rate changes, which is better than annual rate changes for the commodity, but presumably that could look different. So a more frequent reflection of market price would be the reason. 808 MR. DINGWALL: And would that more frequent reflection of market price have some influence on consumption? 809 MS. GIRIDHAR: From a theoretical basis, yes, it should. 810 MR. DINGWALL: Listening to the growling stomachs around me, I'm going to halt my questions at that point. Thank you very much, Panel, for your responses. 811 MR. BETTS: Thank you, Mr. Dingwall. 812 I think we'll take this opportunity, then, to take a break for lunch and we will resume after lunch with Mr. Klippenstein. And is that the last party to cross-examine, apart from the Board Staff? I think so. So we'll resume at -- we'll allow two minutes extra and we'll resume at 2:00, so we will recess at this point. Thank you. 813 --- Luncheon recess taken at 12:52 p.m. 814 --- On resuming at 2:02 p.m. 815 PROCEDURAL MATTERS: 816 MR. BETTS: Thank you, everybody. Please be seated. 817 Are there any preliminary matters? 818 MR. POCH: Mr. Chair, just to say if I zip out in the middle of Mr. Klippenstein's cross, it's no disrespect to you or Mr. Klippenstein. I just I have a plane to catch. 819 MR. BETTS: I hope you didn't stay to deliver that message. If you did, that's even more to your credit. 820 Are there any other preliminary matters? 821 MR. WIGHTMAN: Yes, Mr. Chair, I just wanted to let you know that we have 10 copies of the Enbridge QRAM Decision and Interim Order. 822 MR. BETTS: Thank you. Perhaps we'll just place that at the back, and if I understand correctly it's not the complete order, it doesn't include the Rate Handbook, but it's just the decision portion and the company will be required to distribute the full decision as they normally would. 823 If you wouldn't mind placing them at the back and parties can grab them. Or some may want it as you're passing by. 824 Are there any other preliminary matters? 825 MS. PERSAD: I have a few, Mr. Chair. 826 MR. BETTS: Please proceed, Ms. Persad. 827 MS. PERSAD: I have two undertaking responses first of all. The first is Undertaking J.2.3 where our Risk Management Panel, I believe, was asked to provide 2002 and 2003 estimates for transaction costs for risk management. 828 And I also have Undertaking J.2.6, to provide the number of system gas customers on Enbridge Gas Distribution's equal billing plan. 829 The final preliminary matter I have, Mr. Chairman, is a transcript correction, and it's not terribly material but I did want to bring it to everybody's attention on the record because it does have the Board implicated in the sentence. It's paragraph 722 of volume 2 and it's the last -- it's Mr. Pleckaitis of the company who is speaking there, and it's the last sentence of his words in that paragraph, the sentence reads: 830 "The point is that we're saying that the changes are needed now and we are prepared to accept that the Board may change its time at subsequent date." In fact, the word "time" should read "mind." 831 MR. BETTS: Thank you. 832 MS. PERSAD: That's all I have. 833 MR. BETTS: Any other procedural matters to deal with? 834 Mr. Klippenstein, please proceed with your cross. 835 MR. KLIPPENSTEIN: Thank you, Mr. Chair. 836 MR. BETTS: I think I change your name every time I say it. Is it -- how to write this? Klippen-stein or Klippen-steen? 837 MR. KLIPPENSTEIN: I once went through a trial with a very elderly judge who, for about three days, called me Mr. Flippenstein. 838 MR. BETTS: Well, I'm glad I didn't call you that. 839 MR. KLIPPENSTEIN: Mr. Chair, Members of the Panel, I had prepared a cross-examination reference book which I believe was delivered to you, and just this morning it was provided earlier to my friend and the witnesses and I have some extra copies made in case anybody needs any. I haven't heard that there's any concern about the contents, some of which is just a repeat of existing evidence on the record for convenience and unless there's some objection, I propose to have it marked as an exhibit and use it. 840 MS. PERSAD: I have no objection, Mr. Chairman. 841 MR. BETTS: Thank you, Ms. Persad. I see no signs of objection then, so may we have an exhibit number, please. 842 MR. SCHUCH: Mr. Chair, that would be Exhibit K.6.3, Pollution Probe Cross-Examination Reference Book - Deseasonalization. 843 EXHIBIT NO. K.6.3: POLLUTION PROBE CROSS-EXAMINATION REFERENCE BOOK - DESEASONALIZATION 844 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON RATE DESIGN - GIRIDHAR, COLLIER: 845 M.GIRIDHAR; Previously Sworn. 846 J.COLLIER; Previously Sworn. 847 CROSS-EXAMINATION BY MR. KLIPPENSTEIN: 848 MR. KLIPPENSTEIN: Good afternoon, members of the panel. The Enbridge system peaks in winter; right? 849 MS. GIRIDHAR: Yes. 850 MR. KLIPPENSTEIN: And a peaky system is more expensive to run than a steady-demand system, right? 851 MS. GIRIDHAR: Yes. 852 MR. KLIPPENSTEIN: And the less peaky the system, the better your rates; right? 853 MS. GIRIDHAR: The better our rates meaning, the lower our rates? 854 MR. KLIPPENSTEIN: That's right. In my mind, better is lower when it comes to prices. 855 MS. GIRIDHAR: It was a judgmental view. 856 MR. KLIPPENSTEIN: So generally speaking, the less peaky the system the lower your rates? 857 MS. GIRIDHAR: That's right. 858 MR. KLIPPENSTEIN: And load factor and all that technical stuff. The higher the proportion of the steady-demand loads in your system, the less peaky your system; right? 859 MS. GIRIDHAR: That's correct. 860 MR. KLIPPENSTEIN: And water heaters are a steady-demand load; right? 861 MS. GIRIDHAR: Yes. 862 MR. KLIPPENSTEIN: They're called base load. So water heaters make the system less peaky which helps keep rates low; right? 863 MS. GIRIDHAR: That's correct. 864 MR. KLIPPENSTEIN: And if your proportion or amount of water-heater load is decreasing in the system, that's an ominous sign for rates, isn't it? 865 MS. GIRIDHAR: Assuming nothing else changed. If we lost our base load, yes, that would make our system peakier. 866 MR. KLIPPENSTEIN: Because water heaters are steady demand and they help make your system less peaky which helps keep rates low; is that right? 867 MS. GIRIDHAR: Right. 868 MR. KLIPPENSTEIN: And you touched on the fact this morning that the Enbridge system is losing its water-heater load. 869 MS. GIRIDHAR: I believe it was pointed out to me, actually, yes. 870 MR. KLIPPENSTEIN: Was this the first time you realized that? 871 MS. GIRIDHAR: No. I did not touch upon it, it was mentioned, I believe, in the context of interrogatories. 872 MR. KLIPPENSTEIN: Just kidding. I wonder if you could take the Pollution Probe reference book, Exhibit K.6.3, and turn to tab 4, which is Enbridge's response to a CME interrogatory. In the response, subparagraph B, the answer is: 873 "According to the customer attachment residential conversion research, 22 percent of the customers who converted to natural gas in fiscal 2003 installed a natural gas water heater compared to 70 percent in fiscal 2000." 874 So that shows that the company is having a large percentage of fewer customers choosing water heaters, natural gas water heaters in 2003 as compared to 2000; right? 875 MS. GIRIDHAR: Yes, that's what that indicates. 876 MR. KLIPPENSTEIN: And that's accurate, as far as you know? 877 MS. GIRIDHAR: Yes. 878 MR. KLIPPENSTEIN: And then going on, it says: 879 "According to the residential market survey of fiscal 2002, it is estimated that the company's current water heater market share is 90 percent, declining by approximately 1 percent per year." 880 Is that accurate as far as you know? 881 MS. GIRIDHAR: Yes. 882 MS. COLLIER: Our names aren't on the interrogatory response but we assume it's accurate. 883 MR. KLIPPENSTEIN: So there's a significant trend, apparently, of declining natural gas water heater use in your system; right? 884 MS. GIRIDHAR: Sorry, could you say that again? 885 MR. KLIPPENSTEIN: There appears to be a significant decline in the natural gas water heater use in your system. 886 MS. GIRIDHAR: I'm not sure that it's a significant decline in use. I thought what it conveyed is that it's growing -- sorry, market share is declining by 1 percent per year. Assuming that total market is growing, I don't know if it necessarily means that. The usage is declining. If market share is declining, I guess, that market itself is declining, it doesn't necessarily mean that usage is declining. 887 MR. KLIPPENSTEIN: Okay, thank you. But that means the rates, the -- sorry, the benefit from water heaters in the system, which is beneficial for rates, is declining on the system; right? 888 MS. GIRIDHAR: The benefit from water heaters -- 889 MR. KLIPPENSTEIN: Because your market share is declining. Even if the absolute numbers are going up, you're losing ground; right? 890 MS. GIRIDHAR: Yes. 891 MR. KLIPPENSTEIN: Now, it's a central principle of current, mainstream economic theory that people respond to price signals; right? 892 MS. GIRIDHAR: Yes. 893 MR. KLIPPENSTEIN: I think this morning you mentioned that theoretically, you didn't have a problem with that idea; right? 894 MS. GIRIDHAR: Yes. 895 MR. KLIPPENSTEIN: And so the use of price signals for reducing peakiness [sic] is certainly solid in economic theory; right? 896 MS. GIRIDHAR: Yes. 897 MR. KLIPPENSTEIN: Now, let's have a look at what the Premier of Ontario thinks about this issue in the reference book at tab 5. And at tab 5, we have a statement to the Ontario Legislative Assembly by Premier McGuinty entitled "Building a Culture of Conservation," and I would refer you to paragraph 4, I'm sorry, page 4. I've highlighted a few sentences there which I'll read, plus the sentence just before it. 898 Now, I recognize the premier here is talking about peak and off-peak use in the electricity sector and it's not seasonally peakiness, it's day and night, I think, or some other form of peakiness, but I want to ask you some questions about this. The premier says: 899 "We will provide the leadership that creates opportunities for savings, but it's up to Ontarians - from all walks of life - to make good decisions about how they use energy. Right now, most customers don't get a break on their bill if they use energy during off-peak hours, when demand is lower. That's because old-fashioned energy meters only record how much energy is being used, not when it is being used. Smart meters, together with more flexible pricing, would allow Ontarians to save money if they run appliances in off-peak hours. That's why we will direct the Ontario Energy Board to develop a plan to install a smart electricity meter in 800,000 Ontario homes by 2007...and in each and every Ontario home by 2010." 900 Now, the premier is referring to using peak and off-peak price signals; right? 901 MS. GIRIDHAR: Yes. 902 MR. KLIPPENSTEIN: And he talks about savings and good decisions about energy use, and part of what he's talking there is the principle we talked about before which is reducing peakiness reduces bills; right? 903 MS. GIRIDHAR: That's correct. 904 MR. KLIPPENSTEIN: That's the logic behind it; right? 905 MS. GIRIDHAR: Yes. 906 MR. KLIPPENSTEIN: And the premier is using peak/off-peak price signals to move in that direction, he says; right? 907 MS. GIRIDHAR: So it appears, yes. 908 MR. KLIPPENSTEIN: Okay. Now, did you tell the premier that you were trying to move away from using peak and off-peak prices? Because my recommendation is if you haven't yet, don't tell him. 909 Do you think that moving away from seasonalization now, moving away from peak and off-peak prices, is, in principle, consistent with what the Premier of Ontario said in the Legislature about the other energy sector, electricity. Do you think that's consistent? 910 MS. GIRIDHAR: Let me, if I may, drop on a couple of points here. I'm not an expert on the electricity market; however, I can attest to the fact that, for natural gas, we do use market prices. Natural gas is a North American competitive market. 911 One of the principles in economics is that, in a competitive market, price equals marginal cost. If you've got an appropriate reflection of marginal cost, that price should encourage conservation. I believe that is the case with the natural gas commodity. I do not know if that's the case with electricity, and maybe that's why you need off-peak and peak pricing to indicate what that marginal cost of electricity is. But I think the natural gas industry is a much better reflection of that concept. 912 Secondly, it's also a central tenet of economics that you focus on the most material issues that affect whatever it is you want to effect. You always focus on what is the most efficient way of bringing about the change you want. It's agreed that a powerful price signal is the right way to do it, and I do not deny that. I think my point this morning has been that natural gas commodity prices are a powerful signal. A 1- or 2-cent differential in the delivery charge is not a powerful price signal, and that's the point I've been trying to make, one of materiality. I'm focussing on the ones that make the most impact, so I hope that that -- it doesn't answer your question as to whether I should tell premier or not but... 913 MR. KLIPPENSTEIN: I might tell him. 914 Just because there are various factors that are relevant to the pricing use and just because some are larger than others doesn't mean you can only use the large ones; correct? 915 MS. GIRIDHAR: I agree, but I would suggest that where you have trade-offs, and we pointed out one this morning where we said that seasonality in the delivery charge, in our opinion, is not material from the point of view of encouraging conservation, and there is a conflicting objective that we do achieve if we eliminate seasonality and that is one of ease of rate of implementation. 916 So clearly where you've got conflicting outcomes, while in your mind keeping a seasonal rate might add to the price signal, I guess the point we are making, the company is making, is that it is not material; and on the other side, it does make certain things easier us from an implementation perspective. 917 MR. KLIPPENSTEIN: Let's ask about that materiality issue now. So you have no problem with the theory, you just think -- 918 MS. GIRIDHAR: That's right. 919 MR. KLIPPENSTEIN: -- in the particular facts of this situation, that the price would have -- the seasonality has no effect, it doesn't affect anybody's decision; is that your position? 920 MS. GIRIDHAR: It does not have a material effect. 921 MR. KLIPPENSTEIN: But you're not saying it doesn't affect anybody at all. 922 MS. GIRIDHAR: I think I quoted the example of a customer that has a water heater and a furnace, and I indicated that for that typical customer, the impact is a 6-cent reduction in the monthly bill. The point I was trying to make there is that if that reduction in the bill then prompted somebody to consume more gas, while they would consume one-quarter of a cubic metre more and that 28-cent commodity charge which the Board has just approved, it would immediately result in a higher bill than before. So I have difficulty understanding how the bill impacts emanating from our proposal would have a material impact -- 923 MR. KLIPPENSTEIN: My question was a little different one, and I respectfully suggest you didn't answer it because you used an example that combined furnaces and water heaters, and those other examples involved just water heaters. So my question is: Do you really believe that there is nobody out there that is affected by the seasonalization? 924 MS. GIRIDHAR: Well, let me then look at the water heater impact. I think we quoted a 50-cent impact per month, or $6.50 per year. Correct me if I am wrong but that's my recollection. And again, I guess I have difficulty understanding that a 50-cent impact would materially change the customer's behaviour with respect to consuming more gas for a water-heater application. 925 MR. KLIPPENSTEIN: Could you turn to tab 6 in the materials, please. And this is the company's interrogatory response to a CME interrogatory, and if I could just read the second paragraph of the response to you: 926 "Natural gas water heaters are at risks of losing market share due to higher equipment cost. The manufacturers' cost will increase as a result of addressing flammable vapour concerns and implementing increased efficiency standards. These higher equipment costs combined with the potential for other offers, for example, time-of-use rates for electricity, can result in erosion of the competitive advantage of natural gas water heating." 927 So the answer says: 928 "The time of use rates for electricity can result in erosion of the competitive advantage of natural gas water heating." 929 So peak/off-peak pricing, which is what time-of-use rates are for electric water heaters, seem to be a real concern for the company when it comes to the competition between natural gas and electricity water heaters, at least that's what this suggests. Would you agree that that's one of the factors that's affecting or going to likely affect competition? 930 MS. GIRIDHAR: Pricing in the alternative field market, yes, I would agree with that. I should point out though that you if you look at the second page of that same interrogatory response, I think it indicates that narrowing of that competitive advantage for natural gas has a lot to do with commodity prices and we are talking about a differential in our delivery charges. In terms of cost allocation as a principle, we don't cross-subsidize commodity charges for anything upstream of us on the distribution side. 931 So to have a differential or to compete with electricity by changing our distribution charges to reflect any perceived competitive advantage in the electric-generation costs or whatever, wouldn't comply with our cost-allocation principles. We cannot shift costs that are truly commodity in nature and reflect them in our delivery charges. We have full flow-through of commodity costs or commodity charges and full flow-through of deliver costs for deliver charges. We might have some element of cross-subsidization between rate classes, but we don't cross-subsidize between types of class. 932 MR. SOMMERVILLE: Mr. Klippenstein, in your previous question, I just want to make sure we're talking about the same things here. In the reference to the CME Interrogatory No. 62 you referred to time-of-use rates. 933 MR. KLIPPENSTEIN: Yes. 934 MR. SOMMERVILLE: And you seemed to be referring to as time of use was a seasonal time of use; is that right? 935 MR. KLIPPENSTEIN: I think I used the term peak and off-peak. 936 MR. SOMMERVILLE: I just wanted to be clear because I would ask someone to clarify that reference here if you were relying upon that phrase to indicate that that was a seasonal change. 937 MR. KLIPPENSTEIN: Thank you for that clarification. I certainly didn't mean to suggest that. 938 MR. SOMMERVILLE: Thank you. 939 MR. KLIPPENSTEIN: I take it what you said doesn't change the answer given in the interrogatory here; namely, that time-of- use rates for electricity can reflect in the erosion of the competitive advantage; right? 940 MS. GIRIDHAR: That's right. 941 MR. KLIPPENSTEIN: Now, can you turn to tab 3, please, of the Pollution Probe book. I'd like to refer you to table 1 where I've circled the line -- sorry, table 1 is called "Impact of removing rate seasonality on customer bills." 942 And the line rate 1 entitled "General and water heating," says that rate 1 T-service customers who use natural gas water heating will have their bills increased by 2.4 percent; is that fair? 943 MS. GIRIDHAR: On a T-service basis, excluding the cost of the commodity. 944 MR. KLIPPENSTEIN: Focussing on just that, then, I tend to think that 2.4 percent increase is often relevant in the marketplace. 945 MS. GIRIDHAR: It translates into an impact of $6.75 on an annual basis which would be 6 cents per month. 946 MR. KLIPPENSTEIN: And that will change the relative competitive advantage of an electric water heater and a gas heater in a store; right? It is a change directionally against the natural gas water heater and in favour of the electric water heater that's sitting right beside it; right? 947 MS. GIRIDHAR: Well, at any point in time our commodity prices vary so much you have to assume that nothing else changes in the marketplace for this to have an impact. To give you an example, our latest QRAM application results in an increase in the bill of residential customer of $126 per year. So if I were to assume that the world were entirely static and nothing else changed, I would still have difficulty thinking that a 56 cent impact on a monthly bill would change ... 948 MR. KLIPPENSTEIN: But if the customer's standing in the store looking at those two things side by side, the gas heater and the water heater, the customers know that prices are affected by many things, the simple reality is that this will affect the relative prices of the two of them there, side by side, directionally. 949 MS. GIRIDHAR: Directionally, yes; materially, probably not. 950 MR. KLIPPENSTEIN: It will make a change, right? You say it's not material, right? 951 MS. GIRIDHAR: Yes. Mm-hm. 952 MR. KLIPPENSTEIN: Now, just so I understand this now, I've suggested to you, and you've agreed, that one of the central principles of economic theory says that price signals are very important and usually have an impact; right? 953 MS. GIRIDHAR: Yes, I agree. 954 MR. KLIPPENSTEIN: And the Premier now seems to be wanting to use peak and off-peak price signals in the energy sector; right? 955 MS. GIRIDHAR: Yes. 956 MR. KLIPPENSTEIN: And you've agreed that the market share of natural gas water heaters which help make the system less peaky and therefore less costly is dropping; right? 957 MS. GIRIDHAR: Yes. 958 MR. KLIPPENSTEIN: And you say the change that you propose is not material, but you don't have any studies or details that show that it will have no effect and your only point is that you don't think the change will be material. 959 MS. GIRIDHAR: Based on bill impacts. 960 MR. KLIPPENSTEIN: Now, I would suggest to you that now is not the time to drop the peak/off-peak pricing principle because the Premier likes it, your water-heater share is declining, it's not the time to take the risk. 961 MS. GIRIDHAR: I would just like to make an analogy in terms of the peak and off-peak concept for electricity, given my understanding of the electricity market. Because electricity cannot be stored you've got intraday or pricing, realtime pricing is an issue for electricity. So peak and off-peak for the electricity market translates into intraday differentiation. 962 The concept for the gas industry is seasonal differentiation, and I would suggest that with our quarterly rate changes, we do in fact have seasonal reflection of prices because we look at our commodity price every quarter. So I would not agree that removing a seasonal differential in the delivery charge necessarily eliminates seasonal price signals for the commodity for the natural gas market. 963 MR. KLIPPENSTEIN: Why don't you increase seasonality? If it's a good idea, the premier likes it, water heaters are important, why don't you make it more material, the way it used to be, instead of backing off? 964 MS. GIRIDHAR: Well, it used to be material, more material because commodity prices were lower in the '80s and the early '90s, and commodity prices are not something that the natural gas company controls. So a decline in materiality for the seasonal differential has come about because commodity prices have become much more material in terms of sending the appropriate price signal. 965 There is nothing we can do from a cost-allocation perspective that can increase the seasonal differential in proportion to what it was. For example, in 1991, it was 25 percent of the price of the commodity. For us to make 25 percent of a 28-cent, commodity, which incidentally might go up to 32 cents or come down to 24 cents so it's a volatile number, would require us, really, to deviate from what we believe is related to the winter season in terms of the costs we incur, in terms of our storage costs. 966 So really we could not implement a differential that exceeded what we have today. So I would have difficulty making the seasonal differential as material as it was in the early '90s or the late '80s simply because we don't control that element of cost that has made it less material, i.e., the commodity cost. 967 MR. KLIPPENSTEIN: But you could increase the seasonalization of distribution rates; right? 968 MS. GIRIDHAR: I think what I'm saying is that at the current level, it's a reflection of our storage costs which are -- which could be viewed as seasonally incurred. For us to increase that differential would have to really reflect a level of seasonalization that's not reflected in our underlying costs. 969 MR. KLIPPENSTEIN: No, but my question was, you could increase the seasonalization of the distribution rates; right? You could. 970 MS. GIRIDHAR: Without regard to cost incurrence? 971 MR. KLIPPENSTEIN: No, I'm not saying -- but I'm just saying you can do it, you could do it if the Board approved it; right? 972 MS. GIRIDHAR: Yes, but I wouldn't recommend it. 973 MR. KLIPPENSTEIN: And increasing that price signal would tend to increase the desirability to the customer of natural gas water heaters; right? 974 MS. GIRIDHAR: I have difficulty with this line of questioning because for it to be material at all times, I would need to be in sync with the way commodity prices change. And I could not justify that as a cost -- based on our cost-allocation principles, nor would I recommend that from a revenue-recovery perspective; to have a lesser level of cost incurrence. And to an extent that you would need to make it material, you're talking about a big increase in the seasonal differential. Our overall distribution charge for residential customers is about 10 cents per cubic metre, or maybe between 10 and 12 cents per cubic metre. If I wanted to reflect a 25-percent differentiation like we did in 1991, at a 28-cent commodity, that's 7 cents. So 7 cents out of a 12-cent distribution would be reflected in a seasonal differential where we've identified between 1 and 2 cents as being reflective of storage costs. 975 So I could not really support that from a cost-allocation perspective. 976 MR. KLIPPENSTEIN: Well, I know that you can't support it, but, you know, the premier has made this dramatic statement about using peak and off-peak pricing and my question was, and I'm not even sure you answered it, but you could, in fact, increase the seasonability of distribution rates if you wanted to, right, with the Board's approval? 977 MS. GIRIDHAR: It wouldn't be cost-based. But if it was -- if we were directed to do that, yes, we would. 978 MR. KLIPPENSTEIN: And that would tend to increase the desirability to a customer of a natural gas water heater which would reduce the peakiness of the system and reduce rates; right? That's the logic. 979 MS. PERSAD: Mr. Chairman, if I might interject, I think we've heard this question a number of times and I think the witnesses have attempted to answer it. If Mr. Klippenstein has another question to ask... 980 MR. KLIPPENSTEIN: I'll withdraw that question. I don't have any further questions. Thank you. 981 MR. BETTS: Thank you. That concludes, I believe, cross from intervenors. 982 Are there any questions in cross-examination from Board Staff? 983 MR. SCHUCH: Mr. Chair, no, Board Staff has no questions. 984 MR. BETTS: Thank you. 985 Any redirect at this point? 986 MS. PERSAD: Not at this point, Mr. Chairman. 987 MR. BETTS: The Board Panel has no questions either. So thank you very much. You both were very informative and certainly understand your sector of the business very well, so thank you for appearing before us today. 988 Am I correct that we finished early? 989 MR. KLIPPENSTEIN: I just thought of some more questions. 990 MR. BETTS: Is this my first opportunity to say "overruled"? 991 I think we have finished early today and I thank you all for covering that subject very thoroughly and yet doing it expeditiously as well. 992 You've caught me a little offguard because I'm trying to think whether there's anything I need to tell you at the end of the day today, but I don't think there is. 993 So we can recess or adjourn at this point to reconvene tomorrow morning here at 9:30. No questions arise from any of the parties out there at this point? 994 [The Board confers] 995 MR. BETTS: Ms. Nowina has pointed out one question that perhaps you can help us with, and that is assuming that we are able to deal with the confidentiality matters in less than a full day tomorrow, whether the parties had any -- or the applicant has any intention of trying to fill that afternoon? It's difficult to do. I don't think anybody present would object to getting finished a little bit early on a Friday afternoon either. But I pose that question to you. 996 MS. PERSAD: Yes. The applicant had planned to bring the panel up on deferred taxes on Monday because it involves people from Calgary and they have their flights already planned. So the only issue we were going to deal with tomorrow, then, would be the confidentiality issue. 997 MR. BETTS: Thank you very much. We will focus on that for tomorrow's activities. 998 So once again, thank you to the witness panel and thank you all for your participation, and we'll adjourn to reconvene at 9:30 tomorrow morning. 999 --- Whereupon the hearing adjourned at 2:40 p.m.