Rep: OEB Doc: 12YPP Rev: 0 ONTARIO ENERGY BOARD Volume: 8 28 JUNE 2004 BEFORE: R. BETTS PRESIDING MEMBER P. NOWINA MEMBER P. SOMMERVILLE MEMBER 1 RP-2003-0203 2 IN THE MATTER OF a hearing held on Monday, 28 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 28 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: [20] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DEFERRED TAXES - BOYLE, ROSS, JOZSA, SPEVICK: [57] EXAMINATION BY MR. CASS: [63] CROSS-EXAMINATION BY MR. SHEPHERD: [136] CROSS-EXAMINATION BY MR. THOMPSON: [1093] PROCEDURAL MATTERS: [1413] 10 EXHIBITS 11 EXHIBIT NO. K.8.1: BOARD'S NOTICE REGARDING THE NATURAL GAS FORUM, DATED JUNE 24TH, 2004 [43] EXHIBIT NO. K.8.2: STEADY STATE DEPRECIATION MODEL [199] EXHIBIT NO. K.8.3: NON-CONSOLIDATED FINANCIAL STATEMENTS FOR RENTCO FOR SEPTEMBER 30TH, 2001 [635] EXHIBIT NO. K.8.4: NON-CONSOLIDATED FINANCIAL STATEMENTS FOR RENTCO FOR MAY 6TH, 2002 [636] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.8.1: TO CONFIRM THAT THE PURCHASER OF THIS BUSINESS REPORTED THAT THE PROFIT ON THIS BUSINESS FOR THOSE PERIODS WAS RESPECTIVELY $87 MILLION AND $23 MILLION [840] UNDERTAKING NO. J.8.2: TO PROVIDE TOTALS OF UTILITY-RELATED AND NON-UTILITY-RELATED PROFITS FROM THE SALE OF THE UTILITY [868] UNDERTAKING NO. J.8.3: TO PROVIDE SEGMENT OF BOARD OF DIRECTORS NOTE FOR ESI (REPORT TO BOARD ON NOVEMBER 30, 2001) [1240] 14 --- Upon commencing at 9:35 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. Welcome back on this Monday, to day 8 of the hearing of application RP-2003-0203. Our hearing schedule indicates that today we will be examining issue number 12.1, which relates to deferred taxes. 17 I hope all of you had an opportunity to review our decision on Friday regarding the question of confidentiality of certain documents, and the Board Panel would just like to qualify that decision slightly by saying that we trust or expect that everybody will treat that information with respect and, to the extent possible, to treat it sensitively. And that doesn't change its status as being open to the public and, therefore, not of a confidential nature. 18 Did that confuse anybody? I'm going to let you stay confused and put your minds to it. 19 Before we begin the day's activities, can I hear if there are any preliminary matters for our consideration? 20 PRELIMINARY MATTERS: 21 MR. CASS: Mr. Chair, the company has some undertaking responses that are ready to be provided to the Board. 22 MR. BETTS: Thank you. Let's do that. 23 MR. CASS: I won't take the Board's time to describe in detail each undertaking, unless the Board so desires. There are two that relate to the issues regarding the Union storage contract. These are Undertakings J.1.8 and J.2.2. There are also three that relate to the questions on transactional services. These are Undertakings J.5.3, J.5.4, and J.5.6. 24 MR. BETTS: Thank you, Mr. Cass. Can you help me just to make sure that -- they came in such a flurry. I have six in front of me. I have 1.8, 2.2, 5.3. I have two of those, actually. I have five in front of me. 5.4 and 5.6; is that correct? 25 MR. CASS: That's correct, Mr. Chair. 26 MR. BETTS: Anything else? 27 MR. CASS: No, thank you, Mr. Chair. 28 Mr. Janigan. 29 MR. JANIGAN: Yes. I'm responding with respect to the Board's proposed date for oral argument. We have a matter that the CRTC has set for an expedited hearing on that date involving an application of ours with respect to the six telephone companies. There is a very good prospect for settlement of that particular issue, but both the expedited hearing and settlement of any issue is very new to the CRTC so that we are in the process of exploring both those options and attempting to settle with all six telephone companies, some of whom have different ideas from the other. I put that matter before you now as to whether or not the prospect of arguing orally is something that could be continued onward, or should I put on the record now the fact that I would prefer written argument based upon this potential conflict. 30 MR. BETTS: I'm not sure that I'm in a position to answer that at this point. I think I've indicated the Panel would prefer oral arguments wherever possible, and that's how we're looking at it. I would not expect you to not appear at another hearing unless, obviously, other alternate arrangements could be made. But could I ask you to just confer with Ms. Lea, who's doing the very best she can to try and establish a schedule for oral arguments? It may very well be that there is some date that wouldn't interfere with that proceeding that you could speak to the Board and present your arguments. But if you wouldn't mind, please, discuss that with her. 31 MR. JANIGAN: I will do that, Mr. Chair. 32 MR. BETTS: Thank you. 33 MR. JANIGAN: And I would also add, on the issue of deferred taxes, I expect that my friends Mr. Thompson and Mr. Shepherd will take up the balance of their day in cross-examination, and I also expect it to be so thorough that it will obviate the necessity for me to cross-examine tomorrow. I will be unavailable tomorrow in the event that there is any questions, but I don't expect that I will be appearing on this issue otherwise. 34 MR. BETTS: Thank you, Mr. Janigan. 35 Any other preliminary matters? 36 MR. THOMPSON: Mr. Chairman, I just have one. You may recall that we filed as Exhibit K.1.6 a documents brief of IGUA with respect to the Union Gas storage contract, and at tab 5 of that brief there was the October 24, 2003 documentation pertaining to the Natural Gas Forum. I received last week the Board's notice dated June the 24th of 2004 with respect to the Natural Gas Forum indicating that the regulation of storage and transmission is one of the three areas on which the Board intends to focus, and I wanted, if I could, to simply file that document in this record as essentially a sequel to what is at tab 5 of the previous exhibit. I don't have additional copies here at the moment, but I'd ask that we simply give it a number and I'll attempt to get copies made and have it filed at the break, if that's satisfactory. 37 MR. BETTS: Thank you. 38 Ms. Lea. 39 MS. LEA: Thank you. So this is the Board's notice -- may I just have a look at it, Mr. Thompson? 40 MR. THOMPSON: Yes. 41 MS. LEA: Thank you. Board's notice regarding the Natural Gas Forum, dated June 24th, 2004. Exhibit K.8.1, please. Mr. Thompson, we'll need a few copies. 42 MR. THOMPSON: Yes. I'll get those at the break. 43 EXHIBIT NO. K.8.1: BOARD'S NOTICE REGARDING THE NATURAL GAS FORUM, DATED JUNE 24TH, 2004 44 MR. BETTS: And I will mention -- and Mr. Thompson, please forgive me for mentioning it when you happened to do it, but we've had several occasions where parties have not had sufficient copies to be handed out when any presented a document. I would like every effort to be made to ensure that you have sufficient copies with you when you present a document to the Panel. Thank you. 45 MR. THOMPSON: Thank you. My apologies. 46 MR. BETTS: As I say, I'm sorry, I wasn't focusing this necessarily at you, Mr. Thompson. 47 MR. THOMPSON: I couldn't get our copier to work last night, unfortunately. Low-tech Pete. 48 MR. BETTS: Are those all the preliminary matters for the Board Panel's consideration? 49 Mr. Cass, I see we have some new faces at the witness panel table, and we have a new issue to deal with. Are you ready to begin that? 50 MR. CASS: Yes, Mr. Chair. Perhaps I might begin by introducing the members of the panel, and then when they have been introduced, perhaps they might go forward to be sworn. 51 Starting with the witness sitting closest to the Board Panel, we have Mr. Brad Boyle, who is the Assistant Treasurer of Enbridge Inc. as well as the Assistant Treasurer of Enbridge Gas Distribution. 52 Sitting beside him is Bill Ross, who is Director of Finance of Enbridge Gas Distribution. 53 The next witness going in the same order is John Jozsa, who is Manager Tax Services of Enbridge Gas Distribution. 54 And then finally is Mr. Ted Spevick, who is a partner with KPMG. 55 Perhaps the witnesses could go forward and be sworn. 56 MR. BETTS: Thank you. Ms. Nowina will swear them in. 57 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DEFERRED TAXES - BOYLE, ROSS, JOZSA, SPEVICK: 58 B.BOYLE; Sworn. 59 B.ROSS; Sworn. 60 J.JOZSA; Sworn. 61 T.SPEVICK; Sworn. 62 MR. BETTS: Thank you. The witnesses have been sworn in, so please proceed, Mr. Cass. 63 EXAMINATION BY MR. CASS: 64 MR. CASS: For the benefit of the Board and the intervenors, I will start by addressing a question to each witness just to have them identify their role on this witness panel. 65 Starting with you, Mr. Boyle, can you explain briefly, please, for the Board your role in relation to deferred taxes. 66 MR. BOYLE: Sure. For the last three years, I've been the treasurer of Enbridge Inc. -- sorry, the assistant treasurer of Enbridge Inc. as well as the assistant treasurer for Enbridge Gas Distribution. For the last six years in total, I've been involved in our treasury group at Enbridge. For the two years prior to that, I was involved in finance reporting and budgeting at Enbridge Inc. and I also worked eight years at Enbridge Gas Distribution in the budgeting and forecasting department, and financial and economic studies groups. I've been involved in this issue for about the last five years since it arose in 1999. 67 MR. CASS: Thank you, Mr. Boyle. 68 Mr. Ross, what's your involvement with the deferred taxes? 69 MR. ROSS: In my role, I'm Director of Finance and I'm responsible for the upkeep of all accounting information for Enbridge Gas Distribution and the control of that information as well and recording of anything associated with the deferred taxes. 70 MR. CASS: Thank you. 71 Mr. Jozsa, could you explain your role to the Board, please. 72 MR. JOZSA: I've been Manager of Tax Services at Enbridge Gas Distribution for the past two and a half years and have been involved with preparation of the tax returns and financial statements. 73 MR. CASS: Thank you. 74 Finally, Mr. Spevick, could you respond to the same question, please. 75 MR. SPEVICK: I'm a tax partner with the firm of KPMG Chartered Accountants, and our firm was retained by Enbridge to provide specified and limited audited procedures on schedules that they prepared in respect of this issue. 76 MR. CASS: Back to you, Mr. Boyle. Was the company's evidence on deferred taxes, including answers to interrogatories, prepared by you or under your direction or control? 77 MR. BOYLE: Yes, it was. 78 MR. CASS: And is the evidence accurate, to the best of your knowledge or belief? 79 MR. BOYLE: Yes, it is. 80 MR. CASS: All right. And Mr. Spevick, I believe that there is a report from KPMG that is attached as an appendix to Exhibit A8, tab 5, schedule 1. Was that prepared by you or under your direction or control? 81 MR. SPEVICK: It was prepared by me and also under my direction and control. 82 MR. CASS: Thank you. Is that evidence accurate, to the best of your knowledge or belief? 83 MR. SPEVICK: Yes, it is. 84 MR. CASS: Back to you one more time, Mr. Boyle. Could you please summarize for the Board the company's position on deferred taxes. 85 MR. BOYLE: Yes, I can. The company is seeking to recover from the notional utility account established as a result of the EBO 179-14/15 decision the sum of 23.9 million after tax. In order to explain why the company's position is this in this regard, I'll address the following: 86 First, I'll provide a brief overview of how deferred income taxes arise from a technical accounting and tax context, and then try to translate that into more basic financial concepts. 87 Second, I'll review a flow chart which I prepared that identifies the various businesses and economic units that are involved in this transaction. 88 Third, I'll summarize some of the various numbers in evidence and try to visually match them with the business and our economic units on the flow chart. 89 MR. CASS: All right. Mr. Boyle, could you then please begin with your overview of deferred income taxes. 90 MR. BOYLE: Sure. What I'll try to do is break down the technical tax and accounting principles into some more basic business concepts. At a high level, if you look at deferred income taxes, like an interest-free loan from the Canada Revenue Agency bank, if you will, with a scheduled repayment schedule, it may assist in trying to follow the concepts. Essentially, each interest-free loan, if you will, from the bank of Revenue Canada is tied to capital assets purchased by a business in a single year. The reason the government offers this interest-free loan benefit, if you will, is to encourage capital investment in Canada. 91 So if you visualize deferred income taxes as an interest-free loan from the Canada Revenue Agency bank, it may be easier to follow the financial statement impacts that are shown in the spread sheet that we've included in Exhibit K.7.1. And I'll try and walk through a little bit of that with you. 92 If you turn to the first page of Exhibit K.7.1, which is entitled "Deferred Income Tax Illustrative Example," I'll try to walk through some of the concepts there. 93 The very top part of the spreadsheet shows the accounting income statement for a business that has $200 in operating income before depreciation expense in year 1, and $400 in year 2 and beyond. This is shown in line 1. In year 1, the business also makes $250 of capital investments throughout the year, and this is shown down on line 9 as additions. And we assume in this example that it's spread out throughout the year so that, on average, the capital investment is in the middle of the year. And again that's on line 9. 94 Now, we've talked about the income before depreciation up in line 1. We're now going to try and calculate the accounting depreciation. So to calculate the accounting depreciation, if you move down to line 8, 9, 10, and 11, I've assumed a 20 percent accounting depreciation rate. And our opening balance is zero for the year, we add $250 of assets in the year, and that's mid-year on average. Our depreciation expense is calculated on line 10, which is the $250 times 20 percent which is 50 times the half-year weighted average amount, or our $25 depreciation expense. Then I've shown the closing balance of $225 at the end of the year. But I'll take my depreciation expense for accounting purposes on line 10 and move that back up to line 2. 95 That will produce, for accounting purposes, earnings before income taxes of $175 in year 1, and applying the same theory across the years, the amounts shown in columns 2 -- year 2, 3, and 4 are across. 96 Now, I'd like to also calculate the tax depreciation amount, which is different than the accounting depreciation because of the different rates for tax purposes. I've done that in section 12 -- lines 12 through 16, essentially. Again, I've got an opening balance of zero on line 13, then the additions again are the same $250. My tax depreciation, though, is essentially at a 40 percent rate in my example, so double the rate of the accounting depreciation. So again, $250 times 40 percent times the half-year produces a tax depreciation or capital cost allowance of $50. My closing balance for tax purposes for tax depreciation is now $200. And again I carry that forward into year 2. 97 So in this case, I've got accounting depreciation of $25 and tax depreciation of $50. The reason the tax depreciation is higher than the accounting depreciation in the early years of a new capital investment is that that is an incentive for businesses to invest in capital and create this interest-free loan concept. 98 Now, if I then look at what the impact of that difference is on the income tax expense, I've gone down in lines 17 through 20 to calculate the income taxes for accounting purposes. I start with my operating income before accounting depreciation from line 1 brought down to line 17 of $200. I subtract my accounting depreciation we just calculated of $25. That reduces to accounting earnings before income taxes on line 19 of $175. My accounting income tax at a 40 percent assumed tax rate is 40 percent times 175, which is $70 of accounting income tax expense. I move that number on line 20 up to line 6, which is my total income taxes for accounting purposes from my accounting income statement at the 40 percent tax rate. However, there is a difference between the accounting income tax expense and the Canada Revenue Agency income tax expense, if you will, and I've shown that calculation from lines 21 through 24. Again, I start with the accounting income before tax and depreciation of $200 from line 1. On line 22, though, I subtract the tax depreciation of $50. That gives me taxable income of $150 in this case. My Canada Revenue Agency income taxes at the 40 percent tax rate are $60 in this case. So that difference is -- I move that $60 up to line 4, which is called the current income tax expense of $60, the Canada Revenue Agency tax of $60 and the accounting -- 99 [Brief pause in proceedings due to court reporter's coughing] 100 MR. BOYLE: Just discussing the operating income before tax depreciation on line 21, I guess so the $200 again and the tax depreciation or capital cost allowance of $50, producing the taxable income of $150 on line 23. So my Canada revenue agency income taxes at 40 percent are $60 in this case. 101 I then move that $60 income tax item up to line 4 and show that as the current income tax amount. That is the current amount due to Canada Revenue Agency. However, the accounting income taxes as we calculated were $70 on line 6. The difference between those two items is the deferred income taxes shown on line 5. That negative amount essentially represents the amount of the loan from Revenue Canada for this period. 102 Continuing the example on, I basically duplicate the analysis in years 2, 3, 4, and 5, assuming no additional capital investment in this business. What that shows if you focus on line 5, the deferred income tax line, we basically borrow, if you will, another $20 from Canada Revenue Agency in year 2, another $20 in year 3, because in these years the tax depreciation is in excess of the accounting depreciation. However, that process reverses over time naturally, and in years 4, 5, and 6, my accounting depreciation exceeds my tax depreciation and therefore I must repay that loan, if you will, to the Canada Revenue Agency bank. So it's essentially a timing difference. And as I said, if you view it as a loan from Canada Revenue Agency, it helps perhaps to follow the concept here. 103 MR. CASS: All right, Mr. Boyle. Can you also explain, please, the flow chart that is included as part of Exhibit K.7.1. 104 MR. BOYLE: Sure. In order to assist the Board's understanding of the various numbers and how they fit together, I have prepared the flow chart and income tax summary that will visually link the economic units and numbers involved in this issue. The first page is the flow chart that shows the utility rental assets that were originally part of the utility prior to being transferred to Enbridge Services Inc. in October 1999. The prefiled evidence and interrogatory responses often refer to this segment as the transferred rental assets. 105 As background, for a number of years, the utility rental assets operated together with gas utility ratepayers. Upon separation of the two economic entities, it was determined by the Board that gas utility ratepayers had received a benefit of $50 million from its economic relationship with the utility rental assets. Moreover, upon the separation of the economic units, the utility rental assets had an outstanding deferred income tax liability of $126 million; that is, the utility rental assets had borrowed 126 million in interest-free loans from Canada Revenue Agency that would need to be repaid over time. 106 The Board decided that to balance off the benefit received by the gas utility ratepayers from the utility rental asset program, gas utility ratepayers would pay the deferred income taxes as they became payable on the utility rental assets up to a maximum of $50 million. This is an important element, the matching of benefits and costs. 107 Now, in October 1999, the utility rental asset economic unit was separated from the gas utility ratepayers and transferred to Enbridge Services Inc. That's shown in the second set of boxes there. There were other businesses in Enbridge Services Inc. at that time, which we'll touch on later. 108 In December 1999, though, a second transfer was made with the utility rental assets going into an entity called 3696669 Canada Inc., along with a very small amount of new 1999 non-utility rental assets installed between October 1999 and December 1999. For convenience, I'll refer to 3696669 Canada Inc. as Rentco. 109 The second transfer of the utility rental assets to Rentco did provide some modest additional financial value to Enbridge Services Inc., but also allowed Enbridge to better isolate the utility rental asset economic unit for evaluation. For the majority of the relevant time period here, the utility rental assets were held by Rentco along with a small amount of 1999 new non-utility rental assets. Other non-utility investments were also brought into Rentco during this period. 110 MR. CASS: Thank you, Mr. Boyle. Finally, could you explain the third page of Exhibit 7.1. 111 MR. BOYLE: Sure. The second page here provides a summary of the causes of the amount of cash income taxes actually paid by Rentco and Enbridge Services Inc. Over the relevant October 1999 to May 2002 period. 112 Starting at the top, I have noted the total income taxes payable by Rentco of $48.3 million associated with the utility rental assets. Of this amount, 23.9 million is the actual deferred income taxes payable to Canada Revenue Agency, and 24.4 million is primarily attributable to operating business profits. 113 Now, I say the 23.9 million represents the exact actual amount of the deferred income tax loan liability that was payable to the Canada Revenue Agency from October 1st, 1999 to May 7th, 2002, with respect to the utility rental assets. It is important to note the deferred income taxes payable amount of $23.9 million on the utility rental assets is directly tied to the utility rental assets regardless of what legal entity the assets reside in. 114 Now, because Enbridge, on a consolidated basis, has numerous other business income and expenses, Enbridge does utilize common financing techniques to optimize corporate income taxes. This is common for many large corporations in Canada because there is not a consolidation of corporate tax returns permitted in Canada like there is in other jurisdictions, such as the United States. Essentially, using my earlier analogy of Canada Revenue Agency as a bank, Enbridge, on a consolidated basis, has made excess cash income tax payments to the Canada Revenue Agency, or has equivalent certificates on deposit from other businesses and other deductions and will look to optimize the use of the cash income taxes paid within the Enbridge family. 115 Specifically here in this case, Enbridge Inc. determined that it would $37.4 million of its excess cash or equivalent certificates of deposit at the Canada Revenue bank from other entirely unrelated businesses and investments to partially offset the cash income taxes obligations of Rentco from the utility rental assets. This resulted in a net cash tax payment of $10.9 million by Rentco over this period. To be clear, the ability to do this came from expenses or other assets within the Enbridge group that had their own tax characteristics. There was an economic cost incurred by Enbridge Inc. elsewhere in order to use the deductions in Rentco. 116 By using these deductions within Rentco, Enbridge can no longer use the benefit anywhere else. In order to match costs and benefits, the Rentco tax savings from other investments should not be considered a benefit for the utility rental assets. Again, costs must be matched with benefits. 117 For completeness, I've also summarized on this page the components of Enbridge Services Inc. cash income taxes paid over the October 1999 to May 2002 period. The three main items there are the deferred income tax credit in this case from new non-utility rental asset additions of $5.2 million and a net credit of 13.7 million due to tax credits on rental asset installation costs. There is also the net taxes payable from all other ESI businesses, including the new non-utility rental asset business profits of 21.3 million. 118 While I've noted these for completeness, the figures do not in any way impact the 23.9 million deferred income taxes payable on the utility rental assets. In fact, the use of any of these numbers on this page as an adjustment to the $23.9 million amount would be contrary to the basic accounting and finance principle that there be a matching of costs and benefits. A basic principle of accounting and finance is that every economic entity must have two entries for every transaction. Revenues must be matched with expenses, assets matched with liabilities, debits matched with credits, and costs must be matched with benefits. 119 To pick an example from this page, if the utility rental asset entity tried to combine the 23.9 million deferred income taxes payable with the $5.2 million deferred income tax credit related to CCA in excess of depreciation on the 1999 to 2002 new non-utility rental assets, and claim a net deferred income tax payable of 18.7 million, this would violate the matching principle since there is no offsetting cost. The cost that is the future loan repayment to Canada Revenue Agency from this 5.2 million, has been left with the 1999 to 2002 new non-utility rental assets entity as that entity holds the assets that must pay the future deferred income tax loan back to Canada Revenue. The basic principle, then, of matching costs and benefits has been violated. 120 That concludes my remarks. 121 MR. CASS: Mr. Chair, that is the examination-in-chief of this witness panel. 122 MR. BETTS: Thank you, Mr. Cass. 123 Can I first have an indication of who expects to cross-examine this panel. 124 MR. SHEPHERD: Mr. Chairman, we will be cross-examining. We have between two and three hours, and I think the intervenors have agreed that we'll go first. 125 MR. BETTS: I didn't catch that. 126 MR. SHEPHERD: That Schools will go first. 127 MR. BETTS: Schools will go first. Who else will? 128 MR. THOMPSON: I'll be cross-examining, Mr. Chairman. 129 MR. BETTS: Do any other parties at this point expect to be cross-examining? 130 MR. DINGWALL: I don't expect to be, but there's a possibility. 131 MR. BETTS: Thank you, Mr. Dingwall. Is there anyone else in that category? 132 MS. STREET: I fall into that category as well, Mr. Chair. 133 MR. BETTS: Ms. Street, thank you. 134 Okay. Let us proceed with Mr. Shepherd. 135 MR. SHEPHERD: Thank you, Mr. Chairman. 136 CROSS-EXAMINATION BY MR. SHEPHERD: 137 MR. SHEPHERD: Witnesses -- 138 MR. BETTS: Mr. Shepherd, I keep forgetting to do this. Perhaps you could help all the witnesses, and everyone could do the same thing, if you could just introduce what parties you represent as well. 139 MR. SHEPHERD: Sorry, I thought these witnesses knew. My name is Jay Shepherd, and I represent the School Energy Coalition. 140 Witness, although I'm going to -- normally, I like to ask questions of individual witnesses. In this case, I think the questions are generally to the panel at large and feel free to answer whatever question you feel you can assist on. 141 I'm going to start by going back over a little bit of what you've talked about, Mr. Boyle, because I find that the concept of deferred taxes for non-tax specialists can be a bit confusing, as I'm sure you have. We're just going to restrict this to the timing differences in depreciable assets for now, okay? 142 MR. BOYLE: Okay. 143 MR. SHEPHERD: This is what we're talking about here; right? 144 MR. BOYLE: Yes. 145 MR. SHEPHERD: And you have a deferred taxes issue raised whenever the deductions under the Income Tax Act are different from your accounting deductions; right? 146 MR. BOYLE: Yes. 147 MR. SHEPHERD: And the accounting rules say that for depreciation, you depreciate assets over their useful life; correct? 148 MR. BOYLE: Yes. 149 MR. SHEPHERD: Basically, all you're doing is you're taking the costs and you're splitting it up over the periods to which -- from which you're going to earn income from. 150 MR. BOYLE: Yes. 151 MR. SHEPHERD: And that's, in fact, the matching principle, isn't it? That's an example of it. 152 MR. BOYLE: That's an example, yes. 153 MR. SHEPHERD: Okay. I'm going to have a little aside here. You just said that having ESI and Rentco operate the business together and offset their deferred taxes would violate the matching principle. Can you tell me how that is? 154 MR. BOYLE: If you're combining the deferred income taxes with utility rental assets, it's important to understand where that benefit was attributable to. That is the cost. The cost is this loan repayment on the utility rental assets. The benefit for that was partially provided to utility ratepayers when the assets were part of the utility operations. 155 If you look at the new assets, the new non-utility rental assets acquired by ESI or Rentco, basically those business units or the non-utility businesses are taking on the risks and rewards of that program. To the extent that there are costs or benefits, they belong to that economic unit, that is, the non-utility, non-regulated asset owner. So to the extent that it has benefits that it generates because of those new non-utility assets, those new non-utility assets bear that risk or that cost in the future, that is, that the loan must be repaid to Revenue Canada. So to take the benefits from those new non-utility rental assets and ascribe them to the utility rental assets as well, but to leave the cost of that benefit, that is, the future income taxes that are going to be payable on those non-utility, non-regulated assets to the shareholder, is a mismatch of benefits and costs to that economic unit. 156 MR. SHEPHERD: So, Mr. Boyle, I always understood the matching principle to be about making sure that costs were put in the right time period, they were matched against the right revenue, and I've never seen it applied to matching costs to the right entity. And so I wonder if you could undertake to provide us with the reference in the CICA manual that says that you do -- that that's an application of the matching principle. 157 MR. BOYLE: I'm talking about the matching principle of costs and benefits for an economic unit. 158 MR. SHEPHERD: so this is not the matching principle in accounting, this is a different matching principle. 159 MR. BOYLE: It's similar, because the economic units that bear that should be looked at on an economic basis. I agree from a legal entity accounting basis, there may be differences. But I'm looking at the economic unit for costs and benefit purposes, and those units can be different. 160 MR. SHEPHERD: So if we talk about the matching principle here, it would be useful for us to refer to the accounting matching principle which is a very specific thing in the CICA manual, and then this other finance matching principle which is similar but you wouldn't find it in the CICA manual, would you? 161 MR. BOYLE: You would find elements but you would not -- there are provisions in the CICA handbook for matching entries: Liabilities and assets, revenues and costs, et cetera. 162 MR. SHEPHERD: Okay, thanks. So in accounting depreciation, what you do is you take the expense and you split it up over the period that you're going to use the asset, but you don't do the same thing for tax depreciation for CCA, do you? 163 MR. BOYLE: You do something similar but they permit, for income tax purposes, a different rate that can be used, and that rate is prescribed to incent investment. 164 MR. SHEPHERD: Okay. And that's generally on a declining balance method, isn't it, as opposed to a straight-line method? 165 MR. BOYLE: Yes, it is. 166 MR. SHEPHERD: So your example in K.7.1, where you use 40 percent straight line for tax depreciation, that was just to simplify it; right? 167 MR. BOYLE: Yes, it was. 168 MR. SHEPHERD: Because actually that's not how it's done, is it? 169 MR. BOYLE: No, but the effect is the same. It was simplification. 170 MR. SHEPHERD: Okay. Thanks. And CCA, the tax depreciation is also based on a pooling concept, isn't it? 171 MR. BOYLE: It's a pool of assets of the same type as defined in the Income Tax Act. 172 MR. SHEPHERD: So what it means is that you don't depreciate individual assets as you do for accounting purposes, you depreciate the pool of assets, the dollars rather than the things; right? 173 MR. BOYLE: Well, the dollars are related to specific physical assets, so I would argue that they are physical assets as well. 174 MR. SPEVICK: Mr. Shepherd, if I could add one thing. It's possible that you could have identical assets in separate pools if they are in relation to a separate business. 175 MR. SHEPHERD: Clearly. Clearly. One of the results of the pooling concept is that when an asset is no longer useful, it doesn't have an impact on your depreciation, does it, for tax purposes; right? Because the pool has not changed. 176 MR. BOYLE: There are certain adjustments that are occasionally made for asset retirements and the like, but you're correct, on a pool basis, in an economic unit or entity, they are done for CCA purposes on the pool basis. 177 MR. SHEPHERD: The end result, at least in theory, the end result is that both CCA tax depreciation and accounting depreciation simply split up a cost over a period of time; right? The total deduction should still end up being the same; right? 178 MR. BOYLE: Yes, over -- if you went to -- in my example, they did end up being the same, it was just a timing difference as you can see in the years 1 through 3 and 4 through 6. 179 MR. SHEPHERD: If you bought one asset and you used it for its entire useful life and then disposed of it for zero dollars, tell me if I have the effect right, in the early years you paid less tax than the accounting rules would provide for so you borrow from the Revenue Canada bank, and in the later years the CCA is less than the accounting depreciation so you actually pay more taxes in those years than the accounting rules say, so you're paying back the bank, but in the end it should work out to zero. 180 MR. BOYLE: That's correct. 181 MR. SHEPHERD: And you don't pay any interest on that loan from the Revenue Canada bank. 182 MR. BOYLE: That's correct. As I said, that's an interest-free loan to encourage investment. 183 MR. SHEPHERD: Okay. So the result is the longer you can put off paying it, the less the net present value of that liability. 184 MR. BOYLE: Yes. 185 MR. SHEPHERD: Okay. Now, let's turn to your Exhibit K.7.1. We see that effect that you just described as you build up the deferred tax balance, and then you drawdown, this is line 26, as the asset gets older; right? 186 MR. BOYLE: Yes. 187 MR. SHEPHERD: Okay. I guess one can't help but notice that if you bought another $250 asset in year 3, then you wouldn't have any drawdowns in year 3 and 4, would you? 188 MR. BOYLE: Potentially not. But you would have a greater loan repayment in the future. 189 MR. SHEPHERD: Of course. But if you bought another asset then in year 5, then you wouldn't have any drawdowns up until year 7; right? 190 MR. BOYLE: Again, that's correct, but you would be building up the size of the loan, it would be getting larger and larger and due in different years, yes. But going back to the original assets, they have a fixed repayment schedule, essentially. The fact that you add additional assets in future years will create a benefit in that period but create, again, future obligations. 191 MR. SHEPHERD: This is a five-year asset that you're hypothesizing here; right? 192 MR. BOYLE: That's correct, the 20-year straight line depreciation. 193 MR. SHEPHERD: So if the business grows over the first five years, just by another -- it just needs to double in those five years, and then all you do after that is just replace the assets as they are retired, you never pay back the loan, do you? 194 MR. BOYLE: There is a scenario that could be constructed that would show that, yes. 195 MR. SHEPHERD: Okay. Mr. Chairman, I have a visual aid. This was provided to the witnesses on the weekend. You've seen this, Mr. Boyle? 196 MR. BOYLE: Yes, I have. 197 MR. SHEPHERD: You've seen -- 198 MR. SCHUCH: Mr. Chair, I think we should give it an exhibit number. That could be K.8.2, Steady State Depreciation Model. 199 EXHIBIT NO. K.8.2: STEADY STATE DEPRECIATION MODEL 200 MR. SHEPHERD: Mr. Boyle, you've seen the data on which this chart was based? 201 MR. BOYLE: Yes, I have. 202 MR. SHEPHERD: Now, correct me if I'm wrong, this hypothesizes a business that starts from nothing in year 1, buys a million dollars of depreciable assets in the first year and then each year after that, continues to buy another million dollars of depreciable assets, just paying inflationary increases, and it uses your assumptions of five-year assets, 20 percent annual accounting depreciation, and 40 percent declining-balance depreciation for tax purposes. Can you confirm that those facts are correct? 203 MR. BOYLE: Yes, I can. 204 MR. SHEPHERD: And the blue curved line here that you see on this chart, that's the CCA tax depreciation each year; right? 205 MR. BOYLE: Yes. 206 MR. SHEPHERD: And the red line, that's the accounting depreciation? 207 MR. BOYLE: Yes. 208 MR. SHEPHERD: And the accounting depreciation changes direction after five years because after that, all you're doing is replacing old assets; right? 209 MR. BOYLE: Yes. 210 MR. SHEPHERD: In the first four years when the tax depreciation is higher than the accounting depreciation, you're getting a tax benefit -- you're borrowing, if you like, from the bank of Revenue Canada; right? 211 MR. BOYLE: Yes. 212 MR. SHEPHERD: And then in that period in years 5, 6, and 7, where the red line is higher than the blue line, you're paying back some of that. 213 MR. BOYLE: Yes. 214 MR. SHEPHERD: Not all of it but some of it; right? 215 MR. BOYLE: Yes. 216 MR. SHEPHERD: And then after that, starting in about year 9 or so, it looks like, just in this example, just using these numbers, you have sort of a steady state in which your tax depreciation and your accounting depreciation are roughly the same. As long as you continue to run the business that way, you don't have any additional deferred taxes and you don't pay any back; right? 217 MR. BOYLE: That's correct. And it depends on the specific characteristics of the assets, the depreciation rate, capital cost allowance rate, and the addition rate, but there is a scenario that exists where you can defer, for periods of time, that loan repayment. 218 MR. SHEPHERD: And, in fact, it's quite common amongst businesses in Canada, mature businesses in Canada, to have deferred taxes that they essentially never pay back; right? 219 MR. BOYLE: I don't know if it's common, but you can adjust the amount, depending on your growth rate and your depreciation rate and CCA rate, yes. 220 MR. SHEPHERD: Is that, by the way, an effect that EGD has? 221 MR. BOYLE: I believe EGD is in crossover overall in that at least in some of the years I've looked at recently, its accounting depreciation is in excess of its capital cost allowance and it is paying a tax amount that is slightly higher than its accounting cost. 222 MR. SHEPHERD: And in some other years it's lower; right? 223 MR. BOYLE: That's correct. 224 MR. SHEPHERD: Because it's at roughly this steady state; isn't it? 225 MR. BOYLE: Well, again, it depends on additions in the year. You could go either way potentially, yes. 226 MR. SHEPHERD: Okay. Now, what interests me about this concept of a steady state is that if you acquired this business in year 9, and let's say you could acquire it with the tax consequences as they are on a rollover basis, right, you wouldn't really have to worry about deferred taxes, would you? As long as you're continuing to operate the business -- it's just there, it's on your balance sheet, never going to affect you. 227 MR. BOYLE: I would not agree that you cannot worry about it because that liability would come due at some point. If you're unable to grow at that rate or different CCA rates or depreciation rates come into effect, you will be required to pay that deferred tax liability. It is only a question of when. But you must pay it at some point. 228 MR. SHEPHERD: And so that gets back to that question of how long can you defer it; right? 229 MR. BOYLE: To some extent, but it also depends on who is the economic owner of that cost or benefit. 230 MR. SHEPHERD: Okay. So the reason I got into this is I couldn't understand why Centrica was willing to buy shares of this company instead of assets, because when they buy shares, they have to essentially take on this deferred tax liability, don't they? 231 MR. BOYLE: Yes, because when you buy shares, it doesn't affect the asset capital cost allowance that's embedded in the assets. They don't belong to the assets. 232 MR. SHEPHERD: And so when you sold this business to Centrica, the entire deferred tax liability that had not yet been drawn down was transferred to Centrica through Rentco; right? 233 MR. BOYLE: Yes. 234 MR. SHEPHERD: And so you think that Centrica would say, Well, we don't want that big liability. In fact, that's what you said when you got this business from Consumers Gas in the first place; right? 235 MR. BOYLE: You have to recognize that that liability is part of the transaction and appropriately value or cost that liability. 236 MR. SHEPHERD: But the real reason why they didn't care is this steady state idea; right? As long as they're going to run the business, this liability isn't going to come home to roost for a long, long time. 237 MR. BOYLE: No, I would disagree with that, Mr. Shepherd. They would come home to roost, they are coming home to roost today. It depends on your, as I said, your growth rate and what is transpiring in the market with the new investment as well as your CCA rate and depreciation rate, and those can change over time. In fact, they did have to specifically, I would suggest, value that in their bid because the alternative would have had other tax consequences as well for both parties that both parties would need to value in the bid. 238 MR. SHEPHERD: So you're saying they did value that in the bid. 239 MR. BOYLE: I would suggest, if I was looking at it from their standpoint, I would, yes. 240 MR. SHEPHERD: Sorry, is your evidence that they did value it in the bid or that you think they might have? 241 MR. BOYLE: I don't know what they valued in the bid, no. 242 MR. SHEPHERD: Okay. And you just said that right now, that deferred tax liability is coming down to roost -- coming home to roost for Centrica, isn't that what you just said? 243 MR. BOYLE: I would expect so as it was for us. 244 MR. SHEPHERD: So can you tell us what their drawdowns for deferred taxes are today? 245 MR. BOYLE: No, I can't because I don't know their figures. 246 MR. SHEPHERD: So you don't actually know whether they are drawing down deferred taxes or not, do you? 247 MR. BOYLE: No, I don't. 248 MR. SHEPHERD: Okay. So I just want to get some basic facts clear here. At the time Consumers Gas transferred the rental assets to ESI, Enbridge Services Inc., the defer tax liability was $168 million; right? 249 MR. BOYLE: Well, there was a $42 million credit that applied to that. I think the net amount was 126 million. 250 MR. SHEPHERD: Okay, well, let's -- I wonder if we could turn to Exhibit K.7.4. K.7.4 is the motion record of EGD in -- I don't even know what it's in -- in 2002. Do you have that? 251 MR. BOYLE: I believe I do. 252 MR. SHEPHERD: And if you could turn to tab D, please, and on page 2 of that tab. 253 MR. BOYLE: Yes. 254 MR. SHEPHERD: Okay. Now, this is an affidavit of Patricia O'Connor. Who was Patricia O'Connor? 255 MR. BOYLE: She was the controller of Enbridge Gas Distribution at this point, I think. 256 MR. SHEPHERD: At paragraph 3 of her affidavit, she describes the accounting entries on the transfer of the rental program. And I don't see $126 million there. Why don't you take me through what those entries were. 257 MR. BOYLE: Sure. This was with respect to the transfer -- sorry, out of the utility and being part of non-utility operations. And basically the $168 million total you referred to there is shown at the bottom is the credit, and the $42 million I referred to was the deferred credit which was applied at that time against that liability. The number 126 million I referred to was the $76 million retained earnings and the $50 million regulatory assets, so the addition of those two is the 126 million. 258 MR. SHEPHERD: What is the amount you put in the defer taxes account? 259 MR. BOYLE: It was the 168 million. 260 MR. SHEPHERD: And where did the 42 million eventually go when you collected the money? 261 MR. BOYLE: Well, it went into the deferred tax -- future tax liability account. The number was $126 million prior to that $42 million adjustment. 262 MR. SHEPHERD: Now you're confusing me. You just said that the amount that you put in was 168 million? 263 MR. BOYLE: Yes. I guess, trying to step back, the amount originally was $126 million, but there was an issue of a $42 million credit that was associated with a Revenue Canada issue around the installation costs. And based on the determination of that decision, the deferred tax amount needed to be increased by $42 million. And the question was: When did that occur and who would receive that credit, if you will? It was determined by the Board that because the shareholder was essentially liable for the deferred taxes, the $42 million was recorded as a deferred tax liability against this asset and the credit was received by the company. 264 MR. SHEPHERD: So, okay, let me understand. You -- now, what happened was you were reassessed; right? Revenue Canada changed their assessing practice in 1999 and as a result you got a $42.3 million refund; isn't that correct? 265 MR. BOYLE: That's correct. 266 MR. SHEPHERD: And that hadn't been included in your deferred taxes before, but the refund was a timing difference, wasn't it? 267 MR. BOYLE: Yes, it was. 268 MR. SHEPHERD: So you had to increase your deferred taxes by the amount of that timing difference, didn't you? 269 MR. BOYLE: That's correct. 270 MR. SHEPHERD: And the $42.3 million went into your bank account. 271 MR. BOYLE: Yes, it did. 272 MR. SHEPHERD: Okay. I'll come back to that. So the rest of that accounting transaction was the $50 million receivable from the ratepayers; right? 273 MR. BOYLE: Yes. 274 MR. SHEPHERD: That's the notional utility account. And the $76 million write-down of retained earnings; correct? 275 MR. BOYLE: Yes. 276 MR. SHEPHERD: Now, when you -- that's all on a consolidated basis? 277 MR. BOYLE: Yes, it was essentially at each entity level along the chain, yes, but it was also consolidated -- 278 MR. SHEPHERD: Sorry, I didn't hear that answer. 279 MR. BOYLE: It was at each entity level along the chain, but it was also at the consolidated level at the end of the day, yes. 280 MR. SHEPHERD: When you sold ESI to Centrica, you didn't consolidate that liability anymore; right? 281 MR. BOYLE: That's correct, because it belonged to the assets and went along with the rental assets. 282 MR. SHEPHERD: So then what were the accounting entries on a consolidated basis to get rid of that deferred tax liability on sale? 283 MR. BOYLE: Essentially it's no longer there. It's the -- the investment has gone off our balance sheet. We had an investment in Enbridge Services Inc. and we now have cash consideration for that. So the asset was reduced on the offsetting entries on the liability side. 284 MR. SHEPHERD: And the investment included the deferred taxes? 285 MR. BOYLE: No, the investment was the amount in shares that we had invested. 286 MR. SHEPHERD: No, but just look at it from EI's point of view. EI has this, whatever the number was. Let's say it hadn't change. We have some changes in the meantime. But let's say it was still $126 million; right? It's got this $126 million consolidated liability on May 5th, and then on May 7th, 2002, it doesn't have it anymore; right? So what's the matching entry to that $126 million reduction of liability? 287 MR. BOYLE: The matching entry is the reduction in investments because we no longer have the investment. 288 MR. SHEPHERD: I don't understand that. Try again. 289 MR. BOYLE: On our balance sheet, we have an investment in Enbridge Services Inc. and the investment was essentially $737 million, or property, plant and equipment, if you will. 290 MR. SHEPHERD: Okay. 291 MR. BOYLE: That's the investment. The property, plant and equipment were assets that we have. When the property, plant and equipment come off the balance sheet, there's debt and equity and deferred taxes that come off the balance sheet on the offsetting entries. 292 MR. SHEPHERD: The effect would be that the deferred taxes would end up going back into retained earnings, wouldn't they? At the end of the day, when it all comes out, you'd have a $126 million boost to retained earnings because of that, wouldn't you? 293 MR. BOYLE: No, not necessarily. It depends on the purchase price and the asset value -- the investment value. 294 MR. SHEPHERD: Okay. I was trying to get the basic numbers right. So we have this $126 million, we have the $50 million, the notional utility account, we have the $23.9 million, that's what you actually drew down on the deferred tax account during those two and a half years; right? 295 MR. BOYLE: Yes, it is. 296 MR. SHEPHERD: Is that the actual amount you drew down? 297 MR. BOYLE: Yes, it's the actual amount related -- excuse me, related to the utility rental assets. 298 MR. SHEPHERD: So it's not the actual drawdowns, it's an adjusted amount. 299 MR. BOYLE: No, it's the actual amount related to the utility rental assets. 300 MR. SHEPHERD: So we're going to be able to go to your financial statements for each year and we're going to be able to track that $23.9 million exactly. 301 MR. BOYLE: Yes, with the adjustments for the 1999 new non-utility assets added. 302 MR. SHEPHERD: So, in fact, it's an adjusted amount; right? 303 MR. BOYLE: Well, it's adjusted from the legal entity total numbers but it is not adjusted in respect of belonging to exclusively the utility rental assets. 304 MR. SHEPHERD: Another number that's relevant here is the actual income taxes paid by Rentco in that two and a half years were $10.9 million; right? 305 MR. BOYLE: I don't believe it's relevant, no, but it is a figure that we've identified, yes. 306 MR. SHEPHERD: And why isn't it relevant? 307 MR. BOYLE: Because the difference between the taxes payable on the deferred income tax amount and the business profits of Enbridge Services Inc. Is related to non-utility, non-regulated investments. Enbridge has decided to use some of its credits, if you will, with the Bank of Canada -- Revenue Canada to offset that against the liability. It is a hard liability of $23.9 million and the total $48.3 million. Because of these other assets, we have offset that amount and the actual cash income taxes paid was the 10.9 million. But the cause of the deferred tax liability exclusively related to the utility rental assets is the $23.9 million payable amount. 308 MR. SHEPHERD: Mr. Boyle, you said in your direct evidence, and I think I have this quote exactly, that what you used were "your excess cash or certificates on deposit with the bank of Revenue Canada to pay some of the Rentco taxes." Now, that's not entirely correct, is it? You didn't have any cash at revenue Canada, you didn't have any certificates there. What you had were losses in other companies; right? 309 MR. BOYLE: Or, excess cash payments that had been made in the past that we could use to offset against these amounts. 310 MR. SHEPHERD: So Revenue Canada was sitting there with some of your money and you said, Please use some of this money to pay the Rentco taxes. Is that what happened? 311 MR. BOYLE: Essentially, yes. Maybe a better analogy is like a money order. We have a money order drawn against the bank of Revenue Canada that we can use to offset other tax obligations and we use that money order that we had paid with hard consideration to offset the taxes here. 312 MR. SHEPHERD: Sorry, Mr. Boyle, I'm having -- I know you're speaking by analogy, and I understand what you're saying, but I think you may be unintentionally misleading, and so I'm going to ask you this again. Was there real money sitting at Revenue Canada that was used to pay the taxes; yes or no? 313 MR. BOYLE: Yes, there was. 314 MR. SHEPHERD: There was real money? Tell us what that real money was. 315 MR. BOYLE: Enbridge has paid on a consolidated basis cash income taxes to Revenue Canada. It also has deductions in other entities that it can use at points in time to reduce that amount or get a credit or refund back, essentially. And that's what we've done in this case. 316 MR. SHEPHERD: So you took -- you had deductions in one company and you shifted them over to Rentco so that it could reduce its taxes. 317 MR. BOYLE: Yes. 318 MR. SHEPHERD: So are deductions cash in the bank? 319 MR. BOYLE: In some cases, yes, because we could have used those deductions elsewhere at points in time. For tax-planning purposes we elected to use those deductions at this point in time, beginning in 2000, 2001, in Rentco, because -- 320 MR. SPEVICK: Mr. Shepherd, from an accounting perspective, those items that I think you're referring to could be categorized as a deferred tax asset, and in the accounting sense, you can use a deferred tax asset to offset a deferred tax liability. It would seem to me that a better way to approach this is to look at the fact that the Board, my understanding is that the Board said to Enbridge that they could claim, through increased rates, deferred taxes that became payable in respect of those assets and rental property that was transferred from the utility. So if you look at those assets in isolation, because you can't add new -- you're not adding new assets to the pool, in isolation, those timing differences will reverse, and I think even in your example, they would reverse. 321 But what the company has done, and I think what is very confusing here, is that the company has taken other tax assets that they might have, in other words, other depreciable property that they purchased in that period, losses that sat in other entities, and combine those to disguise the fact that the deferred tax liability in respect of those transferred water heaters was being drawn down and paid. So you're confusing issues here. You're confusing taxes payable with taxes paid, and they are quite a different concept. 322 MR. SHEPHERD: I'm not sure how that was responsive to my question to Mr. Boyle, but that was still very useful. 323 Mr. Boyle, it's true, isn't it, just trying to get the numbers nailed down, it's true, isn't it, that Enbridge Inc. and its subsidiaries, in the two and a half years it owned these assets, made a net profit of more than half a billion dollars on them; isn't that right? 324 MR. BOYLE: Sorry, if you could run me through that again. 325 MR. SHEPHERD: In the two and a half years that you owned this rental business, after the ratepayers built it, you transferred out in 1999, you sold it in 2002, and your net benefit, your net profit was more than half a billion dollars; isn't that right? 326 MR. BOYLE: Sorry, I'm just referring to our annual report here. In fiscal 2003, Enbridge Inc. had earnings applicable to common shareholders of 392.3 million; in 2001, earnings applicable to common shareholders of 458.5 million; in 2002, the comparable number is 576.5 million. That's from all our business investments across the Enbridge group of companies. 327 MR. SHEPHERD: I asked about your profit from the businesses you transferred from the utility. That was actually about $548 million, wasn't it? 328 MR. BOYLE: I'm not sure of the specific amount there, but I do know that there was about a $240 million gain on the sale of the assets, if that's what you're referring to, as part of that amount. 329 MR. SHEPHERD: Let's talk about that. It was actually a $296 million gain on the sale, wasn't it? 330 MR. BOYLE: Pretax, yes. 331 MR. SHEPHERD: But you didn't pay any tax on it, did you? 332 MR. BOYLE: There was an accounting tax expense recorded of about $40 million as a capital gain. However, because of our ability to use deductions for other business investments and losses, we did not actually pay any cash income taxes, that's correct. Again, applying this principle, using our deferred tax assets prudently to offset other cash income tax expense. 333 MR. SHEPHERD: So you made $296 million after tax, after real tax, on the sale; yes? 334 MR. BOYLE: No, it was $296 million before taxes. The cash amount was that same amount. But it was not the after-tax amount. 335 MR. SHEPHERD: And on the -- in ESI and Rentco during the two and a half years, you made about $250 million on the business, didn't you? 336 MR. CASS: Mr. Shepherd, could you please be clear on what business you're talking about? Because you started out with questions about the rental program. You're now using the word "the business" as if you're implying that it's just the rental program which I don't think is correct. I'd appreciate it if you could be clear as to what business you're talking about. 337 MR. SHEPHERD: Okay. Just give me a second, Mr. Chairman. 338 Mr. Chairman, in responding to Mr. Cass's question, I'll ask the witnesses whether in fact in their 2002 annual report, they referred to "The company's operations that provide energy products and services to retail and commercial customers, including the water heater rental program." 339 I'm quoting that from your annual report. 340 MR. BOYLE: What page is that, Mr. Shepherd? 341 MR. SHEPHERD: That is -- well, the pages aren't numbered. This is about -- this is in note 5 to your 2002 annual report, which is found in IGUA Interrogatory 36, Exhibit I, tab 13, schedule 36. It's about -- 342 MR. BOYLE: Yes, I do have that. That shows that we had, over the 2000-2002 period earnings of 242 million in 2002, 45 million in 2001, and 34 million in 2000 itself. The sum of those three numbers is about 322.2 million. 343 MR. SHEPHERD: But that assumes a whole lot of taxes that you didn't actually pay because you sheltered them; right? 344 MR. BOYLE: No, that has nothing to do with it. This is the accounting income and that is based on accounting taxes. 345 MR. SHEPHERD: Okay. But those accounting taxes, you've said you didn't pay them; right? 346 MR. BOYLE: They were not a cash tax expense in those years because of other business investment earnings and losses that were allocated against that income stream. 347 MR. SHEPHERD: I wonder if you could turn to School Energy Interrogatory 155, which is Exhibit I, tab 16, schedule 155. 348 MR. BOYLE: I have that document. 349 MR. SHEPHERD: Just for clarity, I'm looking for the unredacted version of this. There are two versions floating around and I'm looking at the unredacted version. 350 MR. BOYLE: Yes, I do have that. 351 MR. SHEPHERD: Mr. Chairman, are we missing a copy? 352 MR. BETTS: We are. I think Staff are going to help us here. 353 MR. SHEPHERD: I'm going to be spending quite a lot of time on this interrogatory. Would it be useful if we take an early break? 354 MR. BETTS: That is a good solution, Mr. Shepherd. We all know where that document is. It was referred to as we were deliberating on Friday. Thank you for that suggestion, and I will take you up on that. 355 So let us take a 25-minute break, if we can. We will return at 11:15. Thank you very much. 356 -- Recess taken at 10:52 a.m. 357 --- On resuming at 11:20 a.m. 358 MR. BETTS: Thank you, everybody. Please be seated. 359 Did any matters arise during that break? 360 Mr. Shepherd, please continue. 361 MR. SHEPHERD: Thank you, Mr. Chairman. 362 Mr. Boyle, I wonder if you could turn to Exhibit I, tab 16, schedule 155, that's School Energy Interrogatory 155. 363 MR. BOYLE: Yes, I have that. 364 MR. SHEPHERD: And I'm looking now at page 3, and there at the beginning you describe the transfer, the initial transfer from Consumers Gas to ESI; right? 365 MR. BOYLE: Yes. 366 MR. SHEPHERD: And you describe those accounting entries we talked about, the 50 million, the 76 million, and the 42 million. 367 MR. BOYLE: Yes. 368 MR. SHEPHERD: Just to clarify, I thought you told us that the 42 million was used to reduce the 168 million; isn't that what you told us? 369 MR. BOYLE: Well, it was part of the 168 million deferred tax liability, but prior to the $42 million credit, the number was $126 million. 370 MR. SHEPHERD: No, but when you got the cheque, you got a $42.3 million cheque; right? 371 MR. BOYLE: Yes. 372 MR. SHEPHERD: Then you had to account for it somehow, and did you account for it by saying, Well, we don't have this obligation anymore, we've been paid? 373 MR. BOYLE: No, it was increasing the deferred tax liability to the 168. 374 MR. SHEPHERD: So you treated it as if you borrowed that money from CCRA, from Revenue Canada. 375 MR. BOYLE: Yes, and we had to pay that back over time. 376 MR. SHEPHERD: You never actually paid it back, did you? 377 MR. BOYLE: We did pay parts of it, yes. 378 MR. SHEPHERD: How much did you pay back? 379 MR. BOYLE: With respect to the rental utility assets, we paid back the 23.9 million out of the 168. 380 MR. SHEPHERD: So you got the $42.3 million in cash and you paid back the 23.9 million. Doesn't that mean that you ended up with $18.4 million in your pocket? 381 MR. BOYLE: Not really, because we still need to pay the remaining balance of that and essentially did so when we executed the sale to Centrica. That was part of the cost that we had to incur in order to sell those assets. 382 MR. SHEPHERD: So you had to write a cheque to Revenue Canada at the time of this sale? 383 MR. BOYLE: No, it was -- it would required to be paid by Centrica, but it was affecting the amount that they would pay and our cost basis on our statements. 384 MR. SHEPHERD: So what you are saying, again, is that your price was reduced -- Centrica paid less because they had to take over this liability; right? 385 MR. BOYLE: Yes. 386 MR. SHEPHERD: But you don't have any evidence for that. 387 MR. BOYLE: Well, the evidence is the market value of the assets and the cash flows which would include that obligation. 388 MR. SHEPHERD: Sorry, the evidence was the market value of the asset? 389 MR. BOYLE: When we executed the sale to Centrica, we would record on the sale transaction the purchase price of approximately $1 billion, but we must reduce off of our statements the debt equity and deferred taxes associated with that asset. So that deferred tax liability was still a cost of that transaction to us. 390 MR. SHEPHERD: It wasn't like a cost that you had to pay, it was just an accounting cost. 391 MR. BOYLE: No, it was a cash cost, because if it was not an obligation of those assets, the purchaser would have paid more for those assets. 392 MR. SHEPHERD: Well, it's interesting that you say that because they paid well over market value for the assets, didn't they? 393 MR. BOYLE: No, they paid market value. 394 MR. SHEPHERD: Okay. Well, you actually projected what the value of those assets would be into the future when you acquired them in 1999, didn't you? 395 MR. BOYLE: They were transferred out of Enbridge Gas Distribution at their fair market value at that time and then they were sold for fair market value in 2002. 396 MR. SHEPHERD: That wasn't my question. In 1999, internally at EI, didn't you project the future value of the rental program assets; yes or no? 397 MR. BOYLE: No. We forecast the fair market value at that time which would include a forecast of future cash flows, yes. But you can't predict the future value, you can only predict the current market value. 398 MR. SHEPHERD: I'm going to ask you to turn to -- sorry, I thought this would be easier. I'm going to ask you to turn to attachment 9 to School Energy 155. Attachment 9 is a series of, look like, eight or nine pages of spreadsheets. Do you see that? It's right near the end of the attachments. 399 MR. BOYLE: I'm afraid I don't have that handy. Let me pause a moment to see if I can locate that, please. Yes, I see that now. 400 MR. SHEPHERD: Now, the first page of that attachment is headed up "Rental Program Income Statement - Continuing Business Scenario," do you see that? 401 MR. BOYLE: Yes, I do. 402 MR. SHEPHERD: Now I'm going to the third page which is "Rental program valuation re cash flow during business scenarios." 403 Do you see that? 404 MR. BOYLE: Yes, I do. 405 MR. SHEPHERD: When was this document prepared? 406 MR. BOYLE: It appears to be about August of 1999. 407 MR. SHEPHERD: So in 1999; right? 408 MR. BOYLE: Yes. 409 MR. SHEPHERD: And am I wrong that you're projecting in the continuing business scenario the fair market value of the rental program; am I wrong? 410 MR. BOYLE: No, that's correct. 411 MR. SHEPHERD: So you projected that the fair market value would be between 578 million and 682 million; right? 412 MR. BOYLE: Yes. 413 MR. SHEPHERD: But you sold it for a lot more than that, didn't you? 414 MR. BOYLE: No, it was sold from Enbridge Gas Distribution Inc. to Enbridge Services Inc. for approximately $590 million which was in that range. 415 MR. SHEPHERD: Sorry, this is a projection into the future, isn't it? This is a projection to 2004, isn't it? 416 MR. BOYLE: It is a projection of the cash flows from that business, and that's how you create a value for a business. You look at the forecast value of the cash flows to create a current fair market value. 417 MR. SHEPHERD: And isn't what you were doing here deciding, Are we going to continue this or wind it down, and in order to decide that you had to figure out five years out, Are we going to end up with more or less by continuing it versus winding it down? Isn't that what you were doing? 418 MR. BOYLE: It's not five years out, it's based on the present value today of those cash flows depending on what the business operates as and what its forecast cash flows would be. 419 MR. SHEPHERD: Your projections were five years, weren't they? Look at pages -- the first two pages of that attachment. 420 MR. BOYLE: Yes, they would be that, and then they would typically be beyond that with some sort of terminal value calculation. So it does go essentially to the end of the business life. That's how you predict the current market value. 421 MR. SHEPHERD: So you predicted that as a continuing business, the highest it would be worth would be $681.5 million on a present-value basis over those five years; right? 422 MR. BOYLE: In this particular scenario, that was the upper end of the range, yes. 423 MR. SHEPHERD: It's not a billion, is it? 424 MR. BOYLE: No, it's not. 425 MR. SHEPHERD: Okay. At the time you made the transfer, you transferred $168 million -- this is the first transfer, the transfer on October 1st, 1999. At the time you made that transfer, you transferred $168 million of deferred taxes; right? 426 MR. BOYLE: Yes. 427 MR. SHEPHERD: Okay. Now, you've testified that you then adjusted that, right, by $42 million? 428 MR. BOYLE: No, sorry, that was the adjusted amount with the $42 million credit received, so the credit was the $42 million in cash, the debit was $42 million to deferred taxes. 429 MR. SHEPHERD: So the 168 is the total that you -- 430 MR. BOYLE: Yes, it is. 431 MR. SHEPHERD: Okay, good. Now, of that $168 million of deferred taxes, 126 million of that was -- the ratepayers got the benefit of that because they received those benefits during the course of the operation by Consumers Gas; right? 432 MR. BOYLE: That was part of it, yes. I think the Board determined that there was about $50 million in total that was the gas utility ratepayer benefit. 433 MR. SHEPHERD: Okay. But the ratepayers didn't get the benefit of any of the 42.3 million, did they? You got that. 434 MR. BOYLE: That's correct, because we were required to pay the full $168 million over time. 435 MR. SHEPHERD: So I'm just -- I wonder if you could turn to Exhibit K.7.3, which is a binder of documents filed by my friend Mr. Thompson on Friday. 436 MR. BOYLE: I think I have that, yes. 437 MR. SHEPHERD: Do you have that? And if you look at tab A at the page that's numbered in the top right, 47, it says here at the bottom of the page, the last sentence on the page, referring to the $42 million, it says: 438 "In the Board's view, whoever is responsible for the payment of the deferred taxes should be entitled to this credit." 439 That's the $42 million. And that's what you were saying before; right? You had to take the deferred tax liability, you got to keep the money too; right? 440 MR. BOYLE: Yes, I'm sorry, I can't quite find that page at this moment, but I agree with your comment. 441 MR. SHEPHERD: By all means. It's page 47. Look at the numbers in the upper right. It's the last sentence on the page. 442 MR. BOYLE: Yes. Sorry, I have that now. 443 MR. SHEPHERD: Okay. So am I right that what your evidence is is that Enbridge Inc. Eventually was responsible for the payment of those $168 million and therefore Enbridge Inc. got to keep the 42 million? 444 MR. BOYLE: Yes. 445 MR. SHEPHERD: And so if you didn't end up being responsible for the payment of that $168 million, does it follow, and is it your evidence, that you then wouldn't be entitled to keep the 42 million? 446 MR. BOYLE: Originally we sought recovery of the $126 million and we determined that there was a $42 million credit that would be -- turned out to be received. The Board, in its decision, determined that that credit would belong to the rate -- sorry, to the shareholder, essentially, because the shareholder was responsible for the 168 million less the $50 million notional utility account. 447 MR. SHEPHERD: That doesn't answer my question. If it turned out that you weren't responsible for the 168 million for some reason, and let's say -- there were, in fact, some tax changes that resulted in the 168 million being written down. What if it had been written down to zero? Am I correct in saying that therefore, because you wouldn't have been responsible for it anymore, you would not have been entitled to that money anymore? 448 MR. BOYLE: I think there would have needed to be a review of the allocation, I would expect, yes. 449 MR. SHEPHERD: Coming back to 155, and I'm still on page 3. I just have a question about your wording here. You say in the middle paragraph, in the middle of the paragraph you say: 450 "Enbridge Inc., on a consolidated basis, for accounting purposes reported a $168 million deferred tax liability." 451 Just help me through, what's the point of saying it's a consolidated basis? Is that because the entries weren't actually in EI? 452 MR. BOYLE: They were not in EI on a legal entity basis, no. They were in Enbridge Gas Distribution or Enbridge Services Inc. 453 MR. SHEPHERD: The notional utility account being in EGD? 454 MR. BOYLE: Yes. 455 MR. SHEPHERD: The 76 million write-down of retained earnings being in EGD? 456 MR. BOYLE: Yes. 457 MR. SHEPHERD: The $42 million being in ESI? 458 MR. BOYLE: No, it was in EGD as well. 459 MR. SHEPHERD: So it was all in EGD. 460 MR. BOYLE: Yes, and then would flow through on a consolidated basis. 461 MR. SHEPHERD: Okay. Now, your original plan, as I understand your evidence here, was that Consumers Gas was going to transfer the assets to ESI which was an existing company; right? 462 MR. BOYLE: Yes. 463 MR. SHEPHERD: And there were two reasons for that. First, you had accrued loss carry-forward, so if you made money in ESI, you wouldn't have to pay tax on some of it; right? 464 MR. BOYLE: No. We could always move those around, essentially. It was just that was the entity that was going to operate the non-utility businesses, including rentals, merchandise finance program, the services business, the heating insurance business, all of those businesses were transferred to that entity. 465 MR. SHEPHERD: So the fact that there were lost carry-forwards was not a factor in that. 466 MR. BOYLE: No, it was not a key factor because, as I said, for tax-planning purposes you can always move those around, if required. 467 MR. SHEPHERD: Sorry, it was not a key factor or it was not a factor? 468 MR. BOYLE: It was not a key factor, it was a factor, as all of those would be. 469 MR. SHEPHERD: And the second reason why you transferred to ESI was that it had a December year-end and you had a plan to get some extra CCA; right? 470 MR. BOYLE: There was the potential for that, yes. 471 MR. SHEPHERD: And the way that was going to work was that was because EGD had a September 30th year-end and ESI was an existing company that had a December 31st year-end, you were going to be able to get 12 months of CCA in ESI even though nine of those months you'd already taken the CCA in EGD; right? You were going to be able to double count. 472 MR. BOYLE: There was the potential for that, yes. 473 MR. SHEPHERD: And there's nothing illegal about that. That's a normal tax-planning thing, if you can do it; right? 474 MR. BOYLE: It is not, as we understand it, illegal, but it is an aggressive position. 475 MR. SHEPHERD: And if you'd carried out that plan, the net additional tax savings over the two and a half years you owned this business would have been about $11 million; right? 476 MR. BOYLE: In hindsight, based on the facts that turned out to occur, that is, the fact that we did sell Enbridge Inc. to Centrica, and the Board determined that the amount of deferred taxes payable between October 1999 and May 2002 were the amount that the utility was entitled to recover from the notional utility account, that number would have been different if we had done the transaction in that manner. However, we always claim maximum CCA and there was no intent to affect the amount of the recovery, because we had assumed that we would get the full $50 million. It was only a question of when we'd get that, and there was no intent to sell the Enbridge Services Inc. businesses at that time. 477 MR. SHEPHERD: I wasn't meaning to imply that you were somehow trying to rip off the ratepayers. Don't misunderstand what I was saying. But what I was trying to identify there is that you had a plan in place, which is correct, that you could have saved an additional $11 million of tax; right? 478 MR. BOYLE: No, it would not have satisfied it, it just would have affected the timing. There was no permanent savings available from that transaction. 479 MR. SHEPHERD: But during the two and a half years that you owned the assets, you would have paid $11 million less tax, as it turns out. 480 MR. BOYLE: In that period, yes. The obligation to pay that amount would have still existed in future years, though. 481 MR. SHEPHERD: If you owned the business. 482 MR. BOYLE: No, whoever owned the business, whoever owned the assets. 483 MR. SHEPHERD: But you didn't carry out that plan. At the last minute, on December 23rd, you transferred the water heaters to a new company, that's Rentco. Tell us why you did that. 484 MR. BOYLE: We did that because there was a permanent tax savings on capital tax associated with that transfer. That permanent tax savings came at a cost, if you will, of timing differences on the deferred tax amount, but it did not affect the ultimate obligation. So we locked in a permanent tax savings of about $2.7 million in exchange for timing differences on CCA. That seemed to us to be a prudent thing. You can lock in a permanent savings and offset it with a temporary timing difference. That was a prudent business decision. 485 MR. SHEPHERD: Well, okay, that's what you did it on December 23rd, but you that's not why you transferred it to Rentco in the first place, is it? The reason you transferred it into Rentco, correct me if I'm wrong, is because you wanted to segregate the assets on which you were going to get the deferred tax drawdown; isn't that right? 486 MR. BOYLE: That was another element in that it made it easier to track the evaluation of the rental utility assets. 487 MR. SHEPHERD: So the reason to transfer to Rentco, it wasn't tax planning, it was regulatory planning; right? You wanted to put them in their own separate pots so that everybody could see how much you were drawing down; right? 488 MR. BOYLE: It was both business and strategic reasons, yes. It made it easier to track the utility rental assets. That was a prudent thing to do, we felt. It should not make a difference in the long run, but it made it easier to observe the effects on the rental utility assets. 489 MR. SHEPHERD: Now, you could have done that January 1st, 2000 and got the $11 million net tax benefit, the timing difference, but you did it December 23rd because there was a $2.7 million permanent tax saving available if you did that; right? 490 MR. BOYLE: It's not a $11 million tax savings, it's a timing difference on the $11 million. The permanent tax savings was 2.7 million. 491 MR. SHEPHERD: Okay. And the $2.7 million that you saved, that's not on income taxes; right? That's a tax on capital. 492 MR. BOYLE: It is a form of tax and it's a capital tax. 493 MR. SHEPHERD: So that would accrue to the benefit of EI; right? 494 MR. BOYLE: Yes, it did. 495 MR. SHEPHERD: But a tax saving on the business could have at -- you didn't know at that point, but it could have accrued to the benefit of the Consumers Gas ratepayers; right? 496 MR. BOYLE: We did not expect it would. We expected it would totally be neutral to the notional utility account because we would collect the $50 million over time, and that's what we intended to do. 497 MR. SHEPHERD: Well, if you didn't think that actual cash taxes payable were relevant, then why every year that you came back to this Board was that a central feature of your evidence? This is the cash taxes we had to pay on this business. Why? 498 MR. BOYLE: The reason for that was that while we didn't think it was relevant, we understood the position of other parties that it should be taken into account, so we came up with a proposal, while we didn't believe it was necessary, it would show an amount of cash taxes payable in Rentco. Now, again, it should not be relevant, but in order to address the concerns of others, we agreed that we would manage it in that fashion in exchange for certainty of recovery of the $50 million over ten years. 499 MR. SHEPHERD: Try that on me again. I didn't see how the last part followed. Try again. 500 MR. BOYLE: Our belief, and still our view, is that the utility rental assets should be isolated and the effects of the deferred taxes payable focused on those assets. The amount of the cash taxes actually paid by Rentco is not relevant to the benefits or costs associated with those utility rental assets. However, we recognized that others took a different view on that. In order to address those concerns, we were willing, for a surety of recovery of $50 million over ten years at $5 million a year, that we would manage the taxes of Rentco to leave $5 million of cash taxes payable. But that was not our belief, that that was the appropriate way to recover it. But in the spirit of cooperation and trying to find a solution, we were willing to do that. 501 MR. SHEPHERD: So are you suggesting this was some sort of settlement offer? 502 MR. BOYLE: It was a proposal that we were prepared to live by. But that was the proposal, and that we would allocate $5 million a year of -- at least, of cash taxes payable in exchange for assured recovery. 503 MR. SHEPHERD: I'll come back to that as well. It's true, isn't it, that in splitting up the assets into two pools, as Mr. Spevick said earlier, splitting it up into two pools, you were maximizing the drawdown on the old assets, that was the intent; right? 504 MR. BOYLE: No, it was not. We can't maximize. The drawdown is occurring on those assets regardless. 505 MR. SHEPHERD: Well, no, if they are in the same pool, there is no drawdown. 506 MR. BOYLE: There is a drawdown on the utility rental assets that are the focus of this issue. There were deferred tax credits associated with the new non-utility rental assets. Those benefits belong to the party bearing those costs, that is, the none utility business, which will pay those deferred tax credits, if you will, in the future. 507 MR. SHEPHERD: So in your minds, even if they were all in -- all the old assets and the new assets were all in one pool, conceptually, it was like two different pools; there was the old pool -- within that total. There would be the old pool which would be drawing down deferred taxes and there would be a new pool which would be creating new deferred taxes and they belonged to different people. That's your point. 508 MR. BOYLE: That's correct. 509 MR. SHEPHERD: I'm just trying to understand why you would trade an $11 million -- actually, an $18 million immediate tax saving, even though it's a timing difference, for a $2.7 million savings. I mean, I was a tax planner for years and I've never seen anybody do that sort of trade. Can you explain why you did that again? 510 MR. BOYLE: Absolutely. We did it for a couple of reasons. 511 First of all, our view was that the net present value of the permanent tax savings was in excess of the net present value of the timing difference. 512 The second reason is that permanent tax savings goes to the income statement and increases the net worth of the corporation. The timing difference had no effect on the firm's equity position or net worth, so we improved the net worth of Enbridge Inc. by doing so. 513 MR. SHEPHERD: If you had carried through with that tax plan and then sold the assets as you did in 2002, the deferred tax drawdowns would have been less; right? 514 MR. BOYLE: In this particular case, as it turned out in hindsight, yes, they would have. 515 MR. SHEPHERD: And Rentco wouldn't have paid any tax at all; correct? 516 MR. BOYLE: No, that's not correct. It depends on what other transactions were taking place, but that's hypothetical. It turns out that the actual amount of deferred taxes payable that we did incur in Rentco for the utility rental assets was the 23.9 million. 517 MR. SHEPHERD: I wonder if you could turn up Exhibit A8, tab 5, schedule 2, appendix 3A, please. 518 MR. BOYLE: Yes, I have that. 519 MR. SHEPHERD: Now, Mr. Boyle, I have to confess that when I first saw this, I thought that it was intended to represent what would have happened had the rental assets all stayed in one place, but that's not what it represents, is it? 520 MR. BOYLE: No. It represents the net amount of the deferred taxes payable on the utility rental assets against the credits for the deferred taxes payable on the 1999 to 2002 non-utility asset additions and the asset installation costs for those. 521 For example, if you turn back to my Exhibit K.7.1, the flow chart with the numbers on it, on that Exhibit K.7.1, utility asset -- rental asset income tax summary, the top line on the page is the deferred taxes payable on the utility rental assets, the 23.9 million. Then if you subtract from that the two numbers shown in the bottom set of boxes, the deferred taxes payable on the 1999 to 2002 new non-utility rental assets, the 5.2 million, and the same 1999 to 2002 non-utility rental assets installation deduction, the 13.7 million, you will get the total shown on appendix 3A, the $5 million in the bottom right-hand corner. 522 But, again, that's combining two different concepts. That's combining the deferred taxes payable on the utility rental assets with the benefits from the new non-utility rental asset additions, and those benefits are attributable to the non-utility businesses and essentially the non-utility operations. And that's because the costs associated with those loans, if you will, is going to be paid back by the non-utility businesses. So it's combining two different economic entity concepts, and therefore, is not an appropriate analogy of what the deferred taxes payable on the utility rental assets would be. 523 MR. SHEPHERD: I understand. I guess when I looked at it I thought this was sort of the scenario of what if we hadn't separated the two pools, but as I understand what you're saying, this is the scenario assuming you separated the two pools and then you consolidated them for accounting purposes; right? 524 MR. BOYLE: Well, either way, if you combined those separate items, this is the sum of those items. Now, it's not a fair addition, if you will. It's looking at only one side of the entry in the case of the credits. 525 MR. SHEPHERD: Now, if we instead were to hypothesize that you had gone through with your tax plan, your 1999 tax plan to get that extra CCA, then what we'd have to do is we'd have to put an additional $41 million of capital cost allowance in that column 1 there, wouldn't we? 526 MR. BOYLE: I don't think it's quite that significant because there are offsets in other years. I'd just have to check. 527 MR. SHEPHERD: I'm just asking about column 1 right now. Column 1 would be $41 million; right? That's your evidence? 528 MR. BOYLE: Just give me a minute here, Mr. Shepherd. Yes, you're correct. 529 MR. SHEPHERD: And, in fact, if you carry it through to its logical conclusion, isn't it true that if you hadn't carried out that transfer prior to December 31st, 1999, there would have been no net deferred tax drawdown during the two and a half years that you owned the business; isn't that correct? 530 MR. BOYLE: On a net basis, that's correct. But that, again, is combining two different concepts. That's taking the benefits of the non-utility rental asset additions and combining them with the cost of the deferred taxes payable on the utility rental assets and that ignores the fact that the cost of those benefits is being borne by the non-utility businesses. And you can't separate the costs and benefits that way. It's like a one-sided journal entry. 531 MR. SHEPHERD: That's not the question I'm asking, Mr. Boyle. I'm asking the question: If you had kept the assets that were transferred separate from the new assets but you had just carried through that tax plan to get that extra benefit, there still would have been no net drawdown; isn't that right? 532 MR. BOYLE: Combining those two figures, that's correct. 533 MR. SHEPHERD: And so even forgetting putting the two pools together, even if you kept the new assets separate, for example, you could have left the old assets in ESI and put the new assets in Rentco; right? It would have been just as easy. 534 MR. BOYLE: Sorry, repeat that, please. 535 MR. SHEPHERD: You could have left the transferred assets in ESI and put the new assets in Rentco, you would have had the same result on an ongoing basis; right? 536 MR. BOYLE: You would have had the situation where you have incurred a permanent tax cost of $2.7 million and would have offset that against a timing difference which was less than that, and that would not have been a prudent thing to do. 537 MR. SHEPHERD: But if would have reduce the deferred tax drawdown to zero; right? 538 MR. BOYLE: In the first year, that's correct. But there would have been offsets to that in future years which would have increased the amount of the deferred tax drawdown because you don't have that CCA claim available, you've used it up, and that will increase your amount in future years. 539 MR. SHEPHERD: The net over the two and a half years would still have been zero, wouldn't it? 540 MR. BOYLE: Yes, the net would have been less than zero, essentially, because you're combining the benefits of one things with the costs of another. But yes. 541 MR. SHEPHERD: I think your evidence is that when you were, in December 1999, considering whether to transfer these assets to Rentco, the impact of that on your ability to drawdown deferred taxes was not a factor; right? 542 MR. BOYLE: That's correct. 543 MR. SHEPHERD: Had you gone through with your tax plan, there wouldn't have been any drawdown and you wouldn't have been able to recover anything from the ratepayers; right? 544 MR. BOYLE: No, that's not correct, because again, the utility rental assets are the assets that generated the benefits for ratepayers, and those assets are generating a cost of $23.9 million of actual deferred taxes payable. Now, there are other credits that the company has for other businesses that are not in any way related to those assets, and the combined effect of those would have resulted in a different cash taxes payable, yes, but it's not going to the heart of the issue which is the costs and benefits being matched. 545 MR. SHEPHERD: Again, I'm not talking about that. I'm just talking about the extra CCA that was available to you on the assets that came from the ratepayers. That extra CCA which you gave up for a $2.7 million permanent saving to the shareholder, that CCA, had you taken it, would have meant no deferred taxes payable; right? 546 MR. BOYLE: No, that's not correct. Over the period October 1999 to May 2002, there still were deferred taxes payable on the utility rental assets of 23.9 million. 547 MR. SHEPHERD: I'm sorry, I think you just said that if you put that $41 million into the schedule, and even if you keep out all the new stuff, there would have been no net drawdown. Isn't that what you said? 548 MR. BOYLE: No. Over that time frame, there would have been an $11 million decrease in the deferred taxes payable, as you indicated, but that was, as I said, based on what we hypothetically might have done and would not have been a prudent decision for us to undertake, because it's only a timing difference versus the permanent tax savings of $2.7 million which increased the net worth of the company. 549 MR. SHEPHERD: If you reduce the deferred tax drawdown over those two and a half years, that would save the ratepayers $11 million; right? 550 MR. BOYLE: In this particular case, in hindsight with what happened, that is, that we did in fact sell the business and the Board determined that it was entitled only to recover the amount of deferred taxes actually paid between October 1999 and May 2002, that number would have been different. But we did not do that and the actual amount of deferred income taxes that we did pay was the 23.9 million. That was the actual amount. There are a lot of hypothetical scenarios of a lot of other things we might have done, but that's what we actually paid, and we acted prudently in every step of the way. 551 MR. SHEPHERD: Well, you didn't actually pay it, did you? You hypothetically paid it. 552 MR. BOYLE: It was the actual deferred income taxes payable, and we did incur that liability. We were able to use other deductions to offset that for cash taxes paid by Rentco. 553 MR. SHEPHERD: So you want to count the planning that you did for the benefit of the shareholder, but you don't want to count the planning that you chose not to do for the benefit of the ratepayers; have I got that right? 554 MR. BOYLE: No, we did not expect that it would have any difference on the amount of recovery from ratepayers, because at that time, we fully expected to recover the full $50 million. It would not have any impact, we believed, at that time. 555 MR. SHEPHERD: Let me turn to another issue, Mr. Boyle. And this, I guess, is at page 5 and following of Exhibit I, tab 16, schedule 155. 556 MR. BOYLE: Sorry, Exhibit I, tab 16, schedule 155. 557 MR. SHEPHERD: School Energy 155, starting at page 5. 558 MR. BOYLE: Okay. 559 MR. SHEPHERD: If I understand what you did directly, you set up Rentco but you didn't run it separately, did you? What you did is you had it give a blanket lease of all those assets that it just bought back to ESI so that ESI could run the whole business together; right? 560 MR. BOYLE: Yes. 561 MR. SHEPHERD: And so ESI, in fact, used them in the rental business along with its newer water heaters; right? 562 MR. BOYLE: Yes, it did. 563 MR. SHEPHERD: So you didn't actually wind down the rental business, did you? 564 MR. BOYLE: On a consolidated basis, we did not wind it down. But the assets that were associated with the utility rental asset program were segregated for evaluation purposes. They, by their nature, must wind down. 565 MR. SHEPHERD: So we looked at attachment 9 to this interrogatory response where you did the analysis of continuing business scenario versus wind-down scenario, and you concluded it was more valuable if you continued the business; right? 566 MR. BOYLE: On a consolidated basis, yes. 567 MR. SHEPHERD: And so you wanted to continue the business, but you wanted to get the deferred tax drawdown, so you separated out the transferred assets as if they were a separate business being wound down; right? 568 MR. BOYLE: Yes, we did, in order to be able to assess the economic evaluation of those assets more efficiently. 569 MR. SHEPHERD: This sounds like you were trying to have your cake and eat it too; isn't that true? You were separating them out so you could drawdown your deferred taxes, but you were running them together so you could maximize value. That's fair, isn't it? 570 MR. BOYLE: No. Whether or not we separated the businesses, the economic effects of the utility rental assets would occur. 571 MR. SHEPHERD: In the Board's 1999 decision on this, they said that you basically had a choice of continuing to operate it, winding it down, or selling it, and you ended up doing all three, didn't you? 572 MR. BOYLE: We transferred the businesses to an affiliate and ultimately sold them, yes. There was an effect on the utility rental assets in that there was a wind-down, if you will, for depreciation versus CCA purposes, regardless of where they were held. 573 MR. SHEPHERD: You continued to operate the entire business in ESI, all the assets, old and new, but with some of those assets you created the appearance that you were winding it down in a different company; right? 574 MR. BOYLE: No. We were putting those assets there so you could evaluate those assets more independently, and it was appropriate, in our view, because the costs and benefits of the new non-utility assets were the responsibility of the non-utility businesses and the shareholder. Whatever those consequences may be, positive or negative, they were not the assets that were in any way related to the utility rental asset program that operated within the utility. 575 MR. SHEPHERD: Whenever you have affiliates working together like this, for tax purposes you have a transfer pricing issue; right? 576 MR. BOYLE: In some cases, yes. 577 MR. SHEPHERD: There's a rule that says that the transfer pricing has to be at fair market value; right? 578 MR. BOYLE: That's correct. 579 MR. SHEPHERD: So could you describe how you devised the transfer pricing formula to calculate how much ESI had to pay Rentco for these, what was it, several million dollars of water heaters? 580 MR. BOYLE: We looked at what was an appropriate rate of return for a non-regulated, non-utility business in the retail sector, and based on the capital structure associated with that business, we determined a transfer price amount, yes. 581 MR. SHEPHERD: And in fact, it was driven by ROE; right? 582 MR. BOYLE: Yes, it was. 583 MR. SHEPHERD: And you decided that the right ROE for a rental business would be 14.5 percent; correct? 584 MR. BOYLE: For a non-utility, non-regulated retail-services business, yes. 585 MR. SHEPHERD: And so the formula that you created for the rental payments -- sorry, the lease payments from ESI to Rentco was a formula that was expressly designed to return 14.5 percent ROE to Rentco; right? 586 MR. BOYLE: Yes, it was. It was an allocation of the revenue between those two entities for legal entity income tax purposes. 587 MR. SHEPHERD: It was an allocation of revenue? 588 MR. BOYLE: Yes. 589 MR. SHEPHERD: You're not allowed to allocate revenue for tax purposes, though; right? 590 MR. BOYLE: It was an allocation of the business revenue between the two entities, and the basis on which it was determined was in order to generate a 14.5 percent return in Rentco. 591 MR. SHEPHERD: The transfer pricing was not in any way designed with the notional utility account in mind, was it? 592 MR. BOYLE: It had no effect on the notional utility account because this related to business profits. It had nothing to do with the deferred tax liability amount in any way. 593 MR. SHEPHERD: And so when you designed this, the notional utility account wasn't part of the design, that wasn't a consideration. 594 MR. BOYLE: No, it was not. 595 MR. SHEPHERD: Except, of course, that at the same time you were formulating a plan to claim $5 million a year from that account in a rate case, weren't you? 596 MR. BOYLE: Again, that was not involved in that decision. The $5 million amount was part of a proposal in order to recover the $50 million. 597 MR. SHEPHERD: Well, one of the things you wanted to make sure was that the cash taxes payable by Rentco each year would be at least $5 million; isn't that right? Haven't you admitted that? 598 MR. BOYLE: That was part of our proposal. We were willing to agree that in exchange for certainty of recovery of $5 million per year over ten years, we would manage the deferred -- sorry, we would manage the cash taxes payable at Rentco to that level. Now, that was not our view that we needed to do that, but as part of the settlement -- as part of our proposal, sorry, we would be prepared to do that. 599 MR. SHEPHERD: I'm quoting you from page 6 of 155. This is the second full paragraph, the last sentence: 600 "The companies recognized that if Rentco were to show cash taxes payable of that amount," that's the $5 million," even though it would be less than the deferred tax drawdown for the earlier years, this may assist in achieving recovery of the asset." 601 That's the notional utility account; right? 602 MR. BOYLE: Yes. 603 MR. SHEPHERD: So you wanted to show $5 million at least of taxes because you thought that the Board would be influenced by that in deciding whether to give you your recovery; isn't that right? 604 MR. BOYLE: We believed that in order to assist the process and reach a proposal that would allow us to recover that in an expeditious manner, that that would assist in that. It should not have been relevant, but in the spirit of cooperation in trying to develop a proposal that would be acceptable to all parties, it would assist, yes. 605 MR. SHEPHERD: In fact, in one of the years in question, the deferred tax drawdown wasn't $5 million, was it? It was less. 606 MR. BOYLE: I believe there was a year where it was, yes -- slightly less, sorry, yes. 607 MR. SHEPHERD: Okay, let me go on to the chart at the bottom of page 6 of schedule 155. 608 This shows the annual deferred tax drawdowns coming to 23.9 million; is that right? 609 MR. BOYLE: Yes. 610 MR. SHEPHERD: Now, those aren't the actual deferred tax drawdowns in Rentco, are they? 611 MR. BOYLE: No. That was our forecast. 612 MR. SHEPHERD: No, these are the actuals, aren't they? 613 MR. BOYLE: Sorry, on which line? 614 MR. SHEPHERD: I'm talking about the line that says "deferred tax drawdown, 5.9, 2.9," et cetera, "totals 23.9." Unless you were great forecasters, I'm assuming this is actual. 615 MR. BOYLE: Well, it was our estimate, but we did have a lot of actual information at that time, yes. 616 MR. SHEPHERD: Sorry, you're saying this was a forecast? I'm reading here it says: "Based on the fair-market value transfer pricing employed and the actual results for ESI related to 1999," et cetera, et cetera, "and Rentco for 2000 through 2002," these are actual numbers, aren't they? I'm not trying to confuse you. 617 MR. BOYLE: I'm referring to the part that says "the estimated cash taxes for Rentco." So there was an estimate element of that part. 618 MR. SHEPHERD: But it ended up being the right numbers. 619 MR. BOYLE: Yes, because we had a lot of actual information at that point. 620 MR. SHEPHERD: But these aren't the actual deferred tax drawdowns in Rentco in those years, are they? 621 MR. BOYLE: No, I believe they are. If you look back at Exhibit -- sorry, Exhibit A8, tab 5, schedule 1, and the attachment, schedule 1, that at the top of it it says "Summary of Notional Deferred Taxes," the bottom line there -- 622 MR. SHEPHERD: Sorry, I can't find that, Mr. Boyle. 623 MR. BOYLE: All right. It's Exhibit A -- 624 MR. SHEPHERD: Here we are, schedule 1. 625 MR. BOYLE: -- 8, tab 5, schedule 1, and then there's a second schedule 1 in part of the attachments. 626 MR. SHEPHERD: I've got it. 627 MR. BOYLE: That amount in the bottom right corner of 23.9 million and the amounts in each of the periods shown across there does tie to the amounts in your Exhibit I, tab 16, schedule 155, page 6. 628 MR. SHEPHERD: Now, these are notional deferred taxes, these aren't actual deferred tax drawdowns, are they? 629 MR. BOYLE: They are actual deferred taxes payable that occurred with respect to the utility rental assets over the period October 1999 to May 2002. 630 MR. SHEPHERD: These aren't the amounts that Rentco drew down on its deferred taxes in those years, are they? 631 MR. BOYLE: Yes, they are. 632 MR. SHEPHERD: Okay, well, then, let's look at the statements. 633 Mr. Chairman, what I'm handing out are the non-consolidated financial statements for Rentco for September 30th, 2001 and May 6th, 2002. 634 MR. SCHUCH: Mr. Chair, for the statements ending the year 2001 we'll assign Exhibit K.8.3, and for the other one which is year ended May 6th, 2002, we'll assign Exhibit K.8.4. 635 EXHIBIT NO. K.8.3: NON-CONSOLIDATED FINANCIAL STATEMENTS FOR RENTCO FOR SEPTEMBER 30TH, 2001 636 EXHIBIT NO. K.8.4: NON-CONSOLIDATED FINANCIAL STATEMENTS FOR RENTCO FOR MAY 6TH, 2002 637 MR. BETTS: And these documents refer to 3696669 Canada Inc. which we're referring to as Rentco. 638 MR. SHEPHERD: That's correct, Mr. Chair. And I should thank the company for digging these out of a much larger piece of evidence and numbering them and copying them for me this morning. I appreciate it. 639 So, Mr. Boyle, I wonder if you could turn to page 7 of Exhibit K.8.3. 640 MR. BOYLE: I've got that. 641 MR. SHEPHERD: And can you confirm that what this chart shows is that the actual drawdowns of deferred taxes for 2000 was 2.6 million and for 2001 was 8.7 million; is that right? Under the line "Current Future Taxes," those are the actual drawdowns? 642 MR. BOYLE: Yes, because there were additional assets for the 1999 new non-utility additions in this legal entity during that period in addition to the utility rental assets. 643 MR. SHEPHERD: So when you said earlier that the drawdowns in 2000 and 2001 were as stated in schedule 155, you misspoke yourself. 644 MR. BOYLE: It may be semantics, Mr. Shepherd, in that that was the amount related to the utility rental assets. There were additional amounts in Rentco for the 1999 new non-utility additions. If you go back to my Exhibit K.7.1 and you look at the chart for December 1999 to May 6th, 2002, on the chart entitled "Utility Rental Asset Flowchart," in Rentco were the utility rental assets that generated the amounts on schedule 1 that I referred to. In addition to that, in that legal entity were amounts for the 1999 new non-utility rental assets. Those combined numbers would be the ones that would show in the actual financial statements. But I have segmented those to effects between the two groups. 645 MR. SHEPHERD: So your plan to segregate the old assets and the new assets didn't work and, as it turns out, there was still some confusion because there were new assets mixed in with the old assets. 646 MR. BOYLE: There was a small amount, yes, mixed in but we felt it was best to isolate it as much as we could. You're correct, there was a small amount of the 1999 new non-utility assets in Rentco. 647 MR. SHEPHERD: And that was $9.2 million; correct? 648 MR. BOYLE: That's correct. 649 MR. SHEPHERD: Okay. And now let's look at Exhibit K.8.4, and I'm looking at page 6 of that which is the same note on income taxes, and I don't see there the drawdown number. Can you help me with that? 650 MR. BOYLE: Yes. This was further complicated in this particular year because on May 6th, 2002, the 19 -- sorry, the 2000 to 2002 new non-utility rental assets, which are shown in my utility rental assets flowchart, Exhibit K.7.1, the May 7th figures there at the bottom show that in addition to the 1999 new non-utility rental assets, we have added back into the legal entity Rentco the 2000 to 2002 new non-utility rental assets. So the tax return, the financial statements for Rentco for that fiscal period included those assets. But, again, I've tried to segment in the following page the effects of each of those entities and the economic units and the taxes payable associated with the economic units, not the legal entity. 651 MR. SHEPHERD: Well, let me just -- I'm still trying to run down what the actual drawdown was in that stub year ending May 6th, 2000. If you look at page 4 of those statements, you see the figure "Income Taxes Future, 7.3 million." Do you see that? 652 MR. BOYLE: Yes. 653 MR. SHEPHERD: Okay. And that figure, the income taxes future figure, is made up of two components, isn't it? It's made up of a permanent write-down of deferred taxes because of changes in tax rates and a drawdown of deferred taxes because of timing differences; right? 654 MR. BOYLE: Yes. 655 MR. SHEPHERD: And so the 7.3 million, if we go back to page 6, we actually know what the tax rate changes are. They're 6.4 million; right? Do you see there, tax rate changes on future income tax balances? 656 MR. BOYLE: Yes. 657 MR. SHEPHERD: So the net drawdown in that year, then, was 0.9 million; right? 658 MR. BOYLE: In that legal entity, when you combine the utility rental assets with the 1999 new non-utility rental assets and the 2000 to 2002 new non-utility rental assets. You're combining a lot of different economic units, but that's the combined result. 659 MR. SHEPHERD: So tell me if I'm right here. The actual deferred tax drawdowns in Rentco - actual - throughout the entire period that it was involved with these assets, were 2.6 million in 2000, 8.7 million in 2001, and 0.9 million in 2002, for a total actual drawdown of $12.2 million; is that right? 660 MR. BOYLE: Sorry, you'll have to give those to me again. 661 MR. SHEPHERD: 2.6 million for 2000, that's from Exhibit K.8.3. 662 MR. BOYLE: Yes, I see that number. 663 MR. SHEPHERD: And then in 2001, also from K.8.3, 8.7 million? 664 MR. BOYLE: Yeah, I see that. 665 MR. SHEPHERD: And in 2002, the number we just calculated, 0.9 million. And those total $12.2 million; isn't that right? 666 MR. BOYLE: 12.2, yes. 667 MR. SHEPHERD: So what you actually drew down in deferred taxes in Rentco, this company you set up with the express purpose of showing the deferred taxes amount, the amount you showed in the end was $12.2 million; right? 668 MR. BOYLE: In the legal entity, that's correct. 669 MR. SHEPHERD: Thanks. I just lost my place, Mr. Chair. 670 Let me turn, Mr. Boyle, to your tax-balancing transactions. Many corporate groups use tax-balancing transactions to offset losses in one company against profits in another company; right? 671 MR. BOYLE: In Canada, yes, because of the lack of consolidated corporate tax returns. 672 MR. SHEPHERD: And the effect is that you can get something approaching consolidation; right? 673 MR. BOYLE: Yes. 674 MR. SHEPHERD: So I'm going to ask you now to turn to Exhibit K.7.3, if you could, please, which is the materials filed by Mr. Thompson on Friday. 675 MR. BOYLE: Is that the motion record of the moving parties? 676 MR. SHEPHERD: That's correct. I'm looking at pages 81 and 139. 677 MR. BOYLE: 81 is the RP-2001-0032, Exhibit A, tab 17. 678 MR. SHEPHERD: Now, this was your evidence, wasn't it? 679 MR. BOYLE: Yes, it was. 680 MR. SHEPHERD: And you swore under oath that it was true; is that right? 681 MR. BOYLE: Yes, I did. 682 MR. SHEPHERD: Okay. So I'm reading from the bottom of that where it says: 683 "Further, since there is no corporate income tax consolidation permitted in Canada under the Income Tax Act, there is no opportunity for Enbridge Canada to avoid payment of this cash tax obligation through consolidation with Enbridge Services Inc. or any other Enbridge company." 684 Now, you were in fact able to reduce the taxes payable in both ESI and Rentco, weren't you? 685 MR. BOYLE: Once you've paid the cash -- 686 MR. SHEPHERD: Excuse me, it was a yes or no question. Then explain, please. 687 MR. BOYLE: I want to be very careful here, Mr. Shepherd, because this is an important issue. Once you have paid cash taxes in an entity on consolidation, you can't net them against another entity like you can in the U.S. We can't show a cash taxes payable in one entity and have the net in the other. You can move them around through corporate tax planning, absolutely. But I want to be clear, because once you've paid the cash taxes in that year, when we consolidate, I can't have a credit in another entity. Now, I can, before we make the cash taxes payable, or in future years, move deductions around, absolutely. But it's important to note that on consolidation, when you're consolidating taxes in Canada, if you've paid them in that year, there's not an offset elsewhere like there might be in a United States corporate tax return. 688 MR. SHEPHERD: You filed this evidence on April 12th, 2002; right? 689 MR. BOYLE: Yes. 690 MR. SHEPHERD: And at the time you say in paragraph 6 of this evidence: "The current cash taxes payable in Enbridge Canada," Enbridge Canada is what we're now calling Rentco; right? 691 MR. BOYLE: Yes, it is. 692 MR. SHEPHERD: So the cash taxes payable in Rentco were 23 million in 2000, 6 million in 2001, and a forecast of 7 million in 2002. Now, on April 12th, 2002, less than a month before you closed this sale to Centrica and after you had done, or you papered at least, all of the planning transactions, you knew those statements weren't true, didn't you? 693 MR. BOYLE: I don't believe so, Mr. Shepherd, because we were part -- and this is part of our proposal, as I said, that we were willing to manage that at that level if the parties and the Board were willing to allow us to recover $5 million a year for ten years. We would manage the cash taxes payable to ensure that it was left there. That was our proposal and we were prepared to live by that if the Board granted us that option. 694 MR. SHEPHERD: Mr. Boyle, you had already agreed, on April 12th, 2002, you had already entered into a written agreement with Centrica to transfer the ESI assets into Rentco; correct? 695 MR. BOYLE: Yes, we had. 696 MR. SHEPHERD: And you hadn't done the transfer yet, but you'd agreed to do it; right? 697 MR. BOYLE: Yes, we had. 698 MR. SHEPHERD: And one of the effects of that was that it was going to create a loss in the stub period which you would then be able to carry back; isn't that also right? 699 MR. BOYLE: That's correct. 700 MR. SHEPHERD: And you knew that at the time you filed this evidence, didn't you? 701 MR. BOYLE: No, I did not, Mr. Shepherd, because I knew that we proposed to manage the taxes on that basis if the Board or parties would allow us to recover them. We intended to honour that obligation in exchange for that compromise, if you will. 702 MR. SHEPHERD: So you didn't think that saying that you had to pay $36 million in taxes in those three years was misleading? 703 MR. BOYLE: No, because we did pay the 23. -- approximately the 23, the 6, and was forecast to incur the 7. That was our forecast at the time the evidence was originally prepared. 704 MR. SHEPHERD: Well, you paid the 23 million, but then you got most of it back; right? 705 MR. BOYLE: Once we entered into the tax-balancing transactions and carried them back, yes, we did. 706 MR. SHEPHERD: And you'd already entered into those transactions at the time; right? 707 MR. BOYLE: I don't believe so. There may have been some we were proposing to enter or were planning to if we were not able to get this. But basically at the time we had to make a decision, Are we going to get a deal on the $5 million a year for ten years or not? And we didn't know whether that was going to be the case or not so we had to make a decision, Should we rely on our original argument that it should not be relevant what the actual cash taxes paid in Rentco were? And we determined at that time that we would rely on our original view that it was not relevant and enter into tax-planning transactions. But had the Board awarded us or the parties agreed to a settlement which included the need to maintain $5 million of cash taxes payable or paid in Rentco, we would have done that. 708 MR. SHEPHERD: Mr. Boyle, maybe you're confused on the dates here. This was April 12th, 2002 that you filed this evidence; right? 709 MR. BOYLE: Yes. 710 MR. SHEPHERD: At that time all the tax balancing transactions had been completed; hadn't they? 711 MR. BOYLE: No, we could still undertake others. 712 MR. SHEPHERD: Did you undertake any more? 713 MR. BOYLE: No, because we then determined that this wasn't going to be in place in time and we couldn't wait any longer to make that assessment, so we had to, if you will, take our chances on our original view that it was not relevant. 714 MR. SHEPHERD: So can you take a look at the -- at Exhibit I, tab 16, schedule 155, page 8, please. Don't lose this page from the other exhibit. I'll be back to it. 715 MR. BOYLE: I've got that. 716 MR. SHEPHERD: I'm looking at the chart in the middle that says your net cash taxes paid were 7 million in 2000, 3.9 million in 2001, and zero in 2002. Now, on April 12th, 2002, you knew those were roughly going to be the numbers, didn't you? 717 MR. BOYLE: If we executed our tax-planning transaction, that would be the numbers, absent anything else, yes. 718 MR. SHEPHERD: Which tax-planning transaction are we talking about? 719 MR. BOYLE: The transaction that resulted in the loss carry-back impacts. 720 MR. SHEPHERD: The 14.3 million? 721 MR. BOYLE: Yes. 722 MR. SHEPHERD: And that transaction was the transfer of assets from ESI to Rentco? 723 MR. BOYLE: That was part of it. The other part was an intercompany tax-balancing financing transaction. 724 MR. SHEPHERD: You just testified that after April 12th you didn't do any more tax-balancing transactions. Which is it? Did you do them or not? 725 MR. BOYLE: There were tax-balancing transactions, yes, entered into post April -- 726 MR. SHEPHERD: April 12th, 2002? 727 MR. BOYLE: Yes. 728 MR. SHEPHERD: Post April 2002 you did tax-balancing transactions? 729 MR. BOYLE: Part of the effect of the Centrica transfer was to move assets from ESI into Rentco. 730 MR. SHEPHERD: So that was the only transaction you did after April 12th, 2002; right? 731 MR. BOYLE: Yes. That was May 6th. 732 MR. SHEPHERD: Okay. And you knew that at that time. 733 MR. BOYLE: We expected to do that, yes. 734 MR. SHEPHERD: Okay. I'm just coming back now to paragraph 7, and I'm trying to understand, you said that there is no opportunity for Enbridge Canada, that's Rentco, to avoid payment of this cash tax obligation of $36 million. Was that true when you said it? 735 MR. BOYLE: I think you have to understand the continuation, through consolidation with Enbridge Services Inc. or any other Enbridge company. I want to be clear, Mr. Shepherd. I'm referring to the comparison between consolidated tax returns in Canada and the U.S. In the United States, an entity could show cash taxes payable but another entity could have that deduction. And in the case of Canada, in the particular year, that's not the case. But you can execute tax-balancing transactions to effect the same thing, yes. 736 MR. SHEPHERD: And just before I leave this, could you turn to page 139 of that same exhibit, K.7.3, please. 737 MR. BOYLE: Yes. 738 MR. SHEPHERD: And if you look at paragraph 5, you say the same thing there about not being able to avoid cash tax obligations; right? It's for the same purpose; right? 739 MR. BOYLE: Yes. 740 MR. SHEPHERD: Now, at the time you said this, you were actively implementing a tax-balancing plan to reduce the cash taxes payable in Rentco, weren't you? 741 MR. BOYLE: Yes. We were looking at that option. 742 MR. SHEPHERD: Well, I think you had already started, hadn't you? 743 MR. BOYLE: I'm not sure of the exact date, but that was quite possible, yes. 744 MR. SHEPHERD: So let's talk about tax-balancing transactions. In a tax-balancing transaction, you transfer a loss from one company to another company that has a profit so that you can reduce the profitable company's profit and therefore its taxes payable; right? 745 MR. BOYLE: Its taxable income, yes, you're transferring tax deductions from one entity to another entity. 746 MR. SHEPHERD: So can you explain how you do that? 747 MR. BOYLE: Sure. You enter into a financing transaction which involves intercompany dividends, because intercompany dividends are not taxable for Revenue Canada tax purposes. 748 For example, if an entity, Rentco, has actual taxable income and it is all equity-financed, there is no interest or debt in that entity because the debt may have been raised at a level above; for example, Enbridge Inc. may have gone out to raise debt in the debt market and incur interest expense. Enbridge then takes that debt and makes an equity investment in Rentco, so it's all equity capital in Rentco, there's no interest expense deduction. Rentco will show that it has full income, let's say, of $20 million but it has no interest expense, so its taxable income is $20 million. Therefore, it will pay tax, assume a 40 percent income tax rate, it will pay income tax of $8 million and it has, therefore, a cash flow, after tax, of $12 million. 749 It takes the $12 million and pays dividend up to Enbridge Inc. for its investment. Enbridge Inc. has income of 8 million -- sorry, has cash flow of $8 million, but that dividend is not taxable income for Enbridge Inc., it is treated as zero for tax purposes. But Enbridge Inc. has an interest expense which is a deductible item, so Enbridge Inc. may have $3 million of interest expense but it has no taxable income. 750 So taxable income is zero, interest expense is $3 million which is a taxable deduction, and therefore Enbridge Inc. has a tax credit equal to the $3 million interest deduction times the income tax rate of 40 percent. So Enbridge Inc. will have a tax deduction, if you will, of $3 million or a deferred tax asset of 1.2 million. 751 In order to get that interest expense deduction to match the taxable income and avoid the cash tax payment of $8 million at Rentco, you enter into a tax-balancing transaction which moves the interest expense down to Rentco. There are a number of ways to do that, but basically they also involve intercompany dividends. You create a loan to Enbridge -- sorry, to 369 or create a loan to Rentco, so Enbridge Inc. will take the interest expense on -- or the loan, the debt it borrowed in the market, effectively transfer that debt down to Enbridge Services -- sorry, to Rentco. So by transferring the debt down a level, you get the interest expense down to where you've got the taxable income. 752 MR. SHEPHERD: Well, I taught tax for 11 years and I'm confused. Let's try this again. Let me give you a simple example and see if it works. 753 Enbridge Inc. has $100 million. It invests it in Alliance, let's say. Alliance has losses. Alliance lends that money to Rentco at normal interest. That gives Alliance income, interest income, which it offsets against its losses from its business activities; right? 754 MR. BOYLE: Yes. 755 MR. SHEPHERD: Rentco has a reduction, right, for the interest income and that deduction is used to reduce its income, its operating income; right? 756 MR. BOYLE: Yes. 757 MR. SHEPHERD: And the last part of the transaction is you have to get the $100 million back to EI, right, because it's not a real 100 million, you're just going around the circle; right? 758 MR. BOYLE: It's the real $100 million, but the nature of the financial instrument which it takes does change between entities. 759 MR. SHEPHERD: It ends up back where it's started. 760 MR. BOYLE: Yes. 761 MR. SHEPHERD: And there's nothing illegal about that, is there? 762 MR. BOYLE: Not to my knowledge. 763 MR. SHEPHERD: The purpose of tax-balancing transactions is to make sure you use up your operating losses as quickly and as efficiently as possible; yes? 764 MR. BOYLE: Generally, yes. 765 MR. SHEPHERD: Again, let's use Alliance as an example. You had substantial start-up losses in Alliance. And if you could somehow apply those losses to the income in ESI or in Rentco, you could save tax in those entities; right? 766 MR. BOYLE: We could save cash income taxes, yes. 767 MR. SHEPHERD: Okay. And that's what tax-balancing transactions do. 768 MR. BOYLE: Yes. They are cash efficient. They do not change the accounting income tax expense, but they do change the cash position. 769 MR. SHEPHERD: And so in effect what you're doing is you're taking a loss over here and you're moving it to where the profit is so they offset each other; right? 770 MR. BOYLE: You're taking a deduction. It may be a loss or it may be an expense. 771 MR. SHEPHERD: Okay. And in fact, during the period we're talking about, 1999 to 2002, you had quite a lot of those losses, didn't you? 772 MR. BOYLE: We had a fair number of expenses because Enbridge Inc. does raise the debt for a lot of its operating entities and therefore the interest expense is at the Enbridge Inc. level. We have to get that interest expense down to the operating unit level, so you engage in intercompany financing transactions to get that interest expense down to the operating level. 773 MR. SHEPHERD: Well, you also had operating losses though, too, right, in some of your businesses. 774 MR. BOYLE: Well, in some cases we have business investments that we enter into that do have losses or tax credits, if you will. 775 MR. SHEPHERD: Okay. And in fact, by the end of December 2002, you had $822 million of losses, didn't you? Will you accept that, subject to check? 776 MR. BOYLE: I'm not sure where you're getting that figure. 777 MR. SHEPHERD: I can take you to it if you like. Go to the Enbridge Inc. financial statements for 2002. 778 MR. BOYLE: Yeah. 779 MR. SHEPHERD: And I'm looking at note 13. 780 MR. BETTS: Mr. Shepherd, sorry to interrupt, and I should know this, do we have that document in the record? 781 MR. SHEPHERD: Oh, yes, I'm sorry, Mr. Chairman. This is IGUA Interrogatory No. 36, Exhibit I, tab 13, schedule 36, which is all of the financial statements, all the annual reports for EGD and EI, I believe. 782 MR. BETTS: Thank you, Mr. Shepherd. 783 MR. SHEPHERD: Unfortunately, it's not numbered so I'm avoiding suggesting that you look at it because it could take a while. I have mine marked. 784 MR. BETTS: That was 2002? 785 MR. BOYLE: Yes, I do have that. 786 MR. SHEPHERD: And at the bottom of that page, doesn't it say that your unused cash loss carry-forwards are 822.4 million? 787 MR. BOYLE: Yes, it does. 788 MR. SHEPHERD: And in fact that's a big increase from the previous year; right? 789 MR. BOYLE: There is an increase, yes. There is also a future income tax asset in each year that's noted on the balance sheet. On page 43, there's a $209 million future income tax asset for 2002 and $142 million future income tax asset in 2001. 790 MR. SHEPHERD: Sorry, I'm reading this same page, that note 13, and it looks to me like you have a future income tax asset of 244.8 million in '01 and 321.2 in '02; isn't that right? 791 MR. BOYLE: There are loss carry-forwards and other, but I'm looking at the balance sheet, consolidated statement of financial position on page 43. 792 MR. SHEPHERD: Sorry, I don't know where you're looking. I'm just looking at what you say right here. It says: "Future income tax assets, 2002, 321.2 million." 793 MR. BOYLE: Yes. 794 MR. SHEPHERD: That was your asset; right? 795 MR. BOYLE: That's part of the gross element of it. There are other differences which end up in your balance sheet. 796 MR. SHEPHERD: Using the tax-balancing transactions, you could have made the income in -- the taxable income in Rentco zero if you wanted; right? 797 MR. BOYLE: We had the potential to utilize other non-utility deductions or credits to reduce it to zero, yes, we did. 798 MR. SHEPHERD: And as we've seen, you had lots of losses available to do that, didn't you? 799 MR. BOYLE: Yes, we did. 800 MR. SHEPHERD: But the reason why you didn't do that was you wanted to show at least $5 million of cash taxes payable in each year; isn't that right? 801 MR. BOYLE: Again, as part of our proposal to recover the $50 million, we were prepared to do that, so we looked to manage it to that level, consistent with our evidence and our submission. 802 MR. SHEPHERD: And in fact, in 2000, in May of 2000, you designed a plan which was specifically to create cash taxes of $5 million a year in Rentco; wasn't that right? 803 MR. BOYLE: That's correct, because that, again, was consistent with our proposal that we would manage the cash income taxes of Rentco to that level if we were going to be able to recover the $50 million over ten years at $5 million a year. Again, we did not think it was necessary, but as part of the initiative to try and get a resolution to that, we were prepared to do that. 804 MR. SHEPHERD: Now, you didn't end up implementing that plan as originally thought, did you? 805 MR. BOYLE: Not as originally thought. Ultimately we did, after a few years, yes. 806 MR. SHEPHERD: After, sorry? 807 MR. BOYLE: Well, as I said, once we determined that we weren't sure if that proposal was going to be accepted and we were basically looking to make a decision whether or not we wanted to do the tax balancing and rely on our original view that it was not relevant, we did enter into tax-balancing transactions. 808 MR. SHEPHERD: But you just said after a few years, but I'm reading your evidence here and it says you had the plan in May 2000, and in late 2000, you implemented a slightly different plan. That doesn't sound like a few years to me. 809 MR. BOYLE: Well, I'm thinking after the 1999 transfer. But you're right, that's correct. 810 MR. BETTS: Mr. Shepherd, when you can find an appropriate time to break, I'll leave it to you to let me know. 811 MR. SHEPHERD: Thank you, Mr. Chairman. I think you probably read my mind. I think this is probably a good time. 812 MR. BETTS: Thank you. 813 We will, then, recess now and we will aim to be back at 2:00 to resume with questions from Mr. Shepherd. 814 MR. SHEPHERD: Mr. Chairman, for the benefit of my colleagues, I expect I have about another 30 to 45 minutes. 815 MR. BETTS: Thank you. 816 --- Luncheon recess taken at 12:48 p.m. 817 --- On resuming at 2:06 p.m. 818 MR. BETTS: Thank you, everybody. Please be seated. 819 Were there any preliminary matters that arose during the lunch break? There appear to be none. 820 Mr. Shepherd, are you ready to continue with your cross-examination? 821 MR. SHEPHERD: Absolutely, Mr. Chairman. 822 Mr. Boyle, before lunch, we were talking about the profits that the Enbridge group made on this business that was transferred out of the utility and you gave a number of about $322 million; is that right? As an estimate. 823 MR. BOYLE: That was the profits that were earned on the Enbridge Services Inc. businesses from 2000 through 2002 including the gain on sale. That included, though, more than the rental program. It included a merchandise-finance program, a heating-insurance program business, a services program and the like. 824 MR. SHEPHERD: Now, you have agreed that the profit on the sale was 296 million, right? 825 MR. BOYLE: The after-tax gain on sale was $240 million. There was a pre-tax amount of approximately 290 million. 826 MR. SHEPHERD: 296 actually, right? 827 MR. BOYLE: That was the estimate in the Board memo, I think you may be referring to, but the actual number was slightly less than that. 828 MR. SHEPHERD: Okay. Now, the Internet is a wonderful thing so I went and looked at the Centrica -- Centrica bought it from you, right? 829 MR. BOYLE: Yes, they did. 830 MR. SHEPHERD: So they then had to report this after 2002, right, it was their business? 831 MR. BOYLE: I believe so, yes. 832 MR. SHEPHERD: So would you accept, subject to check, that they've reported in calendar 2001, the profit on this business was $87 million Canadian? 833 MR. BOYLE: I don't know where that number would come from. 834 MR. SHEPHERD: I'm going to get to an undertaking, Mr. Chairman, let me just ask another one then I'll get to the undertaking. 835 Will you accept, subject to check, that the profit from January 1st, 2002, to May 6th, 2002 was approximately 23 million Canadian? 836 MR. BOYLE: No, I would not because it will depend on your financing assumptions for that transaction. It depends on how much debt and equity you would have in the business. There may have been certain revenue streams, but the profit will depend on the financing assumptions. 837 MR. SHEPHERD: I'm going to ask you then to undertake to confirm that the purchaser of this business reported that the profit on this business for those periods was respectively $87 million and $23 million as indicated by way of undertaking. 838 MR. BOYLE: I'm not -- 839 MR. SCHUCH: Mr. Chair, that would be Undertaking J.8.1. 840 UNDERTAKING NO. J.8.1: TO CONFIRM THAT THE PURCHASER OF THIS BUSINESS REPORTED THAT THE PROFIT ON THIS BUSINESS FOR THOSE PERIODS WAS RESPECTIVELY $87 MILLION AND $23 MILLION 841 MR. BOYLE: I'm not sure I can confirm that, Mr. Shepherd, because I don't have access to Centrica's records. 842 MR. SHEPHERD: They are a public company; right? 843 MR. BOYLE: They are a public company, yes. 844 MR. SHEPHERD: They're required to report these things in their annual report; right? 845 MR. BOYLE: They report I'm sure various business income and items. I'm not sure what they do or don't report in the terms of the numbers or the derivation of those numbers. 846 MR. SHEPHERD: I'm not asking you to tell the Board what you think the right numbers are, I'm asking you to tell the Board what Centrica reported with respect to those two periods, and I assume you have access to the Internet? 847 MR. BOYLE: Yes, I do. 848 MR. SHEPHERD: Then I'm asking you to undertake those numbers and report them to the Board. 849 MR. BOYLE: I'll undertake to do my best to do that, yes. Just confirming, the $87 million is the amount reported by Centrica for -- 850 MR. SHEPHERD: The calendar year '01. 851 MR. BOYLE: And the 23 is from January '02, sorry, to May 2002? 852 MR. SHEPHERD: 6th, yeah. 853 Now, before we leave that subject, I wonder if you could undertake one more thing. Could you undertake to provide to the Board a summary of all of the profits that the Enbridge Inc. group of companies made out of these -- this transfer of business, the whole business, for the period October 1st, '99 to May 6th, 2002, both on a before tax and an after-tax basis. 854 MR. CASS: Mr. Chair, might I, through you, clarify again what Mr. Shepherd is referring to when he says "the transferred business." If he's talking more than the rental program, I'm having difficulty with the relevance of it. For example, one of the transferred businesses was the merchandise-finance program which was not a utility program even when it was within Consumers Gas or Enbridge Gas Distribution. I don't understand how there would be any relevance to determine profits in respect of a business like that, but perhaps he's limiting it to the rental program, I'm not sure. 855 MR. SHEPHERD: Mr. Chairman, the verifiable numbers are the numbers for the overall transferred business. These are the numbers that the company has reported in their financial statements, and therefore, are numbers that show the overall benefit that EI achieved out of these assets that had their genesis in -- or these businesses that had their genesis in the utility. This is, I suppose, anticipating final argument a bit, but it's no secret, it's our view that at the end of the day, what this Board is doing is setting just and reasonable rates, and what happened in the December decision, for example? What happened in the previous decisions of the Board with respect to deferred taxes, all must be interpreted in the context of the sole mandate of this Board in this hearing, which is to set just and reasonable rates. It's our submission that the total benefit received by the Enbridge Inc. group of companies from these businesses transferred out of the utility, the total benefit is a relevant factor in determining what is just and reasonable today. 856 MR. BETTS: Let me ask if it's possible for those two components to be separated. Is it possible to answer Mr. Shepherd's question and identify at least what percentage related directly to the rental -- the utility businesses versus the non-utility businesses? 857 MR. BOYLE: I could not do that with the Centrica numbers because I would not have access to any of that information. I'd have to determine what we have with respect to the businesses during the time Enbridge operated them. Those records essentially became the property of Centrica when it was sold to them, but there may be some Enbridge records that may have such information on that. I can undertake to see if there is such information. 858 MR. SHEPHERD: Mr. Chairman, I would be happy with that breakdown. 859 MR. BETTS: So Mr. Shepherd would be looking for the total plus some reasonable estimation, at the very least, of what portion was utility type and what was not utility type. Are we okay with that? 860 MR. BOYLE: Sorry, I'm trying to understand utility type versus non-utility type. 861 MR. BETTS: Mr. Cass indicated that some of the transferred business activities were non-utility, that they may have been within the Enbridge company, but they were non-utility activities. 862 MR. BOYLE: Yes. During -- on September 30th, 1999. 863 MR. BETTS: And I think what I'm suggesting is that those could be separated from the total in order to present a picture of how much was actually utility-related profits or profits from the sale of the utility. 864 MR. BOYLE: I can undertake to see if there is information on that basis, yes. 865 MR. BETTS: Mr. Shepherd is that satisfactory? 866 MR. SHEPHERD: That's fine, Mr. Chair. 867 MR. SCHUCH: Mr. Chair, that would be Undertaking J.8.2. 868 UNDERTAKING NO. J.8.2: TO PROVIDE TOTALS OF UTILITY-RELATED AND NON-UTILITY-RELATED PROFITS FROM THE SALE OF THE UTILITY 869 MR. BETTS: Thank you. 870 MR. SHEPHERD: Now let me just turn back to Centrica for a moment because one of the things I think you said earlier, Mr. Boyle, was that you thought that the price they paid for this business was affected by the amount of the deferred tax obligations; is that right? 871 MR. BOYLE: Yes. 872 MR. SHEPHERD: You don't have any specific evidence to that effect. 873 MR. BOYLE: No, but I have my experience in looking at businesses and evaluating the value of those businesses and you look at the cash flows available from those businesses or those assets and that would involve the amount of the tax liability that you need to pay to Revenue Canada on the deferred taxes. 874 MR. SHEPHERD: It's true, isn't it, that when you buy a business, from an accounting point of view, you account for it as the cost of the assets you acquired, the book value, and an amount which is called goodwill which is the excess you paid over book value; is that right? 875 MR. BOYLE: Yes. 876 MR. SHEPHERD: And will you accept, subject to check, that Centrica has recorded an excess over book value goodwill amount of $442 million Canadian? 193 million pounds? 877 MR. BOYLE: Subject to check, I'd accept that. I don't know what their accounting split is on the purchase price equation, but there would have been an excess, I would have expected, yes. 878 MR. SHEPHERD: And your evidence, as I understand it, is that that excess would have been higher had the deferred taxes been lower. 879 MR. BOYLE: Yes, because in your purchase price equation, you would subtract off the deferred taxes as a cost. 880 MR. SHEPHERD: So now I just want to go back to 155 for a second. This is Exhibit I, tab 16, schedule 155 that we were talking about earlier, and I'm at page 9 now. 881 MR. BOYLE: Okay. 882 MR. SHEPHERD: Now, the original deferred taxes were 168 million, but am I correct that you had to adjust by a total of about 58 million downward because of changes in future tax rates? 883 MR. BOYLE: That's correct. As the federal or provincial governments enact legislation or budgets which include a change to the income tax rate, you must evaluate the future income tax liability and revalue it essentially, and that's what you do. And the difference of that would be, if rates go down, that would tend to decrease the future tax liability; if forecast corporate tax rates go up, that would increase it. And we did so on our balance sheet and that change does go through your income statement. 884 We have reflected the benefit, though, of those tax changes in our calculation of the $23.9 million because that was calculated based on the rates that were in place during the actual years 1999 through 2002. 885 The actual recording of that amount was a higher amount when it was originally put on the balance sheet because income tax rates were higher when they were originally recorded. But we showed the benefit of the lower tax rates when calculating the 23.9 million, so it was allocated its share of that reduced amount. 886 MR. SHEPHERD: Well, that's not 100 percent true now, is it? What you allocated was the current year reduction in taxes, but the future year reduction in taxes was not in any way allocated, was it? 887 MR. BOYLE: It was not because it had not occurred between October '99 and May 2002. It would have continued to occur and be reduced over time at a slower rate. 888 MR. SHEPHERD: So, for example, if -- the rate was, what, about 45 percent or so in 1999, 44.81; is that right? 889 MR. BOYLE: Yeah, 44.72 percent. 890 MR. SHEPHERD: So let's say 45 percent, okay? 891 MR. BOYLE: Fair enough. 892 MR. SHEPHERD: And currently the rate is about 35 percent, isn't it? 893 MR. BOYLE: We believe it's now about 38 percent. It did reduce below that somewhat, but the Ontario government recently increased the corporate tax rates or deferred some of the changes. 894 MR. SHEPHERD: That's right. I forgot about that. So in 2000, the government announced, the federal government announced some future reductions to income tax rates; correct? 895 MR. BOYLE: Yes. 896 MR. SHEPHERD: And there were some that were to apply in the year 2000 and there were some that were to apply in subsequent years. It was stepped over time; right? 897 MR. BOYLE: That's correct. 898 MR. SHEPHERD: And eventually it was going to go down to 35 percent, that was the theory. 899 MR. BOYLE: Yes. 900 MR. SHEPHERD: Which the Ontario government screwed up this year, but otherwise, that's where it was going. 901 MR. BOYLE: Yes. 902 MR. SHEPHERD: Okay. And so what you did, then, in 2000 is you said, Okay, all these future liabilities, we have to project when they're going to be and what the rate is going to be in those years; correct? 903 MR. BOYLE: Yes. 904 MR. SHEPHERD: And if that total is less than the liability, we have to reduce the liability accordingly; true? 905 MR. BOYLE: Reduce or increase as the case may be, yes. 906 MR. SHEPHERD: In this case it was reduce. 907 MR. BOYLE: Yes. 908 MR. SHEPHERD: And the total of those reductions over the couple of years that these changes were taking place was $58 million, roughly. 909 MR. BOYLE: That sounds very close to it, yes. 910 MR. SHEPHERD: And so where did that $58 million go? Does that go to retained earnings? 911 MR. BOYLE: Yes, it does. 912 MR. SHEPHERD: Okay. Now, of that 58 million, there's some portion of it that was reflected, like, for example, in 2000, it was reflected in a change in rates in 2000 that affected the amount of your drawdown that year; right? 913 MR. BOYLE: Yes, it did. 914 MR. SHEPHERD: And do you know how much that was? 915 MR. BOYLE: No, I don't. 916 MR. SHEPHERD: So your drawdown in 2000 - let me just see - was $2.9 million; right? 917 MR. BOYLE: Sorry, our drawdown on... 918 Sorry, yes, I see that now, yes. 919 MR. SHEPHERD: And it's true, isn't it, that the tax rate that you used for the purposes of calculating that drawdown was 44.1 percent? 920 MR. BOYLE: Yes, it was. 921 MR. SHEPHERD: So the ratepayers got the benefit of a 0.6 percent decrease; right? That was how many dollars, do you think? Will you accept that it's under a half million dollars? 922 MR. BOYLE: Yes, about -- yes. I think it's about 40,000, was my calculation. 923 MR. SHEPHERD: 40,000? Or 400,000? 40,000, you're right. Very good. 924 The same would be true in 2001 and 2002, wouldn't it, similar types of impacts? 925 MR. BOYLE: Yes, it would have been larger in 2002 because the decline was more significant. 926 MR. SHEPHERD: Can you undertake to advise us how much of the reduced tax rates was credited to the deferred tax drawdowns, how much of the drawdowns were less because of the reduced tax rates? 927 MR. BOYLE: I may be able to do it right here if you just give me a minute. 928 MR. SHEPHERD: Even a ballpark would be good. 929 MR. BOYLE: I believe that's about 1.3 million. So the 23.9 million shown on our schedule 1 of Exhibit A8, tab 5, schedule 1, would have been higher by 1.3 million or essentially 25.2 million at the rates that they were put on the balance sheet. 930 MR. SHEPHERD: 1.2 million. So out of that 58 million in reduction, 1.2 million was -- 931 MR. BOYLE: Sorry, 1.3 million. 932 MR. SHEPHERD: I'm sorry, 1.3 million, was credited to, in effect, the ratepayers. 933 MR. BOYLE: Yes. 934 MR. SHEPHERD: Okay. Now, out of the eventual figure of 110 million, that's where you got to, right, 110 million? 935 MR. BOYLE: Yes. 936 MR. SHEPHERD: Okay. 24 million of that has been drawn down over the course of those years; right? 937 MR. BOYLE: Yes. 938 MR. SHEPHERD: And that leaves 86 million that wasn't drawn down; what happened to that? 939 MR. BOYLE: That 86 million essentially was the amount that was acquired by Centrica on their purchase. 940 MR. SHEPHERD: Okay. So you've got 110 million you split it up 24 million the ratepayers are going to pay, and 86 million Centrica is going to pay; right? 941 MR. BOYLE: Yes. 942 MR. SHEPHERD: Okay. Now, where, in that calculation, is the $42 million cheque you got in 1999? 943 MR. BOYLE: That has been built into the 86 million or the 110. Either one, it's already been added to that. Now, part of it would have been adjusted by those tax rate changes as well so there would have been an allocation to the 42, so it would have been a lower number after the tax rate. I believe on a proportionate basis. 944 MR. SHEPHERD: Tell me whether I'm right here. So out of that 42 million, 14.5 million would have gone directly to your bottom line as a result of those tax changes? 945 MR. BOYLE: On the 42, that's my calculation as well, yes. 946 MR. SHEPHERD: Now, you said that the amount of the deferred taxes taken over by Centrica was 86 million and I guess I'm trying to follow through in the Rentco financial statements how that works. So I wonder if you could turn up, just to assist us here, Exhibit K.8.3. 947 MR. BOYLE: I've got that. 948 MR. SHEPHERD: On page 2 of that exhibit, that's the balance sheet, right, as of September 30th, 2001? 949 MR. BOYLE: Yes. 950 MR. SHEPHERD: And so I see -- this number, future income taxes, that's the deferred taxes number; right? 951 MR. BOYLE: Yes, for the legal entity. I would stress it's for the legal entity and not necessarily a match with exactly the rental assets because -- the utility rental assets, because there are additional components in the legal entity. 952 MR. SHEPHERD: Okay. I understand. So from 2000 to 2001, the future income taxes went down, it looks to me like about $45 million; right? 953 MR. BOYLE: Yes. 954 MR. SHEPHERD: And that was because of these adjustments we're talking about? 955 MR. BOYLE: That's a major part of it, yes. 956 MR. SHEPHERD: There was also a drawdown, but the main part of it was these reductions. 957 MR. BOYLE: Yes. 958 MR. SHEPHERD: So then you're left with approximately $102 million and now I'm looking, if you could turn up Exhibit K.8.4 and, again, look at the balance sheet which is page 2. You see the line there: Future income tax liability. 959 MR. BOYLE: Yes. 960 MR. SHEPHERD: I guess my first question is, why isn't the number for 2001 the same as the 2001 financial statements? 961 MR. BOYLE: There was likely a restatement of that to be consistent across the two years with changes in accounting or tax. That is often a case where you do restate the prior years. I'm not sure specifically what that would have been in this case. 962 MR. SHEPHERD: So the rules say, if you restate, you have to say so in your notes; right? I'm going to ask you to look at the notes to these financial statements and show me where you restate it, where you said that? 963 MR. BOYLE: Yes, in note 6 on page 8, it says: 964 "Certain comparative amounts have been reclassified to conform to the current year's financial statement presentation." 965 MR. SHEPHERD: Okay. And so that 4.5 million increase in that opening balance, that would be to reflect the fact, what, that you transferred some assets in so you wanted it to be comparable? 966 MR. BOYLE: I'm not sure offhand, but it would have been done to make sure it was comparable to the 111.178 million in 2002. 967 MR. SHEPHERD: Okay. Now let's go to that $111 million, well, 111.2 million. That's actually an increase in the deferred taxes during that stub period. That's because you transferred assets in; right? 968 MR. BOYLE: That's correct. 969 MR. SHEPHERD: So because you transferred those assets in, you had to transfer the deferred tax liability associated with those assets as well? 970 MR. BOYLE: That's correct. 971 MR. SHEPHERD: Do you know how much that was? 972 MR. BOYLE: I don't have it at my fingertips, but I think I may be able to derive it. 973 MR. SHEPHERD: Do you want to estimate it just to give us an idea? I mean, I don't think the exact numbers are important. 974 MR. BOYLE: If you just give me a minute, I'll see if I can do that. We believe in note 3, it indicates an amount that was associated with the acquisition of those assets and related taxes of 11.958 million, so it appears to be approximately 12 million. 975 MR. SHEPHERD: So then the deferred taxes amount that was in Rentco at the time of sale related to the Rentco assets, the old assets, would have been about $98.8 million or so, 11.2 minus 12 -- sorry, 111.2 minus 12. 976 MR. BOYLE: Yes, 98, 99, 100 million, in that range. 977 MR. SHEPHERD: So that's not 86 million, right? So back when Centrica bought the company, they took a $99 million deferred tax liability with respect to the transferred assets; right? 978 MR. BOYLE: Yes, as I stated, because the 86 related only to the utility rental assets. There were these additional assets that had those liabilities that would have gone along with it. 979 MR. SHEPHERD: Okay. And just before we leave this balance sheet, we were talking earlier about tax balancing transactions and we actually see them there; right? On the asset side, you have $1.3 billion of investment in IPL system shares. 980 MR. BOYLE: Yes. 981 MR. SHEPHERD: And that's a company that had losses? 982 MR. BOYLE: It had tax deductions, yes. 983 MR. SHEPHERD: And you see on the liabilities side, you see notes payable to EI for $1.3 billion and you paid 7 percent interest on those, right? 984 MR. BOYLE: That's correct. 985 MR. SHEPHERD: And so the result of that is you had the dividends that you were receiving from IPL system, which were tax free, and you had the interest which you were paying to EI which was a deduction so you sheltered tax; right? 986 MR. BOYLE: That's correct. We didn't shelter it, we transferred the deductions to this legal entity. 987 MR. SHEPHERD: Resulting in less tax payable. 988 MR. BOYLE: Making the efficient tax use of our deductions, yes. 989 MR. SHEPHERD: And if you look at note 5 to those financial statements, you see the summary of those transactions, there were actually two loans from Enbridge, one in December of 2000 and one in September 2001; right? 990 MR. BOYLE: Yes. 991 MR. SHEPHERD: And they were both paid back May 1st, 2002. 992 MR. BOYLE: Yes. 993 MR. SHEPHERD: And the investments in IPL system were at the same time -- was repaid at the same time; right? 994 MR. BOYLE: Yes, they were. 995 MR. SHEPHERD: Okay. Is IPL System Inc. the company that invested in Alliance? 996 MR. BOYLE: No, it is not. 997 MR. SHEPHERD: Okay. Just before I get to the sale, which is the last thing I want to talk about, you didn't actually pay any taxes in ESI during this period, did you? 998 MR. BOYLE: There were small amounts of taxes paid in ESI over that period; I believe it was about $2.4 million. I think that's consistent with the numbers shown on one of my schedules, exhibits, at the start of my testimony today. 999 MR. SHEPHERD: But then you had losses later that you carried back and got rid of those taxes; right? 1000 MR. BOYLE: No, there was the 2.4 million that has been and still was paid. 1001 MR. SHEPHERD: Okay. Oh, I see. Some of that profit was in things other than the rental program. Some of those taxes were for things other than the rental program. The actual tax on the rental program income was zero; right? 1002 MR. BOYLE: It wasn't done on a program-by-program basis, it was the legal entity. 1003 MR. SHEPHERD: Well, I'm just looking at page 11 of School Energy 155 and it says your total taxable income for the period was 0.7 million with respect to the rental program, so you did have the numbers; right? 1004 MR. BOYLE: Well, it's other activities net and the loss carried-forward impact, so of the .7, that is the allocation, yes. And there was in addition to that, I believe it's Ontario minimum tax and capital tax, and the total with that was 2.4. 1005 MR. SHEPHERD: Okay, so -- but taxes on the income itself were zero; right? 1006 MR. BOYLE: 0.7. 1007 MR. SHEPHERD: I think that's actually taxable income, isn't it? Tax on that would be less; right? 1008 MR. BOYLE: Yes, that's correct. 1009 MR. SHEPHERD: Now, let's go to the sale. Let me just back up a second. Consumers Gas sold the assets of these businesses to ESI in 1999; right? 1010 MR. BOYLE: Yes, it did. 1011 MR. SHEPHERD: And that was done on a rollover basis, so there was no tax paid at the time. 1012 MR. BOYLE: For tax purposes, yes. 1013 MR. SHEPHERD: And so then you had this entity, ESI, which had this pile of assets that came from Consumers Gas; yes? 1014 MR. BOYLE: Yes. 1015 MR. SHEPHERD: And then you split those up into two companies, ESI and Rentco. 1016 MR. BOYLE: Yes. 1017 MR. SHEPHERD: Rentco being a wholly-owned subsidiary. 1018 MR. BOYLE: Yes. 1019 MR. SHEPHERD: You ran the two businesses together ESI but you had the assets separated into two different groups. 1020 MR. BOYLE: Yes. 1021 MR. SHEPHERD: Okay. So now you've got ESI owning Rentco, and your deal with Centrica was to sell the shares of ESI, right, the shares, not the assets. 1022 MR. BOYLE: Yes, it was. 1023 MR. SHEPHERD: Okay. So why did you do that? 1024 MR. BOYLE: For commercial reasons, it was determined that that was the best way to execute the transaction. 1025 MR. SHEPHERD: Better from a tax point of view, too; right? 1026 MR. BOYLE: No, it doesn't really matter, in my view, because the value of the cash flows will be identified by the purchaser based on the form of sale. And if there is an asset sale, that has implications to the cash taxes payable and that would be taken into account in the purchase price. 1027 MR. SHEPHERD: You actually went out and got bids for this; right? 1028 MR. BOYLE: Yes, we did. 1029 MR. SHEPHERD: And some of them were for assets and some of them were for shares. 1030 MR. BOYLE: No, it was all shares. That was the structure of the transaction. 1031 MR. SHEPHERD: Okay. And you sold to the highest bidder. 1032 MR. BOYLE: We believe so. 1033 MR. SHEPHERD: So the end result of this transaction, then, was that you had these two companies, one owning the other one, and you sold the shares, so both the two companies became owned by Centrica; right? 1034 MR. BOYLE: Yes, they did. 1035 MR. SHEPHERD: And so the underlying assets, the tax accounts and all those sort of things and the actual water heaters themselves, those weren't transferred, they remained in those companies; right? 1036 MR. BOYLE: Yes. 1037 MR. SHEPHERD: But for accounting purposes, you had already consolidated all of the assets in those subsidiaries into EI; right? 1038 MR. BOYLE: Well, they were always consolidated in Enbridge Inc., yes. 1039 MR. SHEPHERD: Exactly. So when you sold the shares of these companies, the result was you had to take all those things out of the EI books; right? 1040 MR. BOYLE: Yes, we did. 1041 MR. SHEPHERD: Okay. No part of this share sale was -- let me rephrase this. 1042 When you decided to sell shares instead of assets, was any part of your consideration the effect on your regulatory recovery? 1043 MR. BOYLE: Not really. It was something we were aware of but it didn't affect your our decision in the end. 1044 MR. SHEPHERD: And it is true, in fact, that potentially, the deferred tax drawdown would be greater or less if you had sold assets rather than shares; right? 1045 MR. BOYLE: I don't know if that's the case or not. Basically, what we were looking at was the recovery of the $50 million benefit that was afforded to gas utility ratepayers and that's the amount we expected to recover up until the Board's decision in December of 2003. 1046 MR. SHEPHERD: Sorry, that wasn't my question. I accept that you weren't motivated by that. That's not my question. My question is: If you had sold assets, the net deferred taxes in deferred tax drawdown in Rentco would have ended up being greater or less than $23.9 million, right, because of the effects of recapture and terminal losses. 1047 MR. BOYLE: I'm not sure the deferred tax would have been any different. The recapture in capital gains are taxed differently, but the deferred tax amount, I believe, would have been virtually the same. 1048 MR. SHEPHERD: I see, okay. When you -- now, you say in this interrogatory response on page 14 that in fact, in looking at the structure of the sale, you asked yourself the question, Can you structure it to improve your chances of recovering the regulatory asset; right? 1049 MR. BOYLE: Yes. 1050 MR. SHEPHERD: But you concluded that, short of something very byzantine, there was no reasonable structuring activity that you could employ; right? 1051 MR. BOYLE: Yes. 1052 MR. SHEPHERD: And you also concluded that even if you couldn't recover any of the regulatory asset, you still wanted to do the deal. 1053 MR. BOYLE: That's correct. We had a look at the transaction in a worst-case scenario and determined if it was still prudent to proceed, and we determined that it was. Now, we didn't think that would be the outcome and accordingly we continued to record the $50 million receivable on our books. But we recognized that there was a potential outcome of worst-case scenario that would be less than that. 1054 MR. SHEPHERD: You then reported to your board -- you had to get approval of the EI board to do this; right? 1055 MR. BOYLE: Yes, we did. 1056 MR. SHEPHERD: Okay. And so you did a report to your board on November 30th, 2001 and we see what was said there on page 14 of the exhibit. And correct me if I am wrong, you told the board, We're going to make $296 million on this, but you should think of that net of the $50 million notional utility account because we haven't collected that yet. 1057 MR. BOYLE: That's correct. That was our worst-case scenario, and until we get the cash in hand, we don't know what that outcome is. 1058 MR. SHEPHERD: So the board then approved it on the assumption that it wasn't going to get the $50 million; yes? 1059 MR. BOYLE: Not on the assumption. It was still the assumption that we would get the 50 million, but in the event that we didn't, we would still not stop proceeding with the transaction. 1060 MR. SHEPHERD: Well, I guess my question is that they agreed with your conclusion that even if you didn't collect, you should still do the deal? 1061 MR. BOYLE: That's correct, but it was not the assumption that we would not get it, it was in the outside case that happened, it would not cause us not to do the transaction. 1062 MR. SHEPHERD: I just have one more question. I want you to turn to page 7 of School Energy 155. Do you have that? 1063 MR. BOYLE: Yes, I do. 1064 MR. SHEPHERD: And so take a look at the top paragraph. This is your basic position that you've reiterated in your direct evidence; right? 1065 MR. BOYLE: Yes, the use of intercompany transactions to achieve tax efficiency is required as a Canadian tax system does not utilize a consolidation principle. 1066 MR. SHEPHERD: Sorry? Try that again. 1067 MR. BOYLE: Paragraph 2, sorry, under point 2. 1068 MR. SHEPHERD: No, I'm talking about the top paragraph of the page. 1069 MR. BOYLE: The two lines? 1070 MR. SHEPHERD: On mine it's four lines. 1071 MR. BOYLE: Sorry, on mine it's back on page 6. 1072 MR. SHEPHERD: This is the version filed 2004-04-26. 1073 MR. BOYLE: Yes. 1074 MR. SHEPHERD: Okay. It reads: "It's the company's view that the figure of 23.9 million ...," et cetera. 1075 MR. BOYLE: That starts on my page 6, sorry. 1076 MR. SHEPHERD: Oh, really. It. 1077 MR. BOYLE: It must be our printer. 1078 MR. SHEPHERD: So that's the basic position that you stated in your direct evidence; right? 1079 MR. BOYLE: Yes, it is. 1080 MR. SHEPHERD: And the phrase there, "became payable," that actually comes out of the decision in December of 2003, isn't it? 1081 MR. BOYLE: Yes. 1082 MR. SHEPHERD: And when you say "became payable," what you mean there, correct me if I am wrong, you don't mean something you actually had to pay, you just mean you, from an accounting point of view, recognized it as due? 1083 MR. BOYLE: No, we did have to pay that amount. We were able to offset it with other non-utility items, but we did have that cash obligation to Canada Revenue. 1084 MR. SHEPHERD: But you didn't actually pay it? 1085 MR. BOYLE: We did effectively pay it, in my view, because we were able to use these certificates of deposit, if you will, against that. It was an economic cost to the company to use those and we did effectively have to pay that. 1086 MR. SHEPHERD: Mr. Chairman, those are our questions. Thank you. 1087 MR. BETTS: Thank you, Mr. Shepherd. 1088 Mr. Thompson, are you ready to proceed? 1089 MR. THOMPSON: Yes, sir, thank you. 1090 MR. BETTS: Mr. Thompson, just by way of planning, have you an estimate of how long you would be? 1091 MR. THOMPSON: I will take us into tomorrow, I suspect, assuming we're breaking at 4:00. 1092 MR. BETTS: Thank you, please proceed. 1093 CROSS-EXAMINATION BY MR. THOMPSON: 1094 MR. THOMPSON: I suspect, Mr. Boyle, you'll probably be the one that will answer most of these questions, but anybody in the panel can jump in to help out if they think you need help. 1095 I represent The Industrial Gas Users' Association. 1096 The first area that I'd just like to canvass is, if you're successful with this claim against ratepayers, am I correct that the money will accrue to the benefit of Enbridge Inc? 1097 MR. BOYLE: Well, it will accrue to the benefit of Enbridge Gas Distribution and Enbridge Gas Distribution is wholly owned by Enbridge Inc., so it will affect our consolidated results as well, yes. 1098 MR. THOMPSON: Well, does it go to earnings? 1099 MR. BOYLE: No, it does not. It's a balance sheet account receivable. 1100 MR. THOMPSON: So is it fair of me to look at this as a claim of which the primary driver is Enbridge Inc? You are the treasurer of Enbridge Inc. as I understood it. 1101 MR. BOYLE: The assistant treasurer. 1102 MR. THOMPSON: Is it fair of me to look at this claim as primarily driven by Enbridge Inc? 1103 MR. ROSS: Mr. Chairman, I can answer that. This amount is on Enbridge Gas Distribution's balance sheet and is just as much a priority for Enbridge Gas Distribution as it is of Enbridge Inc. 1104 MR. THOMPSON: Okay. So it's not fair for me to look at it as primarily an Enbridge Inc. Claim? 1105 MR. ROSS: No, it is not fair. 1106 MR. THOMPSON: It's Enbridge Gas Distribution. And it relates to, though, taxes paid by affiliates of -- taxes payable by affiliates of Enbridge Gas Distribution; correct? 1107 MR. ROSS: That is correct. 1108 MR. THOMPSON: Yes. And it doesn't relate to any taxes payable by Enbridge Gas Distribution. 1109 MR. ROSS: It does not. It relates to a benefit received by ratepayers prior to the transfer of assets to an Enbridge affiliate. 1110 MR. THOMPSON: Well, I'll come a little later to this benefits point you keep harping on, but moving on, would you agree with me, Mr. Boyle, that deferred tax liabilities do not exist in a vacuum? 1111 MR. BOYLE: I'm not sure exactly what you mean by that, but there are a number of elements to it, yes. 1112 MR. THOMPSON: Well, I would suggest to you they relate to specific taxpayers. You can't have a deferred tax liability without a taxpayer. 1113 MR. BOYLE: Yes, but they are relating to the asset. 1114 MR. THOMPSON: Well, with respect to taxpayers, would you agree with me that when deferred tax liabilities are recorded in a taxpayer's financial statements, the liability is not colour coded by specific assets acquired before a certain date and acquired after that date? 1115 MR. BOYLE: No, they are, but each asset class is unique and carries its own characteristics. 1116 MR. THOMPSON: And are they deferred tax liabilities when recorded on a taxpayer's financial statements colour coded with referred to business lines? 1117 MR. BOYLE: They are segmented by asset type or effectively the capital cost allowance cost schedule and they are defined by the Income Tax Act into specific asset types. 1118 MR. THOMPSON: And with respect to the rental program assets, what are the types of assets that are specified? 1119 MR. BOYLE: Well, those are -- essentially the majority were rental water heaters which was a class 8 item under the Canada Revenue Agency Income Tax Act. 1120 MR. THOMPSON: Anything else? 1121 MR. BOYLE: That's just the way they were defined. 1122 MR. THOMPSON: Okay. And am I correct that the taxpayer that carried on the rental program business before September 30, 1999, was Enbridge Gas Distribution's predecessor, the Consumers Gas Company Ltd? 1123 MR. BOYLE: Yes, it was. 1124 MR. THOMPSON: And am I correct that in the period October 1, 1999 to December -- well, let me back that up. Am I correct that the Consumers Gas company transferred the rental program assets it had on hand on September 30, 1999 to ESI effective October 1, 1999? 1125 MR. BOYLE: Yes. 1126 MR. THOMPSON: All right. And then from October 1, 1999 until, is it September 16, 1999, ESI was the only taxpayer that carried on the business? 1127 MR. BOYLE: Yes, I believe it was December 23rd, essentially. 1128 MR. THOMPSON: Sorry, December 23rd. Thank you. And the equipment rental business is one business? 1129 MR. BOYLE: Well, there are a number of assets in it, but we generally operate as one program. 1130 MR. THOMPSON: And when Centrica bought it, is it fair to say they regarded it as one of the businesses it was buying? 1131 MR. BOYLE: I would expect so, yes. 1132 MR. THOMPSON: Centrica didn't treat this business as a business involving old assets and a business involving new assets, i.e., pre October 1st, 1999 and post October 1, 1999 assets. 1133 MR. ROSS: No, Centrica did not do that. It had no relevance to those assets. 1134 MR. THOMPSON: Right. That's a complete fiction as far as Centrica is concerned, this idea of two businesses. They were buying a business, the equipment rental business. 1135 MR. ROSS: That's correct. 1136 MR. THOMPSON: But between December the 23rd and May the 6th of -- December 23rd of 1999 and May the 6th of 2002, Rentco carried on the rental program business along with ESI; is that right? 1137 MR. BOYLE: Yes, there were the utility assets and the 1999 new additions in Rentco and the 2000-2002 new additions in Enbridge Services Inc. 1138 MR. THOMPSON: And then before the whole package was sold to Centrica, all of the assets, both pre- and post-October 1, 1999, came back into Rentco, all of the rental equipment assets. 1139 MR. BOYLE: Yes, they did. 1140 MR. THOMPSON: So that as of the beginning of the period, October 1, 1999, and as of the end of the period, October 1, 1999, there was actually only one affiliate carrying on the rental program business. Different affiliates, mind you, but one at the beginning and one at the end. 1141 MR. BOYLE: Yes. 1142 MR. THOMPSON: And in between, it was two. 1143 MR. BOYLE: Yes. 1144 MR. THOMPSON: And am I correct that the merger of the two businesses or the two holdings, if you will, asset holdings, back into one business before the transfer to Centrica, transfer of shares to Centrica took place, produced, amongst other things, some tax reductions -- deductions from tax that you've been talking to Mr. Shepherd about. 1145 MR. BOYLE: There were elements that were in each of the different legal entities, yes, and what I tried to do on the Exhibit K.7.1 earlier was to segment those into the economic units, if you will. 1146 MR. THOMPSON: I understand what you're trying to do, but the mere fact of those two asset holdings in different companies merging into one before the deal closed created, I don't know if the word is "tax deductions," but it created tax deductions that, along with other tax deductions, created the loss carry-back which you've carried forward into the numbers you were talking to Mr. Shepherd about. 1147 MR. BOYLE: That was one element of it, yes. 1148 MR. SPEVICK: I'd just like to clarify. I don't think it created deductions, it moved the deductions from one entity to the other entity, because when the assets were moved, the company, the transferor was not able to depreciate those assets for tax purposes. 1149 MR. THOMPSON: So did it bring, then -- am I correct that it brought into Rentco a CCA amount that was in excess of depreciation for that particular period that produced part of the deductions? 1150 MR. BOYLE: Well, it brought the CCA into Rentco and it was not able to be taken by ESI, so it moved it from the one legal entity to the other. As Mr. Spevick said, it's essentially transferring the deduction. 1151 [Audio interference] 1152 MR. SHEPHERD: My apologies, Mr. Chair. 1153 MR. THOMPSON: The upshot of all of those transactions, as I understand it, in terms of the taxes actually paid by Rentco, and I'm looking at the company's response to IGUA No. 89, Exhibit I, tab 13, schedule 89. 1154 MR. BOYLE: Yes, I have that. 1155 MR. THOMPSON: It reduced what the loss carry-back reduced taxes in 2000 -- income taxes down to $7 million from an amount shown on the tax return initially of 21-and-some million; is that correct? 1156 It might be useful to turn up Exhibit A8, tab 5, schedule 2, appendix 4.1, 4.2, and 4.3, just to track this through. Appendix 4.1 is the actual -- it shows the total per tax return in Rentco for the period ending September 30, 2000 of $21,269,794.00 at line -- well, total income tax. 1157 MR. BOYLE: Yes, I agree with that. 1158 MR. THOMPSON: You see that? And then for the following year, which is the next page, the period October 1, 2000 to September 30, 2001, the income tax is 3,903,000; is that correct? 1159 MR. BOYLE: Yes, it is. 1160 MR. THOMPSON: And then in the so-called stub period, the period October 1, 2001 to May 7, 2002, the income tax is a credit amount of $14,237,800; correct? 1161 MR. BOYLE: Yes. 1162 MR. THOMPSON: And you carried that amount back, as I understand it, to the first period on appendix 4.1, and that produces the number that you're showing in the IGUA interrogatory response of $7,031,944. 1163 MR. BOYLE: That's correct. It's actually shown in perhaps a little easier schedule in Exhibit I, tab 16, schedule 155, which is the School Energy Coalition interrogatory on page 8, the second table on that page. 1164 MR. THOMPSON: Right. So at the end of the piece, before the sales share was completed to Centrica, the total taxes, cash taxes paid by Rentco, one of the taxpayers that carried on this business between October 1, 1999 and May 7, 2002, was $10.9 million. 1165 MR. BOYLE: Yes, it was. That was also shown in my Exhibit K.7.1. 1166 MR. THOMPSON: Right. And you also show in your Exhibit K.7.1 as well as in response to the IGUA interrogatory, Exhibit I, tab 13, schedule 89, page 2, that the total income tax paid by Enbridge Services Inc., cash taxes paid between October 1, 1999 and the date the shares were sold was $2.4 million, roughly? 1167 MR. BOYLE: That's correct. 1168 MR. THOMPSON: So the total of those two are -- on the cash taxes paid by the two entities that were conducting the business between the two points in time is about $13 million -- $13.2 million? 1169 MR. BOYLE: That's correct. 1170 MR. THOMPSON: And you're seeking to recover $23.9 million from ratepayers. 1171 MR. BOYLE: That's correct. 1172 MR. THOMPSON: And grossed up for taxes, the claim against ratepayers is close to $37 million; is that right? 1173 MR. BOYLE: That's correct. 1174 MR. THOMPSON: Does Enbridge Gas Distribution actually pay any taxes? 1175 MR. BOYLE: Yes, they do. 1176 MR. THOMPSON: They do. I'm just curious as to whether all of this pushing down in gains results in Enbridge Gas Distribution being in a no-tax situation. Does that happen? 1177 MR. JOZSA: No, they are taxable. 1178 MR. THOMPSON: Now, I just want to follow up if I could for a moment with your development in this claim and it's developed in your prefiled evidence in Exhibit A8, tab 5, schedule 1, and then -- well, there's appendices and then there's further, if you will, verification of the amounts in A8, tab 5, schedule 2 and appendices. Have I characterized that fairly? 1179 MR. BOYLE: Yes. 1180 MR. THOMPSON: And there's been this discussion about the $42 million refund amount that was the subject of, in part, the Board's initial decision. This as I understand it, was a refund amount that the company got from Revenue Canada; is that right? 1181 MR. BOYLE: Yes. 1182 MR. THOMPSON: What gave rise to that refund? 1183 MR. BOYLE: It was the treatment for income tax purposes of installation, delivery and inspection costs. They were permitted to be treated as a tax deduction in the current year as opposed to an element of the capital cost allowance. 1184 MR. THOMPSON: Okay. And when was the amount received by Enbridge Gas Distribution approximately? 1185 MR. BOYLE: Probably either late 1999 or early 2000. 1186 MR. THOMPSON: Okay. And when it was received, it was accounted for how? 1187 MR. BOYLE: It would have basically been a credit to cash and a debit to future income taxes payable, so cash would have went up by $42 million or, alternatively, debt down by $42 million, and the future income tax liability would have went up by 42 million. 1188 MR. THOMPSON: Okay. And you may have covered this with Mr. Shepherd, if you did, I didn't understand it, but I thought you said the $42 million refund has not been accounted for in these calculations that you have done developing your claim against ratepayers. Did I understand that correctly? 1189 MR. BOYLE: I'm not sure I would necessarily agree with that in that because we received the $42 million, there was a future income tax payable that Enbridge shareholders bear and did and will bear or have borne in respect of the actual sale price essentially. 1190 MR. THOMPSON: Okay. So you're saying -- well, it's not accounted for in developing the numbers in this presentation in Exhibit A8, tab 5, schedule 1 or schedule 2, am I right? You didn't start from a deferred tax liability of 126 million, you started from a deferred tax liability of 168 million. 1191 MR. BOYLE: That's correct. 1192 MR. THOMPSON: And had you started from a deferred tax liability of 126 million you would have come up with some different numbers here? 1193 MR. BOYLE: I expect they would have been slightly different. I'd have to think a bit about it as they applied to the utility rental assets because the utility rental assets were essentially fixed at that time and they were on a program essentially where their deductions were set. 1194 MR. THOMPSON: Well, is it fair for us to look at the Board's initial decision here with respect to this $42 million refund as, in effect, allocating that $42 million to cover the first $42 million of drawdown? 1195 MR. BOYLE: I don't believe so. The decision indicated that the company would be able to recover deferred taxes as they became payable on the utility rental assets and as they became payable, the amount between October 1999 and May 2002 was the 23.9 million. That's the amount that became payable on those assets. 1196 MR. THOMPSON: But if the Board intended the $42 million to be applied to the first $42 million of drawdown, if that's what the intent of the decision is, then am I correct the amount recoverable from ratepayers is zero, because 42 million exceeds 23.9? 1197 MR. ROSS: Mr. Chairman, if I can just amplify a little bit on our conclusions here, and the calculations of these deferred tax amounts, if you look at the amounts on schedules -- on A8 and schedule 1 and continuing, these amounts of deferred taxes there calculated already assume that, for example, installation costs are not included in the cost of those assets. So these amounts of $23.8 million will already have already been discounted for that particular amount and I don't believe that the payment of the $42 million is, in this case, relevant to the deferral of, or the recovery, shall we say, of $23.8 million in this case which is already a net amount already incorporated in those assumptions. 1198 MR. THOMPSON: Well, that's really not answering my question. My question was: If the 42 million refund was allocated to the $168 million liability, that's the intent of this decision, am I correct that the drawdown is less than the $42 million? 1199 MR. BOYLE: Certainly the 23.9 is less than 42, yes. 1200 MR. THOMPSON: And so if that was the intent of the decision, the amount recoverable from ratepayers is zero; correct? 1201 MR. BOYLE: That seems to be a matter of argument. I read the decision to say that as the deferred income taxes become payable on the utility rental assets, we are entitled to recover those from ratepayers, and we've identified the amount that became payable on the utility rental assets from October 1999 to May 2002. 1202 MR. THOMPSON: All right. Well, we do agree 42 million exceeds 23.9 million. That's not a matter of argument? 1203 MR. BOYLE: I can agree with you on that. 1204 MR. THOMPSON: All right. Let's move on. I'll argue. 1205 Now, just help me with the gain on the sale from Centrica, and you've had some discussion, because this is the sale of the shares to Centrica. In School's 155 at page, I think it's 14, somebody reported to the EI board of directors that this sale would give rise to a gross accounting gain of approximately $296 million. Do you see that? 1206 MR. BOYLE: Yes, I do. 1207 MR. THOMPSON: Can you help me with what the phrase "gross accounting gain" means? 1208 MR. BOYLE: It means essentially the sale proceeds less the net book value of the assets. It does not take into account transaction costs or accounting income tax expense. 1209 MR. THOMPSON: All right. And then in the company's response to CAC Interrogatory, I believe it's 104, this is Exhibit I, tab 2, schedule 104, the company there states: 1210 "The overall after-tax gain on the sale of the shares was $240 million." 1211 Is that correct? 1212 MR. BOYLE: Yes, it is. 1213 MR. THOMPSON: Can you explain to me what the difference is between the 296 and the $240 million? 1214 MR. BOYLE: Yeah, the 296 was a forecast at the time. It turned out to be slightly less than that on a pre-tax basis. After deducting transaction costs and the accounting capital gains amount for tax purposes, the net after-tax gain was the 240. 1215 MR. THOMPSON: And in the press release announcing the sale, which you'll find, I believe, in Exhibit K.7.3, at -- I'm trying to find this tab, excuse me, it's Exhibit 2K, I believe, the second paragraph, the net gain is referred to there as $210 million after taxes and other costs. Do I take it that 296 was your original estimate, you announced to the press 210, and when the dust settled it was 240? 1216 MR. BOYLE: 296 was the pre-tax estimate at the time of the board memo in November. The 210 million was the after-tax amount estimated at the time of the press release, but the actual amount that actually occurred in our financial statements was the $240 million after tax. 1217 MR. THOMPSON: And does the 240 -- the 246 in the report to the directors, you noted 296 and then you said, "nets to 246 million after deducting a regulatory asset relating to deferred income taxes that were not recovered at the time the water heaters were unbundled." That's the $50 million that you recorded as a regulatory account receivable; is that right? 1218 MR. BOYLE: Yes, it is. And it was not actually deducted against the gain on sale. 1219 MR. THOMPSON: Now, is the 210 that you reported to the press net of the regulatory account receivable? 1220 MR. BOYLE: No, the regulatory account receivable continued to be recorded on our books as a $50 million account receivable because we believed it was still fully recoverable. 1221 MR. THOMPSON: You're not understanding my question. You were reporting to your board of directors that you would get net of the regulatory account receivable 246 initially. 1222 MR. THOMPSON: No, that's not correct, Mr. Thompson. We indicated that if it was to be deducted, that would be the amount, but that is not what we believed was the case. We believed that the $50 million was still recoverable and should be recovered from ratepayers, and we evidenced that by showing it on our consolidated financial statements that management and the board signs off on and is audited by our auditors. 1223 MR. THOMPSON: Well, is there something more to this note to the directors dealing with this proposal? What's quoted in Exhibit I, tab 16, schedule 155, at page 14 appears to be one paragraph. There's nothing in there that talks about, We are a going to get this anyway, or a whole lot of caveats around it. It's a report that effectively states, I suggest, to a reader that we're going to get 246 out of this after the regulatory assets is deducted. 1224 MR. BOYLE: No, that was part of our, if you will, the worst-case planning or scenario analysis in that that was a potential worst-case. 1225 MR. THOMPSON: There is a worst-case scenario analysis in the report to the directors, or is this all they got? 1226 MR. BOYLE: There was a reference to the fact that there could be a worst-case scenario where we did not collect the $50 million and that was part of this analysis. 1227 MR. THOMPSON: There's more to this minute, then, dealing with this topic than what's been quoted in the School's 155; is that what you're telling me? 1228 MR. BOYLE: Well, there's more in the memo, sir. That's not the entire memo. But the intent of the discussion was to state what would be the worst-case scenario, and in order to assess whether or not it would affect the transaction, our conclusion was it would not affect the transaction and it still should be recoverable in any event. But if the worst-case scenario was to develop, it was still the right decision to sell the assets at that point in the market cycle. 1229 MR. THOMPSON: We know from I think it's the 2003 case that these reports to EI directors have a number of segments to them dealing with different topics. Am I correct, that's the way they're structured? 1230 MR. BOYLE: There are different elements of the note. There's strategic rationale, there's background, there's financial implications; there are a number of sections, yes. 1231 MR. THOMPSON: Can I ask you to undertake the whole of the segment in this report of which this paragraph is a part, this paragraph being paragraph 155 on page 14 of the School's 155? 1232 MR. BOYLE: I would have to look and see what's in there because there may be some confidential information in that material that we would not be prepared to release. 1233 MR. THOMPSON: With respect to this note? 1234 MR. BOYLE: Yes. I'm not sure at this point, without looking at it. 1235 MR. THOMPSON: All right. Would you at least look and then report back tomorrow on this topic and I'll follow up on the undertaking? 1236 MR. BOYLE: Sure, I can do that. 1237 MR. THOMPSON: All right. And if there's some attachment to the report to directors that relates specifically to this topic item, would you check to see if there is one and then advise us of its nature tomorrow? 1238 MR. BOYLE: I can undertake to do that, yes. 1239 MR. SCHUCH: Mr. Chairman, that would be Undertaking J.8.3. 1240 UNDERTAKING NO. J.8.3: TO PROVIDE SEGMENT OF BOARD OF DIRECTORS NOTE FOR ESI (REPORT TO BOARD ON NOVEMBER 30, 2001) 1241 MR. BETTS: Do we have specific references to which minutes they refer to? 1242 MR. THOMPSON: Yes, I believe, Mr. Chairman, in School's 155, it's described as a report to the board of directors on November 30, 2001. 1243 MR. BETTS: Thank you. And again, we're not looking for the entire minutes. You're looking for only those portions of the minutes that refer to this issue. 1244 MR. THOMPSON: That's correct, yes. 1245 MR. BETTS: Thank you. 1246 MR. THOMPSON: And just before I leave the gain on the sale, you pointed out to Mr. Shepherd that what was sold was shares and there were a number of businesses -- well, there was more than one business conducted by the company and its subsidiaries whose shares were sold; have I got that straight? 1247 MR. BOYLE: That's correct. 1248 MR. THOMPSON: And the rental -- equipment rental business was one of the business lines. 1249 MR. BOYLE: Yes, it was. 1250 MR. THOMPSON: What were the other business lines? 1251 MR. BOYLE: They would have included the merchandise finance program, the merchandise sales program, the heating insurance parts program, the service business, and the merchandise sales program. 1252 MR. THOMPSON: So a total, then, of five programs, including the rental program; have I got that right? 1253 MR. CASS: Mr. Thompson, if it helps, there is a list, even if it is only a partial list, but it's at page 35 of the annual report for 2002 that's been referred to previously today. 1254 MR. THOMPSON: Okay. Thank you very much for that. 1255 MR. CASS: It's under the heading "Discontinued Operations" on page 35. 1256 MR. THOMPSON: And I guess what I'd like to find out, if it's available, is that in this material that Mr. Shepherd was questioning you about, you had done at appendix A and B, this is attachment 9, if I'm not mistaken, some analysis of the rental program on a continuing-business scenario. Do you recall that discussion? 1257 MR. BOYLE: Yes, I do. 1258 MR. THOMPSON: And I thought you said these schedules were done, by my note, August of 1999. Did I have that down correctly? 1259 MR. BOYLE: That's correct. I'm interpreting that by the heading on the fax, the date up there is -- appears to be August 1999. 1260 MR. THOMPSON: Okay. So the Board rendered its decision in the initial case dealing with deferred taxes, I believe it was in March of 1999. Will you take that subject to check? March the 31st, 1999, according to tab 2(a) of Exhibit K.7.3. 1261 MR. BOYLE: Yes, I agree with that. 1262 MR. THOMPSON: And the relief that the company was seeking in that particular case was based on a premise, would you take subject to check, that this program could not be operated profitably any longer, it had to be wound down. 1263 MR. BOYLE: That was one of the scenarios we were looking at, winding it down within the utility, yes. 1264 MR. THOMPSON: And one of the things that was being said in response to intervenors, would you agree, who were taking the position you could sell this thing at a profit to third parties, that was being poo-pooed by the company? 1265 MR. CASS: Mr. Thompson, do you have references to these statements, by any chance? 1266 MR. THOMPSON: Yeah, I'll find that. Poo-poo is in here somewhere. Not in those terms, I'm sure. I'll just find that. 1267 Yes, if you go to page 105, this is tab 2(i). This is an undertaking response the company provided in the 179-14/15 case dealing with the various scenarios as to what to do with this rental program. And item 2 at page 105 of the motion record deals with the sale of the program to a third party. 1268 Do you see that, Mr. Boyle? 1269 MR. BOYLE: Yes, I do. 1270 MR. THOMPSON: And there the company was taking the position that: 1271 "The sale to a third party was considered and potential buyers were approached. All potential parties were concerned about the lack of written contracts with customers which could lead to premature removals with no recourse. This would result in potential buyers offering less than book value and triggering a loss." 1272 That was the picture that was being painted; would you agree? 1273 MR. BOYLE: Yes. Because if you sell assets in that case, which you had to because the utility owned the assets that weren't shares, that would trigger the recapture and that would result in a cash tax payment decreasing the value. 1274 MR. THOMPSON: All right. But in reality, you, not too long after, I guess the spring of 2002, you're selling this to Centrica for this very substantial gain. 1275 MR. BOYLE: That's correct, but the market had changed significantly over that time frame. From September 1999 to May 2002 was a very significant change in the market for utility-type assets. For example, in that time frame, Enbridge Inc.'s common stock price rose about 42 percent and that would indicate an increase in utility asset values and these were some of those types of assets. So it's not a surprise to me that there was an increase in value over that time frame. 1276 MR. THOMPSON: Well, when it was sold to Centrica, were there contracts? Was the deficiency that was referred to in this undertaking response ever remedied? I don't believe it was. 1277 MR. BOYLE: There were a greater proportion of contracts, yes, but there were still not contracts on a number of assets, that's correct. 1278 MR. THOMPSON: Okay. And another area where this theme of "you can't sell it to a third party" was expressed was in the company's argument in that 179-14/15 case. You'll find excerpts from that at tab 2(j) at page 115 and following. And I don't think you need to read it in full, but my point is the theme that the company was expressing in the 179-14/15 case was that this thing could only be sold to a third party at a loss. Do you accept that, Mr. Boyle? 1279 MR. BOYLE: That was our expectation at that time in that market environment. 1280 MR. THOMPSON: And then by August of 1999, this is a few months after the Board's decision has been rendered, you're doing these analyses of whether we should wind it down or continue it and whether we should carry it on in a continuing business scenario, and by August of 1999, you're showing in the continuing business scenario it has a value that greatly exceeds the value in the wind-down scenario; is that right? 1281 MR. BOYLE: I'm not sure that's the case. There was a range, some below the book value which would have indicated a loss, some slightly above book value. There was a range and it could have been anywhere in that range at that point in time based on those market circumstances. 1282 MR. THOMPSON: I'm looking at appendix B page 1 of attachment 9, where you provided that range of values, and you mention it to Mr. Shepherd, of between 578 million and $681.5 million. 1283 MR. BOYLE: Yes. 1284 MR. THOMPSON: And you say, it was sold to -- transferred to the affiliate ESI for 590 million. That's my note is what you told him. 1285 MR. BOYLE: That's what its book value was and that's what it was transferred at, but there were a range of results above and below that, a number of them below that, yes. 1286 MR. THOMPSON: So when the billion-dollar sale was concluded with Centrica, was a portion of it allocated to this business? My question is what proportion of the gain, the 240 million, did the company allocate to the rental program? 1287 MR. BOYLE: There was no allocation in any of those amounts to any business unit. 1288 MR. THOMPSON: Well, what was the total book value of all the businesses that were sold? 1289 MR. BOYLE: It was approximately $730 million, 720 to 730. 1290 MR. THOMPSON: And the back value of the rental program was what, 590? 1291 MR. BOYLE: It was 590 as of October -- sorry, October 1999. It would have been somewhat different in May of 2002. 1292 MR. THOMPSON: So was the 720 you gave me a May 2002 number or an October 1, 1999 number? 1293 MR. BOYLE: It was a May 2002. The October 1, 1999 number was 737 million. 1294 MR. THOMPSON: 737? 1295 MR. BOYLE: Yes. 1296 MR. THOMPSON: Thank you. 1297 MR. BOYLE: That's the net book value of all the assets, including the non-utility businesses, transferred to ESI. 1298 MR. THOMPSON: Okay. Then coming back to the build-up of this claim that you're presenting in this case, and we find that in detail in Exhibit A8, tab 5, schedule 1, what it is is really a portion of -- it's a build-up of a calculation with respect to a portion of the rental program business assets. 1299 MR. BOYLE: That's correct. It's the portion that were the utility rental assets that were the original assets generating the benefit for gas utility ratepayers. So it was the utility rental assets that we isolated for that calculation. 1300 MR. THOMPSON: And so it's a hypothetical business, right? 1301 MR. BOYLE: Well, they are hard assets and the deferred tax payable refers to the assets. 1302 MR. THOMPSON: But these assets operated in conjunction with new assets and the whole program was operated by one affiliate, ESI, as I understand it; am I correct? 1303 MR. BOYLE: Yes. 1304 MR. THOMPSON: And what you have done is go back and say, Okay, let's isolate a piece of the assets of this particular business. 1305 MR. BOYLE: That's correct. 1306 MR. THOMPSON: And the piece you've isolated is the piece that was acquired prior to October 1, 1999. 1307 MR. BOYLE: That's right. The assets that were in the utility and the subject of the gas utility ratepayer benefit. 1308 MR. THOMPSON: And you then develop your claim by analyzing that piece and you analyze it in a hypothetical taxpayer situation. You don't tie it into the taxpayer that carried on that piece of business, it's a hypothetical taxpayer. 1309 MR. BOYLE: No, I would suggest it's not a hypothetical taxpayer. Rentco was a legal entity and did pay income taxes, as did Enbridge Services Inc. They were both taxpayers. 1310 MR. THOMPSON: But you haven't tied the claim to Rentco's taxes, actual taxes, you've tied it to some hypothetical scenario. Had Rentco carried on this business with only the October 1, 1999 assets, then the taxes payable would have been -- the drawdown would have been X. That's the way you've come at this. 1311 MR. BOYLE: Yes, we've isolated the effects of the deferred taxes payable on the utility rental assets. 1312 MR. THOMPSON: So I suggest to you we're dealing with a hypothetical business and a hypothetical taxpayer in your claim. 1313 MR. BOYLE: I would disagree with that in that the assets are an economic unit and that economic unit can belong to any legal entity, but the costs and benefits of that economic unit need to be matched. In this case, the benefits of that economic unit were generated for gas utility ratepayers and the costs were now being borne by those same assets in the deferred taxes payable. 1314 MR. THOMPSON: Well, I suggest to you taxes are not calculated for economic units, they're calculated for taxpayers. 1315 MR. BOYLE: That's correct, but there's a number of elements that are in any taxable entity, and I'm trying to isolate the effects of the utility rental assets in that legal entity. 1316 MR. THOMPSON: Well, you've used an interesting phrase in your schedule. In Exhibit A8, tab 5, schedule 1, you've called them notional deferred taxes. What do you mean by that? 1317 MR. BOYLE: Well, that's essentially in line with the Board's definition of a notional utility account in that they are associated with the asset. They belong to a number of different entities but they are associated with the asset. 1318 MR. THOMPSON: So you think when the Board established a notional utility account, it was endorsing this notional tax concept? 1319 MR. BOYLE: They, I understand, would need to create an account for us to record that asset under the utility regulatory account code. 1320 MR. THOMPSON: Well, it was a notional account, it didn't authorize the recording of notional taxes, did it? I don't read that in the decision anywhere. Can you point me to where you read that? 1321 MR. BOYLE: I interpret -- the notional utility account was a receivable that was recorded on the books of Enbridge Gas Distribution. The recovery of that notional utility account was linked to deferred taxes. 1322 MR. THOMPSON: Just on this recording it as an account receivable, who made that decision? Was the Board involved in that decision in any way? I don't think so, but correct me if I am wrong. 1323 MR. BOYLE: I'm just reading from our Enbridge Gas Distribution Inc. or Consumers Gas Company Limited 1999 Annual Review and Financial Statements, and this is also in subsequent years' financial statements, where it indicates, in this case, note 14 on page 37, that: 1324 "In March 1999, the OEB released its decision and determined that $50 million of the projected amount may be recovered in future utility rates and a further $42 million related to Revenue Canada's change in assessing practice can be used to offset this deferred tax liability." 1325 And that was in respect of the amounts recorded on the balance sheet of Enbridge Gas Distribution Inc. 1326 MR. THOMPSON: Well, that's the company's interpretation, was it, that it should be classified as am account receivable; am I correct? 1327 MR. ROSS: Well, the fact that the Board allowed us to consider these for subsequent recovery meant that that would become an asset on our balance sheet and that this is in line with our GAAP reporting. 1328 MR. THOMPSON: Well, the language the Board used was that you could recover up to $50 million, and I guess my question is: Did the company come back to the Board and say, Can we record this as an account receivable, or did the company just go ahead and say, This is the way we're going to do it? 1329 MR. ROSS: The company chose the avenue that was with the best information that we had at the time. We did not go back to the Board to ask for that asset to be recovered or recorded, but rather we recorded the asset based on the information that we had at the time. 1330 MR. THOMPSON: And if recovery is not assured, is it appropriate to record an account as an account receivable? 1331 MR. ROSS: If the recovery is impaired in any way, it's correct to write it down. But in the financial statements that released in 1999, 2000, 2001, and 2002, we did not believe that this asset was impaired in any way. 1332 MR. THOMPSON: Okay. Well, let's move on, then. The Board rendered its decision in the initial case in this -- in March, March 31st of 1999. The company then applied for a rehearing, a review and rehearing, and the Board rejected that application and you'll find that -- the Board's decision in that respect in Exhibit K.7.3 at tab 2(b). Will you take that subject to check? That was a decision rendered on August the 17th of 1999. 1333 MR. BOYLE: Sorry, could you quote the reference again, please, Mr. Thompson. 1334 MR. THOMPSON: Yes, it was Exhibit K.7.3, tab 2(b), OEB Ruling on Motion by Enbridge Consumers Gas. 1335 MR. BOYLE: Sorry, I'm just trying to look -- make sure I've got the right exhibit. 1336 MR. THOMPSON: All I wanted you to do, Mr. Boyle, was take, subject to check, that the Board dismissed that motion. 1337 MR. BOYLE: I'll take that subject to check. 1338 MR. THOMPSON: All right. Thank you. And then the company came in in its RP-1999-0001 rate application with a claim for a draw against the notional account, and you'll find the Board's decision with respect to that aspect of the matter at tab 2(c) of Exhibit K.7.3 and it's numbered in the top right-hand corner pages 64 to 78, if you have a copy of the motion record with those numbers on the pages. 1339 Would you take that subject to check? 1340 MR. BOYLE: Sorry, the page number reference again, Mr. Thompson? 1341 MR. THOMPSON: 64 through to 78. 1342 MR. BOYLE: Yes, I've got that. 1343 MR. THOMPSON: All right. And you'll see at page 75 of this motion record, K.7.3, that the oral hearing of this application commenced on August 23, 1999 and concluded on September 9, 1999; would you take that subject to check? 1344 MR. BOYLE: Yes, I agree with that. 1345 MR. THOMPSON: And the Board's decision with respect to the relief that the company was seeking in that case is found at pages 76 to 78 of this motion record. 1346 MR. BOYLE: Yes. 1347 MR. THOMPSON: Do you see that? 1348 MR. BOYLE: Yes, I do. 1349 MR. THOMPSON: Okay. And then at pages -- just to put it in context, the application for judicial review that the company brought of this Board's initial decision and the denial of the motion for review and variance you'll find at tab 2(l) of this motion record, pages 127 through to 136, and you'll see that that was not issued until October the 15th of 1999. Will you take that subject to check? 1350 MR. BOYLE: Yes, I agree with that. I see that now. 1351 MR. THOMPSON: And then, if you go back to what you were seeking in the 1999 proceeding, RP-1999-0001 which would be for the 2000 test year, the test year ending September 30, 2000, you'll see in paragraph 3.1.2 at page 77 that you confirmed to the Board at the hearing you would be transferring your rental program assets to ESI on October 1st; do you see that? 1352 MR. BOYLE: Sorry, the paragraph reference again, please? 1353 MR. THOMPSON: 3.1.2. So during the course of this hearing which concluded by the first week in September, well, September the 9th, you're telling the Board, We're transferring this to our affiliate; right? 1354 MR. BOYLE: Sorry, I may have the wrong reference here. That was the paragraph reference, perhaps you could repeat the exhibit reference for me again, please, Mr. Thompson. 1355 MR. THOMPSON: I have it at page 77 of this motion record and the paragraph reference in the Board's decision is paragraph 3.1.2. 1356 MR. BOYLE: Yes, I do have that now, thank you. 1357 MR. THOMPSON: And then it says in this paragraph you propose to recover in the test year 11.9 million after tax, 21.2 million on a pre-tax basis and deferred income taxes associated with the rental program. So you're making a claim. 1358 MR. BOYLE: Yes. 1359 MR. THOMPSON: And the next paragraph describes intervenors arguments: 1360 "Intervenors argued that no deferred tax amount should be recovered in rates until there is proof that taxes associated with the rental program have been paid by the affiliate. A suggestion for appropriate proof centered around the production of is a certificate by the auditors of Enbridge Services Inc. It was suggested that such certificate should be on the basis of the corporate entity, Enbridge Services Inc. As a whole and not in a stand-alone basis for the rental program only." 1361 Do you recall those arguments? 1362 MR. BOYLE: Yes. 1363 MR. THOMPSON: Have you been an active player in this issue from day one? I thought that's what you told me in chief or told us. 1364 MR. BOYLE: More or less, yes. 1365 MR. THOMPSON: Sorry. 1366 MR. BOYLE: More or less, yes. 1367 MR. THOMPSON: Were you a witness in this particular case? 1368 MR. BOYLE: I don't believe I was. I'm not sure offhand. I was in the subsequent hearing that requested the $5 million a year for ten years, that I definitely was. 1369 MR. THOMPSON: In any event. In this case we see in paragraph 3.1.4: "The company contended that the meaning of the words in EBRO 179-14/15 is that the notional utility account can be drawn down as the deferred taxes become payable, not that they have been paid." 1370 Sound familiar? 1371 MR. BOYLE: Yes. 1372 MR. THOMPSON: Great. 1373 But you didn't get to first base in this case with that argument. You didn't get the taxes payable relief that you were seeking. The Board refused to proceed, as you'll see in the following paragraphs. Would you take that subject to check? 1374 MR. BOYLE: Yes, I think what the Board was looking for was a more complete and clear record and that was based on forecast information at that time, not actual information. So it seems to me the Board was looking for more complete and accurate information i.e., the actual results. 1375 MR. THOMPSON: Well, I don't -- I guess if you look at paragraph 3.1.5, "the Board notes...": 1376 "The Board notes that the deferred tax amount that is being requested for recovery in rates represents the difference between the deferred taxes payable on a rental program wind-down mode in the utility rejected by the Board in EBO 179-14/15 and as a business-as-usual scenario ancillary classification both within the utility. The company's support for this amount is the confirmation for the company's witness that the rental program would be transferred to Enbridge Services Inc ..." And it goes on, "... As for the wind-down of the rental program, the company's witness stated that in its existing structure, the rental program will be wound down. Upon probing, the witness stated hot water units will still be available from Consumers First (Enbridge Services Inc.) And can be purchased and financed or leased but they will not be rented as part of the current program. Upon further probing, the witness stated, 'Hot water units will be financed or leased but not rented.' The witness later stated, 'That is our current plan.'" 1377 MR. BOYLE: Yes, and I believe I was that witness. 1378 MR. THOMPSON: Okay. And then in the next paragraph in the second sentence, the Board says: 1379 "However the testimony by the company's witness is neither definitive that the rental program will be wound down, nor clear as to how it will be wound down, triggering incremental taxes payable within the affiliate. The Board is not prepared to consider the other arguments by the parties unless there's a better understanding on these issues." 1380 Correct? 1381 MR. BOYLE: That's correct. 1382 MR. THOMPSON: I suggest to you the only reasonable interpretation you can apply to that decision is that events after October 1, 1999, with respect to this program are relevant. 1383 MR. BOYLE: I think what the Board was looking at is to identify what the actual results would be, and that's why it was unable to reach a conclusion based on forecast results and that's what we have now let unfold over the last five years, the actual results and the actual results in this case are that the utility rental assets did have a deferred tax liability associated with them of $23.9 million. 1384 MR. THOMPSON: So you interpret this decision as supporting this notion that the taxes payable issue addresses only a segment of the assets. That's the way you're interpreting this decision? 1385 MR. BOYLE: Yes. 1386 MR. THOMPSON: Okay. Well, we'll argue that. 1387 In any event, in that case, we had the taxes payable application of the company, and then in the next case, the company applied for relief and that, I believe, is the application for the 2001 test year which is RP-2000-0040. Would you take that docket number subject to check? 1388 MR. BOYLE: Yes, I would. 1389 MR. THOMPSON: All right. And at tab M of this brief, K.7.3, 2(m), pages 138 and following, we have the evidence, the company's prefiled evidence in that case. Would you take that subject to check? 1390 MR. BOYLE: Yes, it is. 1391 MR. THOMPSON: And you're the witness responsible for this; would you agree? 1392 MR. BOYLE: Yes, I'd agree. 1393 MR. THOMPSON: So this is now -- following the case we just looked at, the next case you come in again for a draw against the account, and the basis on which it's presented is now not the transfer to ESI but the subsequent transfer to the numbered company. That's, first of all, in terms of taxpayer; correct? 1394 MR. BOYLE: Yes. It was now the situation where the assets had been transferred to Rentco. 1395 MR. THOMPSON: And did the transfer to Rentco take place because of the Board's decision in 1999 -- RP-1999-0001. 1396 MR. BOYLE: No. The transfer of the assets to Rentco were twofold; one, as I said, to crystallize the 2.7 million permanent tax savings on capital tax; secondly was to isolate the transfer of rental assets or the utility rental assets for evaluation. Those were the two reasons. 1397 MR. THOMPSON: So it's just a coincidence, then, that the Board's decision in the RP-1999-0001 case was rendered on December 16th of 1999 and, bingo, December the 23rd, 1999, the rental program assets in ESI are now being rolled over to a numbered company? 1398 MR. BOYLE: Yes, that was coincidence. We couldn't arrange that in that time. 1399 MR. THOMPSON: All right. In any event, in this case, you're now putting the claim on the basis of the numbered company taxes and you characterize what's taking place in Enbridge Canada as a wind-down of the -- of what I call the old assets, and at page 139 of the material, the claim is presented on the basis of current cash taxes payable by Enbridge Canada; correct? 1400 MR. BOYLE: That's correct. 1401 MR. THOMPSON: So that's not taxes payable, that's cash taxes, obligation of the taxpayer. 1402 MR. BOYLE: That's correct. It goes back to my discussion with Mr. Shepherd where the company was looking to determine a proposal that it be acceptable to all parties. While we did not believe that it was necessary that the cash taxes be paid, in order to determine an appropriate way in which to recover them, we were prepared to accept that if we could get an assurance that we would recover $5 million a year for ten years, we would manage the cash taxes position of Rentco to $5 million as well. 1403 MR. THOMPSON: But what you were representing was that cash taxes of Enbridge Canada would be the basis for the claim. 1404 MR. BOYLE: We would be prepared to manage those taxes in that manner if we were assured a recovery on that basis. It's not what we believed to be necessary. But again, to try and balance off the interests of other parties and to reach a proposal that was acceptable to all parties, we were willing to do that. 1405 MR. THOMPSON: Well, let's go to page 140, your second last answer. You say: 1406 "In addition to the extent that the cumulative income tax cash cost incurred Enbridge Canada from 2000 onwards does not exceed the cumulative amount recovered from ratepayers, Enbridge proposes that a variance account be established to credit ratepayers with the amount of any overcollection." 1407 That suggests to me that you were limiting your claim to the actual cash taxes payable by Enbridge Canada. 1408 MR. BOYLE: The intent with that was to address the concern that tax people may have that we could carry back tax losses to prior years and reduce the prior years' cash taxes payable. This was a mechanism that would prevent us from doing such a thing, so that we had to ensure that on a cumulative basis, there were certain cash taxes paid to avoid the loss carry-backs that could have theoretically occurred. So it was both a criteria that you had to have $5 million a year in cash taxes paid and also cumulatively, that that needed to be maintained. That was our proposal again, to try and -- as we say in paragraph 8, the proposal is fair to all parties. 1409 That was our intent. It was not what we believed to be true, again, because evidence of that is the fact that we continued to record the full $50 million receivable, even in the last few years when we knew that the cash taxes paid was not that amount. We believed it was not necessary, but again, in this proposal, we were willing to do that in exchange for the certainty of recovery. 1410 MR. THOMPSON: That would be a convenient point for me to break, Mr. Chairman, and come back at it tomorrow morning, if that's acceptable to the Board. 1411 MR. BETTS: Thank you. That's quite acceptable. We will then -- before I conclude, are there any points that you would like to bring to the attention of the Board Panel? 1412 Mr. Dingwall. 1413 PROCEDURAL MATTERS: 1414 MR. DINGWALL: Yes. Tomorrow morning I have a slight conflict in timing because I have an issues conference next door on another matter. But Mr. MacIntosh will be sitting in to watch along with my list of questions to see whether or not they've been asked, and then perhaps grasp me by the scruff of the neck to drag me in here at the convenient time if they have not been asked. So I'll apologize for my interruption in advance. 1415 MR. BETTS: That's fine and we'll try to allow you that flexibility to do both things. 1416 Anything else? With that, then, we will recess or adjourn at this point to reconvene tomorrow morning at 9:30 and continue cross-examination of the panel. Thank you very much. 1417 --- Whereupon the hearing adjourned at 4:02 p.m.