Rep: OEB Doc: 1388P Rev: 0 ONTARIO ENERGY BOARD Volume: 9 29 JUNE 2004 BEFORE: R. BETTS PRESIDING MEMBER P. NOWINA MEMBER P. SOMMERVILLE MEMBER 1 RP-2003-0203 2 IN THE MATTER OF a hearing held on Tuesday, 29 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 29 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; RESUMED: [40] CROSS-EXAMINATION BY MR. THOMPSON: [45] PRELIMINARY MATTERS: [305] ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DEFERRED TAXES - BOYLE, ROSS, JOZSA, SPEVICK; RESUMED: [315] CONTINUED CROSS-EXAMINATION BY MR. THOMPSON: [320] CROSS-EXAMINATION BY MS. GIRVAN: [538] CROSS-EXAMINATION BY MR. DINGWALL: [570] RE-EXAMINATION BY MR. CASS: [614] QUESTIONS FROM THE BOARD: [647] PRELIMINARY MATTERS: [692] INDUSTRIAL GAS USERS ASSOCIATION PANEL ON DEFERRED TAXES AND TRANSACTIONAL SERVICES - FOURNIER: [741] EXAMINATION BY MR. THOMPSON: [747] CROSS-EXAMINATION BY MS. DEMARCO: [790] CROSS-EXAMINATION BY MR. CASS: [843] RE-EXAMINATION BY MR. THOMPSON: [1178] 10 EXHIBITS 11 EXHIBIT NO. K.9.1: DIRECT EVIDENCE OF PETER L. FOURNIER ON BEHALF OF THE INDUSTRIAL GAS USERS' ASSOCIATION [746] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.9.1: TO TRACK THE DEFERRED TAX LIABILITY FROM EGD WITH RESPECT TO RENTAL PROGRAM ASSETS FROM SEPTEMBER 30, 1999 TO MAY 7, 2002 [287] UNDERTAKING NO. J.9.2: TO PROVIDE THE COMPANY'S ESTIMATE OF THE CROSSOVER DATE IN EBO 179-14/15, AND WHETHER ADDITIONS WERE FORECAST IN PERIODS BEYOND SEPTEMBER 30, 1999 [454] UNDERTAKING NO. J.9.3: TO PROVIDE A BREAKDOWN BY RATE CLASS OF THE TOTAL $37 MILLION EGD IS SEEKING TO RECOVER FROM ITS CUSTOMERS RELATED TO THEIR PROPOSED DEFERRED TAX RECOVERY [550] UNDERTAKING NO. J.9.4: TO PROVIDE THE COMPANY'S POSITION AS TO WHETHER THEY WOULD BE WILLING TO SPECIFICALLY INFORM THEIR CUSTOMERS ABOUT THE DEFERRED TAX RECOVERY IN THEIR CUSTOMER NOTICES AT THE END OF THE DAY [560] UNDERTAKING NO. J.9.5: TO PROVIDE MORE DETAIL AS TO THE BASIS OF THE $42.3 MILLION TAX CREDIT, HOW IT WAS TREATED AND WHY IT WAS TREATED IN THAT MANNER [729] UNDERTAKING NO. J.9.6: TO PROVIDE THE LETTER FROM IGUA TO MR. THOMPSON TO THE EXTENT THAT IT ADDRESSES THE STUB PERIOD ISSUE FOR THE 15-MONTH TEST YEAR [883] 14 --- Upon commencing at 9:36 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning, everybody. We are sitting again today being day 9 of the hearing of application RP-2003-0203. We concluded day 8 in the midst of the examination of the company's deferred taxes panel and welcome back, panel. More specifically, we were partway through the cross-examination of Mr. Thompson. 17 I was given indications at that time that Mr. Dingwall and perhaps Ms. Street would be cross-examining the panel as well and they would determine that today after they've heard the completion of Mr. Thompson's cross-examination. 18 Assuming time permits, I understand that IGUA has their intervenor witness panel available this afternoon should that opportunity arise. 19 With that, let me ask if there are any preliminary matters? 20 PRELIMINARY MATTERS: 21 MR. CASS: Mr. Chair, I have a couple of preliminary matters. First, there is an undertaking response from the evidence of this panel that is available to be handed around in writing, that is the response to Undertaking J.8.2 concerning earnings from the sale to Centrica and earnings during the years 2000 to 2002. Also, I understand that the panel members may be able to provide one or more undertaking answers verbally and I understand as well that there may be a correction. 22 Perhaps I could start though by passing around the response to Undertaking J.8.2. 23 MR. BETTS: Thank you. 24 Mr. Cass, we have 8.2. 25 MR. CASS: Having done that, sir, perhaps I might ask the panel to let us know about what other undertakings they are in a position to answer and also to address the correction that I understand needs to be made. 26 MR. ROSS: Yes, Mr. Chairman. I have a response to Undertaking J.8.1 and this is with reference to the profits of Enbridge Services Inc. reported in Centrica's annual report. 27 I have a copy Centrica's annual report and accounts for the year ended December 31st, 2002, and in that report, under note 24, it highlights the profits of Enbridge Services Inc. following the acquisition of that business on 7th of May, 2002. And in quoting from that note, I will read that: 28 "The group acquired Enbridge Services Inc. on 7th May, 2002. The profit after tax for Enbridge Services Inc. from January 1st, 2002 to May 7th, 2002 was 10 million pounds. The profit for the previous financial year was 38 million pounds." 29 That, Mr. Chairman, if we translate that into Canadian dollars, would be roughly the equivalent of about $23 million for the period January 1st, 2002 to May 7th, 2002 and $87 million for the previous financial year, and that would be the year ended December 31st, 2001. 30 I may also just add that in that note it makes reference to accounting policy alignments that have been made to adjust these numbers for the prevailing accounting policies adopted by Centrica. 31 MR. BETTS: Thank you. 32 MR. BOYLE: Mr. Chairman, I also have a response to an undertaking from yesterday and that would be J.8.3 with respect to provide any additional material in the board of directors' note of November 30th, 2001 relating to the utility account receivable, and I can confirm that there is no other information in that note on that topic. 33 MR. JOZSA: Mr. Chairman, I would like to make a correction to a response given to Mr. Shepherd yesterday. He asked what the current effective income tax rate was for 2004, and I would like to confirm that for companies with a September year end, the effective income tax rate is 36.24 percent. Thank you. 34 MR. BETTS: Thank you. 35 MR. CASS: Those are all the preliminary matters that we have, Mr. Chair. Thank you. 36 MR. BETTS: Thank you. Are there any other preliminary matters? 37 Mr. Thompson, are you prepared to resume your cross-examination? 38 MR. THOMPSON: Yes, thank you, Mr. Chairman, I am. 39 MR. BETTS: Please do. 40 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DEFERRED TAXES - BOYLE, ROSS, JOZSA, SPEVICK; RESUMED: 41 B.BOYLE; Previously sworn. 42 B.ROSS; Previously sworn. 43 J.JOZSA; Previously sworn. 44 T.SPEVICK; Previously sworn. 45 CROSS-EXAMINATION BY MR. THOMPSON: 46 MR. THOMPSON: Panel, when we broke yesterday, we were discussing filings that the company made in evidence in the 2000-0040 proceedings as well as the 2001-0032 proceedings where the claim for drawdown against the notional utility account was based on cash taxes in Enbridge Canada; do you recall that discussion? 47 MR. BOYLE: Yes, I do. 48 MR. THOMPSON: And the reason I was doing that was to develop the inconsistency between the position in those cases where cash taxes was obviously relevant to the position you now take in this case where cash taxes is irrelevant. Has the position changed with respect to relevance? 49 MR. BOYLE: No, it has not changed. The company's view was that the cash taxes paid was never relevant or should not have been relevant; however, again, in order to address the concerns of other parties and intervenors that suggested it was important, we were prepared to develop a proposal that offered, in exchange for a shared recovery of $5 million per year over ten years, that we would manage the cash taxes payable position or paid position to that level. It was not our view that it was required but, again, in order to get agreement on a proposal, that was what we were prepared to do. 50 MR. THOMPSON: You keep talking about getting an agreement. My recollection is that this prefiled evidence that we're referring to was not proffered for the purposes of getting an agreement, it was proffered for the purposes of supporting an application to the Board; correct? 51 MR. BOYLE: It was offered as a proposal in order to identify the recovery plan of the $50 million. And we would have been agreeing in that case to that offer, if you will, or that proposal. We were prepared to do that in order to get the assured recovery. 52 MR. THOMPSON: Well, the evidence I suggest to you, Mr. Boyle, it estimates cash taxes for these companies and it represents the cash taxes for Enbridge Canada will be in certain amounts in each of the filings. That doesn't sound like a proposal to get an agreement on something. It's a representation on which you're seeking the Board to grant relief. 53 MR. BOYLE: That was our proposal and, in fact, we did manage the cash taxes to $5 million per year or less for the first two years. That is, in fact, why the $10.9 million for essentially the 2000 and 2001 years was ending up being the cash taxes paid. We did offer that and we were prepared to manage to that. And that was in exchange for the assured recovery. 54 MR. THOMPSON: But when you say "offered," you're offering it to whom, the Board? 55 MR. BOYLE: The Board and all participants in the process. 56 MR. THOMPSON: All right. What I suggest to you, Mr. Boyle, what happened was you were responding to the Board's initial decision in the 1999-0001 proceedings where intervenors had taken the position cash taxes is relevant and the Board's decision appeared to endorse that. I suggest to you that in filing subsequently your evidence on deferred taxes in each of the two cases, you were responding to a cash taxes principle. 57 MR. CASS: Well, Mr. Chair, with respect, I believe that that question is quite unfair. Mr. Thompson is putting to the witnesses the Board decisions and elements of previous Board proceedings and in my submission, he is not putting them accurately. In fact, yesterday, he went to these decisions and read into the record portions of them which, in my submission, are inconsistent with what he's now putting to the witness. 58 If I could ask the Board in this connection to turn up Exhibit K.7.3, and if the Board could turn to page 77 of that, these are excerpts that Mr. Thompson read right into the record yesterday starting at page 77 of Exhibit K.7.3. 59 So at page 77, for example, Mr. Chair, Mr. Thompson read into the record the first sentence of paragraph 3.1.3 setting out the intervenors' position that: 60 "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." 61 He also read into the record the company's position at paragraph 3.1.4: 62 "The company contended that the meaning of the words in the EBO 179-14/15 decision is that the notional utility account can be drawn down as the deferred taxes become payable, not that they have been paid." 63 He also read into the record from the next page, the Board's determination in paragraph 3.1.6 where the Board said: 64 "The testimony by the company's witnesses is neither definitive that the rental program will be wound down nor clear as to how it will be wound down thereby triggering incremental taxes payable" - Mr. Chair, I emphasize "payable" and not "paid" - "within the affiliate. The Board is not prepared to consider the other arguments unless there is a better understanding on these issues." 65 So Mr. Thompson was at pains to bring out yesterday that the intervenors' position was that it should be cash taxes paid, it was the company's position that that was not necessary, that it was taxes payable, and the Board's decision that it needed to see something about incremental taxes payable. He's now suggesting to this witness that the Board decided something else, that the Board decided that it had to be cash taxes paid. And in my submission, that's quite unfair. He's not laid the groundwork for that and in fact he's laid the groundwork for quite the opposite proposition. Thank you. 66 MR. THOMPSON: Well, let me try and rephrase my question, Mr. Boyle. Mr. Cass and I can argue about what that decision meant. 67 But let's just go to your deferred taxes evidence in the 2000-0040 case. This is at pages 138 to 139 of the same document that Mr. Cass was referring to, and 140. 68 Show me in that evidence where the company takes the position that cash taxes are irrelevant. 69 MR. BOYLE: I'm not sure we get into what's specifically relevant or not relevant from that perspective. Again, Mr. Thompson, to reiterate, our position was, as you noted in that prior section, that it was payable, not paid; however, we did note the intervenor issues or concerns and in that regard, we tried to develop a proposal that was sensitive to those issues and concerns. And as part of that proposal, again, our offer or proposal to all parties that we thought would be workable and that we were prepared to live by if assured recovery was that we would manage the cash taxes paid. Again, we did not ever believe that that was necessary. 70 Again, as evidence of that, Mr. Thompson, I would point to the financial statements of Enbridge Gas Distribution Inc. and Enbridge Inc. in that if we believed that was the case when we knew that the cash taxes paid was only $10.9 million in Rentco, we could not record that $50 million liability on our books -- sorry, that receivable, not liability, the $50 million receivable. But we did. And the only way we could do that is if we believed it was fully recoverable. And if we believed in any way that cash taxes paid was the criteria, we could not do that. We did not believe that. We believed it was payable and therefore it was recoverable and therefore it was on our statements. 71 MR. THOMPSON: Well, I'll come back to that in a minute. But can I take it there's nothing in -- you'll agree with me, there's nothing in your evidence, 2000-0040 case, that says that cash taxes is irrelevant. 72 MR. BOYLE: In that particular section of the evidence, no, we were talking about a different proposal. 73 MR. THOMPSON: All right. And I just want to get a clear understanding of the statement in this evidence at page 140, 139 and 140. You say in this evidence, starting at the bottom of 139: 74 "However, in order to provide certainty that the amount collected from customers equals or exceeds the actual income tax cost to Enbridge Canada, Enbridge is prepared to provide the Energy Returns Officer on an annual basis the actual tax return of Enbridge Canada indicating the actual income tax cash cost incurred by Enbridge Canada. In addition, to the extent that the cumulative income tax cost incurred by Enbridge Canada from 2000 onward 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." 75 That sounds to me like you were offering to pay back anything over -- anything that you collected over the amounts actually paid by Enbridge Canada; is that what it says? 76 MR. BOYLE: No, it does not, Mr. Thompson. 77 MR. THOMPSON: What does it say? 78 MR. BOYLE: What it says is that to address issues around the ability to move taxes around a corporate group, we would ensure that the Enbridge Canada Inc. did maintain at least that $5 million amount of cash taxes. And if that amount dropped below the $5 million per year for any reason, we could not collect, then, the full $5 million in that year. So if we fell through on our commitment to manage the cash taxes payable to at least $5 million, then we could not collect the $5 million a year. That was in order to assist parties in assuring that there was at least the 5 million. 79 And as well, that was specifically designed to address the some of the discussions that I had with Mr. Shepherd yesterday regarding the ability to carry losses back into prior years, and that this would prevent us from doing that so that we could not carry losses back to prior years and get that cash back. Cumulative cash tax paid had to always equal or exceed the amount recovered from ratepayers. 80 As well, the earlier comment about the tax returns to the Energy Returns Officer, that was intended to answer the Board's concern about verification of the amounts in question, so that the verification would be provided through those tax returns on a confidential basis to the Energy Returns Officer, and that way the Board could be assured that it had the information to support the recovery. 81 MR. THOMPSON: All right. Let's move forward, then, to the evidence in 2001-0032. You'll find this at pages 80 to 83 of the brief, Exhibit K.7.3. Show me in there where the company says cash taxes are irrelevant. 82 MR. BOYLE: Again, this is basically the same proposal, Mr. Thompson, that we provided earlier and we were prepared to continue to do that at that point in time. 83 MR. THOMPSON: Well, there again, you were representing, at paragraph 6, cash taxes payable, and this is in April of 2002. This is after the deal to Centrica had been announced, and Mr. Shepherd took you through this yesterday in part, but you were representing in paragraph 6, cash taxes payable in Enbridge Canada for 2000, 2001, and 2002; correct? 84 MR. BOYLE: Yes. And those amounts in 2000, the $23 million was paid and is in our evidence in the numbers and I can show you that, as well as the 6 million in 2001. Those were actually paid in those years. We had a forecast for 2002. Our forecast did turn out quite a bit differently because at that point in time, we determined that we had to manage the business in the most efficient way going forward and rely on our arguments that it should be payable and not paid, so we had the $10.9 million representing the first two years, 2000 and 2001, that ended up being the actual cash taxes paid. But we did do tax planning in 2002, ultimately, that did reduce the 2002 amount and carry back some losses to prior years and resulted in the 10.9 million total. But these numbers were accurate actual numbers at that point and are forecast at that point. 85 MR. THOMPSON: All right, well, perhaps we'll argue that. 86 Is there anything in this document that tells us that cash taxes are irrelevant in this evidence? 87 MR. BOYLE: In this proposal, we are prepared to, on this basis at assured recovery, manage the cash taxes paid. Again, we did not believe it was relevant and if we did, we could not have recorded that receivable on our books, but we were in agreement that if we could assure ourselves recovery, we would manage the cash taxes paid in order to assist all parties in getting comfort with a resolution. 88 MR. THOMPSON: All right. Let's just go to pick up on that last point about recording the receivable on the books. You made reference to some financial statements I think yesterday, but in the brief K.7.2, documents brief of IGUA, there are arguments of the parties attached. And what -- I wanted to refer you to page 31 of tab 6 of this argument because it has an excerpt from the financial statements about this company's noting of this $50 million amount. And I wanted you to confirm that this is what is said in the company's financial statements. And I'm quoting, this excerpt comes from the company's financial statements prior to the year ending September 30, 2002, and the note contained in those financial statements reads as follows. Do you want to take a minute to turn up one of those statements? 89 Do you have the statement there for the period September 30, 2002? 90 MR. BOYLE: We do. It doesn't quite seem to match. 91 MR. THOMPSON: Well, I've referred to, in the reference, the financial statement in RP-2000-0040, which I guess would be the September 30, 2001 financial statement; do you have that there in everything that's been filed here? I thought we had it. 92 MR. BOYLE: Yeah, I think we've got more or less the same note. Minor nuances, but I think we've got the gist of it. 93 MR. THOMPSON: Well, what you said in this submission at page 29 under paragraph 62, what you said was: 94 "In management's discussion and analysis of the financial statements in the year ending September 30, 2001, the Board's 179-14/15 decision determining that an amount of up to 50 million may be recovered in future utility rates was contained in a section of the document entitled 'Future Income Taxes.'" 95 Is that right? Can you take that subject to check? 96 MR. BOYLE: Well, I would disagree with the comment that: 97 "This heading recognized what EGD had previously acknowledged by its conduct in the 2000, 2001 test year cases, namely that proof of taxes payable was a condition of obtaining draw against the notional utility account." 98 That was not accurate, no. 99 MR. THOMPSON: No, no, forget the argument, the fact is that in your financial statements -- sorry, in the management discussion and analysis with respect to the financial statements for the year ending September 30, 2001, the Board's decision in 179-14/15 was discussed in a section entitled, "Future Income Taxes." That fact is accurate subject to check? 100 MR. ROSS: Yes, Mr. Chair, under management discussion analysis, there is a section entitled, "Future Income Taxes." 101 MR. THOMPSON: Okay. And the wording in that section, I thought I had accurately quoted at page 31 of the argument where the quote that is here, and if there are any inaccuracies please correct them was: 102 "There are also unrecorded future income taxes related to the rental assets in the amount of approximately $168,393,000. The company had applied to the OEB for full recovery of these taxes in future gas distribution rates as ratepayers have benefited from the tax deductions in prior years by means of lower gas distribution rates. In March 1999, the OEB released its decision and determined that up to 50 million of the projected amount may be recovered in future utility rates." 103 Is that what the note says? 104 MR. BOYLE: I believe the introduction is slightly different but the middle part of it is consistent with the note in the financial statements. 105 MR. THOMPSON: Well, is it, in substance, accurate? If not, maybe we should have you undertake to put precisely what it is that you're referring to on the record. 106 MR. BOYLE: No, in substance, the introduction is correct as well. 107 MR. THOMPSON: All right. And so that's the situation as of September 30, 2001. And it's not until September 30, 2002 financial statements that we get this new section discussing the Board decision under regulatory receivable, a new heading, a new concept. Is that correct? 108 MR. BOYLE: I would not state that was a new concept. The $50 million was always recorded as a regulatory receivable. 109 MR. THOMPSON: All right. Well, was the language of the note carried forward in all financial statements, i.e., that the Board determined that up to 50 million of the projected amount may be recovered in future utility rates? Has that been a consistent inclusion in the management discussion analysis in financial statements or has that changed, or did that change? 110 MR. ROSS: Mr. Chair, the substance of that statement did not change. The wording may have changed from 2001 to 2002 but the substance did not change. 111 MR. THOMPSON: So I suggest to you, Mr. Boyle, that the language, the decision determining that up to 50 million of the projected amount may be recovered in future utility rates doesn't suggest an account receivable to me, it suggests a contingent recovery; do you agree with that? 112 MR. ROSS: Mr. Chair, I don't agree with that. I think the decisions of the Board and the outlying accounting evidence suggests that this was a regulatory receivable, as properly stated in our financial statements. In addition to that, it was recoverable pending a future decision by the OEB, and that was accurately stated in our financial statements as well. 113 MR. THOMPSON: Let's move on to the phrase "taxes payable" or "tax payable," because the company's latched on to that phrase in its evidence in this particular case. 114 Would you agree with me that the phrase "tax payable" is one that appears in income tax returns? For example, if you go to the tax returns that are part of appendix -- sorry, Exhibit A, tab 5, schedule 2, appendix 5, you have there, the corporate -- sorry, the federal and provincial tax returns of Rentco. If you go to page 7, the bottom of the page, you'll see "Tax Payable." It's a calculated number in an income tax return; is that correct? 115 MR. JOZSA: Are you referring to the bottom where it says "Part 1, Tax Payable"? 116 MR. THOMPSON: Yes. The words "tax payable" relate to a calculated number in an income tax return. 117 MR. JOZSA: That is correct. 118 MR. THOMPSON: All right. And you'll see that on the following page and you'll see that also in the provincial tax returns as well, in this material, we have the CT23 corporation's annual return for 2000, the Rentco, and if you go to page 19, we see a summary there of income tax, corporate minimum tax, capital tax, premium tax, and then the phrase, "Total Tax Payable," again, a calculated number in an income tax return of a taxpayer; fair? 119 MR. JOZSA: I agree. 120 MR. THOMPSON: All right. And so I suggest to you that the phrase "tax payable" is synonymous with taxes payable in an income tax return. It could be construed in that manner by reasonable people, wouldn't you think? 121 MR. BOYLE: Taxes payable is a concept in an income tax return, yes, and it typically relates to different elements of the tax return or business income. The taxpayer may have a number of different businesses generating taxes payable, positive or negative. 122 MR. THOMPSON: Well, what you're talking about in my parlance isn't taxes payable, it's taxes attributable to a particular business line or a part of a business line. Can you live with that phrase? 123 MR. BOYLE: Well, they are attribute, they are also payable. You must make those payments absent some other transaction which may have unrelated costs or benefits. 124 MR. THOMPSON: Well, I'll use the phrase "taxes attributable" to reflect the concept that you're advancing here and "taxes payable" when I'm referring to amounts in tax returns, so you'll know what I mean? 125 MR. BOYLE: Fair enough. I may respond differently, but -- 126 MR. THOMPSON: No, I understand. 127 Now, the other point that I just wanted to just emphasize is that this evidence that you filed in the 2000-0040 case and in the evidence that was filed in the next case, the 2001-0032 case, and interrogatory responses, there's never been any cross-examination of company witnesses on that evidence before this proceeding; right? 128 MR. BOYLE: That's my understanding. I believe the issue was removed from the hearing list or issues list at some point. 129 MR. THOMPSON: Right. And that, then, brings me to the -- in terms of the history, the -- and this ties in with this point you were making about benefits, you wanted to match costs with benefits, but it brings me to the motions that preceded the Board's 2003-0135 decision and we have the records here of those motions. These motions, would you agree, Mr. Boyle, or take subject to check, arose as a result of the removal of the -- well, the hiving off of the deferred tax issue from the 0032 case? 130 MR. BOYLE: Yes. 131 MR. THOMPSON: And the initial motion was the IGUA motion -- well, the moving parties, IGUA, CAC, and VECC, and that motion is in Exhibit K.7.3, and the relief that was being sought in that motion was an order dismissing -- if you just go to page 1 of the record, we were looking for a dismissal of your -- 132 MR. BETTS: Mr. Thompson, what's the tab number of that? 133 MR. THOMPSON: It's tab 1, page 1. 134 MR. BETTS: Thank you. 135 MR. THOMPSON: The relief that the moving parties were requesting was an order dismissing the proposals that you are making in those proceedings for a claim for a draw against the notional utility account, and then in the alternative we were requesting directions for, in effect, further production and responses to interrogatories and that kind of thing. 136 And would you take subject to check, Mr. Boyle, that the request for the first branch of the relief, an order dismissing the claims, was based on the assertion that the company had not demonstrated in its prefiled evidence in the 0032 proceedings the extent to which there had been any actual drawdown of deferred taxes. That was the nub of it. 137 MR. BOYLE: I'm not sure of the history there, but obviously the Board in that case deferred it to another proceeding. 138 MR. THOMPSON: All right. And if that was the moving parties' motion that was dated May the 30th, 2002, Enbridge then delivered a motion, and you'll find that in Exhibit K.7.4. It was dated August 1, 2002, and what this motion was for was a decision of the Board establishing or determining the basis or mechanism for recovery in rates of the 50 million recorded in the notional utility account and consequential relief on the basis of that request. 139 Would you agree with me, Mr. Boyle, that this motion was based on a premise or an argument that the $50 million that the Board decided upon in the earlier proceeding constituted or imposed an unconditional obligation on ratepayers to pay the amount? 140 MR. BOYLE: Our view was that it was a $50 million benefit and therefore, an offsetting $50 million cost that we would be entitled to recover. That was our perspective, yes. 141 MR. THOMPSON: And then just in terms of the history, there was a bit of sabre rattling between Mr. Cass and myself as to whose motion should go first, whether they should go together, that kind of thing, and would you take that subject to check? The documents are found in the Exhibit K.7.2 at tab 3. 142 MR. BOYLE: Yes, there does seem to be some correspondence back and forth there in that section. 143 MR. THOMPSON: And Mr. Cass' point, if you'll just turn to the August 29 letter, that was his last word on the subject, it's the three pages in from the back. His point, and I'm paraphrasing, was, Well, if we are entitled to the $50 million as we say we are, by way of an unconditional obligation, the evidence that we were seeking, IGUA was seeking, really isn't necessary. And so he says in his letter on the page 1, last paragraph: 144 "The point though, is that evidence about whether Enbridge or its owner qualifies for an indemnity is relevant only if IGUA is correct in its contention that the notional utility account established in EBO 179-14/15 is a so-called indemnity account." 145 That was Mr. Cass' position. 146 MR. BOYLE: Yes, I read that. 147 MR. THOMPSON: So then following that, we have the Board taking those two motions records and reacting to them by issuing a Procedural Order. You'll find that at tab 5 of the brief Exhibit K.7.2 and on page 1, second paragraph of the procedural order the Board says: 148 "Having reviewed the motions, the Board is of the view that the threshold issue raised by the motions is the appropriate interpretation to be given to the Board's original decision to establish the notional utility account. And the Board has decided that the most effective way to proceed with the two motions is to receive submissions from the parties with respect to the interpretation that ought to be given to that decision." 149 That was the Procedural Order that gave rise to the arguments that subsequently gave raise to the decision. 150 MR. BOYLE: Yes, it was. 151 MR. THOMPSON: And would you agree with me that there was nothing in the evidence before the Board on these motions dealing with this distinction between taxes attributable and taxes payable? Nothing in the evidence dealing with your calculation of this amount, that $23.9 million, or the actual taxes being paid at $10.9 million or the various other scenarios that have emerged in evidence in this proceeding? All that was before the Board was what was in these two motion records; do you agree? 152 MR. BOYLE: There was a number of excerpts of evidence in those motion records, yes, and positions and calculations. 153 MR. THOMPSON: And with respect to this issue about whether what the Board had granted was indemnity relief or an unconditional obligation to pay, the Board found in favour of the moving parties on that point; do you agree? 154 MR. BOYLE: The Board found, I believe, in its decision, that the amount recoverable was the amount of the deferred taxes payable from October 7th, 1999 to May 7th, 2002. 155 MR. THOMPSON: With respect to the issue about the nature of the order where there was an unconditional obligation to pay or, in effect, offset relief for indemnity relief, if you would go to tab 9 of Exhibit K.7.2, at paragraph 58, you will see the Board's decision on that point. Do you have it? 156 MR. BOYLE: Yes, I have that decision. 157 MR. THOMPSON: And the Board said: 158 "The above excerpts represent the core of the Board's decision in this matter. We are of the opinion that these reasons do not support EGDI's view that the Board's decision in EBO 179-14/15 represents an unconditional obligation for the ratepayers to pay $50 million after tax. The Board clearly intended that EGDI would be able to recover from the notional account only as deferred taxes became payable and only up to $50 million after tax." 159 So on that point, the Board agreed with intervenors. 160 MR. BOYLE: Yes, I agree. The Board also goes on for some additional comments there, with the respect to: 161 "The Board confirms that the draws against the notional account are limited to $50 million after tax and are conditional upon deferred taxes associated with the rental program becoming payable. The intervenors argue that EGDI's ability to draw on the notional utility should be limited to the amount which would have been payable in taxes had the assets been kept within the first affiliate and operated on an ongoing basis, rather than transferred to a second affiliate and operated on a wind-down basis. In our view, the language in the Board's EBO 179-14/15 decision does not support this interpretation. This interpretation would preclude, in effect, EGDI and its affiliates from engaging in normal tax planning in order to optimize exposure to deferred tax liability. In fact, one of the options identified by the Board in the EBO 179-14/15 decision specifically contemplates transferring the rental program assets to an affiliate or selling to a third party." 162 MR. THOMPSON: You're quite correct. The Board rejected the hypothetical that we put forward which was to assume these were both operated in one utility. They rejected that; correct? 163 MR. BOYLE: Yes. 164 MR. THOMPSON: And I interpret that to mean what the Board was interested in was not hypotheticals but what actually happened. Can you make that interpretation? 165 MR. BOYLE: No, that was part of it, but the Board was also looking at the economic unit that caused those benefits and was recovering those costs. 166 MR. THOMPSON: Well, how could it be doing that when that wasn't argued -- sorry, when there was no evidence before the Board of all of the implications of these economic units that you now put forward? 167 MR. CASS: Mr. Chair, I'm not sure how Mr. Boyle could answer a question about what the Board could or could not do, the paragraph just referred to, paragraph 60, makes clear that the intervenors argued this position. Mr. Thompson is now asking Mr. Boyle, how could the Board decide that. I don't think Mr. Boyle can really answer how the Board could or could not decide something that the intervenors argued in that case. 168 MR. THOMPSON: I don't think Mr. Cass understood my question. I agree with you that the intervenors argued a hypothetical and the Board rejected a hypothetical. 169 MR. BOYLE: Well, it was more a hypothetical because we had transferred assets and there was another affiliate involved. That was not a hypothetical, that was the real-world case at that time. All of these transactions that occurred that I've outlined in my exhibits had occurred by that point. They were actual events. They were not hypotheticals, they had occurred. 170 MR. THOMPSON: Right. But the evidence of their implications and the evidence that they had occurred with all of the implications that you bring here, there was none of that before the Board. That only came subsequently when you filed all the evidence in this case. The Board didn't know that you were taking the position the drawdown was $23.9 million attributable to assets held as of October 1, 1999. Nobody knew that. 171 MR. BOYLE: Again, at that point, we believed it was the full $50 million that was recoverable even though we knew the $23.9 million was the deferred taxes payable amount. But our view was that it was the full benefit that was recoverable, the $50 million. That was one element of it. 172 MR. CASS: Mr. Chair, I'm just having difficulty with this line of questioning essentially because I think it really should be left for argument. 173 Mr. Thompson seems to be saying that intervenors argued a certain position; he also seems to now be saying that there was some lack of evidentiary record in connection with that position. Well, if intervenors chose to argue it on whatever record existed in that case, I'm not sure how Mr. Boyle can now deal with Mr. Thompson's position as to whether there was an evidentiary record for what intervenors sought to argue. 174 Really, I would submit, Mr. Chair, this is a matter for argument in this case, if it's an issue at all. 175 MR. THOMPSON: Well, Mr. Cass still doesn't understand my point. We argued a hypothetical and we were rejected on the hypothetical. I'm not pursuing the hypothetical. 176 What I'm suggesting to you, Mr. Boyle, is the Board's rejection of hypotheticals doesn't mean the Board endorsed your actuals because nobody knew what those actuals were. 177 MR. BOYLE: Well, I don't agree it was a hypothetical, Mr. Thompson. Those transactions had all occurred. Everybody was aware of them and what had happened and what had transpired. That was all on the record. It was not a hypothetical. 178 The utility rental assets were put in Enbridge Services Inc., then in Rentco, and then back -- and left in Rentco for that entire time frame. Then we sold the business on May 7th, 2002. All of that had occurred, and in fact the Board contemplated a number of those potentials in its original EBO 179-14/15 decision. Then it pointed out what had actually happened. All of those were actual events and were not hypotheticals. 179 MR. CASS: Mr. Chair, I'm just looking at tab 6 of Exhibit K.7.2, which is the argument of IGUA and other parties in that case, and I don't see anything suggesting that these matters were put forward as a hypothetical. As I read this, they were put forward as facts. I'm looking, for example, at page 14, paragraph 28, which talks factually about what was done with the transfer of the businesses. 180 MR. THOMPSON: Well, I'll just come back to it one more time perhaps for you, Mr. Cass. 181 I referred you to your letter where you say we should argue the motions on the theory that evidence will come later depending on the Board's view of the nature of the order. 182 Now you seem to be saying we should have gotten the evidence of all of the facts with respect to the actual transactions then and not later; is that what you're saying? 183 MR. CASS: Well, what I'm saying is that in the argument I've just referred to at tab 6, that IGUA and other parties saw fit to raise a variety of different issues and present, as I understand it, what they believe to be a factual base for those arguments, not a hypothetical base; and faced with those arguments from those parties, the Board chose to determine those points. So whether we agreed or disagreed with those points going forward, these particular parties, including IGUA, chose to argue them and purport to present a factual base and the Board chose to decide them. 184 MR. THOMPSON: I'll save it for argument, Mr. Chairman, and move on. 185 The evidence that you've adduced in these proceedings, though, deals with what actually happened. 186 MR. BOYLE: That's correct. 187 MR. THOMPSON: And in terms of the distinction between taxes payable and taxes paid, excuse me, and taxes attributable, you'll see in the decision that the phrase "taxes payable" first appears, by my notes, in paragraph 27 in characterizing the intervenors' argument. In paragraph 27 it says: 188 "The intervenors concluded that EGDI is only entitled to draw on the notional utility account for any taxes that became payable between October 7, the date on which the assets were transferred out of EGDI to an affiliate, and May 7, the date of the sale of the rental assets to the third party." 189 So that was an intervenor submission. 190 MR. BOYLE: Sorry, paragraph 27 of the? 191 MR. THOMPSON: Board's decision, at tab 9. 192 MR. BOYLE: Yes, I see that. 193 MR. THOMPSON: All right. And I suggest to you that the intervenors were never ever talking about what I characterize as taxes attributable. They were using the phrase "taxes payable" to relate to the tax return concept. Would you agree? 194 MR. BOYLE: It says "payable". I interpret that by your definition to be attributable. I think that's the correct and proper interpretation of that word, yes. 195 MR. THOMPSON: Well, the phrase came from us and you're telling me we meant what you say it means? 196 MR. BOYLE: No, I think the phrase came from the Board's original decision in EBO 179-14/15. I can refer you to that decision. That term was introduced in its decision -- I think the first time they use it is they say they become due. 197 MR. THOMPSON: Well, why don't you just stick with the 135 decision because I think all of the relevant excerpts from the prior decision are quoted. You'll see at paragraph 48 -- 198 MR. BETTS: Mr. Thompson, can I have a reference? I'm going from book to book. 199 MR. THOMPSON: Tab 9 of Exhibit K.7.2. 200 MR. BETTS: Thank you. 201 MR. THOMPSON: You'll see in paragraph 48, Mr. Boyle, that the phrase actually appears to have emanated from the company's claim application, the Board refers to the company's application, saying: 202 "...the recovery from ratepayers in due course on a taxes payable or flow-through basis." 203 MR. BOYLE: Mm-hm. 204 MR. THOMPSON: That suggests cash taxes to me. 205 MR. BOYLE: No. It says "payable," and that is a payable concept in terms of the deferred tax liability. 206 MR. THOMPSON: I see. All right. Well, if you want to just check these excerpts from the prior decision that the Board is quoted to confirm that they capture what you were planning to refer to. 207 MR. BOYLE: Yes, they do. 208 MR. THOMPSON: All right. Thanks. 209 Now, in terms of the $42 million refund and its implications in the calculation, will you agree with me that that was not the subject of any argument before the Board in this case? 210 MR. BOYLE: No, not in this case. It seemed to me they decided that issue in the original 179-14/15 decision where they referred to the $42 million being attributable to the shareholder essentially along with the other deferred tax liability, so they had addressed that issue and closed that off in that proceeding was my interpretation. 211 MR. THOMPSON: All right. Well, whether that means that it's an allocation to the liability we'll argue, but I just wanted to draw your attention to two portions of Enbridge's argument in this 0135 case. You'll find that at tab 7 of Exhibit K.7.2 under a heading, "Equity arguments." 212 MR. BOYLE: Do you have a page reference of that? 213 MR. THOMPSON: Page 15, I'm sorry. 214 MR. BOYLE: Thank you. 215 MR. THOMPSON: You'll see in the middle of the paragraph the following sentences: 216 "On the issue of deferred taxes shall the Board decided that the company's shareholder should be responsible for the entire amount of the deferred tax liability associated with the rental program. This amounted to a liability of approximately 126 million after giving effect to the credit from Revenue Canada." 217 Then if you flip over the next page in the middle of the page, there's a sentence that reads: 218 "As already discussed, the Board decided that the company's shareholders should be responsible for approximately 126 million of deferred taxes associated with the rental program after giving effect to the credit from Revenue Canada." 219 Those two sentences suggest to me that the company acknowledges that this liability -- sorry, this credit, revenue credit, is allocable to the first $42 million of the drawdown of tax liability. 220 MR. BOYLE: No, I would disagree with that, Mr. Thompson. The $42 million, essentially if you break down the 168 million into two components, the $42 million and the $126 million, the $126 million was relevant when it was part of the utility business. That was the amount of deferred tax liability generated by the utility rental assets and part of the benefit that flowed through to ratepayers as it was part of that business unit, if you will. 221 The $42 million was essentially outside of that business unit because it came directly to Enbridge Gas Distribution Inc. as a cash receipt from Revenue Canada, so the company or the shareholder in that case received the benefit and therefore the shareholder was liable for the future tax payments. And we are paying those and did pay those essentially. That's why it was different than the 126 million because the 126 million was the shared amount, if you will, while it was part of the utility, but the $42 million was separate and the benefit flowed to the shareholder of the company and, therefore, the liability was left with the company. 222 MR. THOMPSON: All right, let's move on. Another point that was argued was the question of whether the gain on the sale should be brought into account. We made submissions on that point and the company made submissions to the opposite effect. Would you take that subject to check? 223 MR. BOYLE: Yes. 224 MR. THOMPSON: And the Board, in its decision, says nothing about the gain. Is that the way you read it? 225 MR. BOYLE: That's the way I read it, yes. 226 MR. THOMPSON: And what conclusions does the company draw from that? 227 MR. BOYLE: Well, it's my belief that it is not relevant because the company, the non-utility businesses took on that risk of that business. It could have gone up in value, it could have gone down in value. Whatever it was, the risk of that business was a non-utility asset and a non-utility business risk. It was in no way related to the utility business and should not be factored into utility costs or benefits. 228 MR. THOMPSON: I'll ask this question, and maybe Mr. Cass will say it's for argument, but is it the company's position that this Board Panel cannot consider the gain when responding to your claim for relief in this case? 229 MR. BOYLE: It seems to me to be irrelevant to this issue, again, because it's all non-utility business operations. It seems to me non-utility business operations' risks and rewards are outside of this proceeding on this issue. 230 MR. THOMPSON: Well, you're putting your position on the basis of irrelevance; is that right? Is that the position? 231 MR. BOYLE: Among others. 232 MR. THOMPSON: What are the others? 233 MR. BOYLE: Well, that the Board has looked at this issue as you noted in a prior case and made no determination on that, so that would suggest to me that they did not see it as an issue, but that is, perhaps, a matter of argument. 234 MR. THOMPSON: Well, we'll leave it then for argument. Just a couple of other areas that I want to cover. One is -- a couple of informational areas, and one is just getting a clarification of the deferred tax liability recording in the various corporate entities taking it from September 30, 1999, to the date when the liabilities were taken over by Centrica as a result of the share transaction. 235 At the beginning, the company was forecasting in the 179-14/15 case that the unrecorded liability in EGD for the rental program as of September 30, 1999, was about $168 million. Would you take that subject to check? 236 MR. BOYLE: Yes, I would. 237 MR. THOMPSON: What was the amount that was actually recorded after the Board decision in EGD? 238 MR. ROSS: The number recorded in EGD's financial statements was 168 million. 239 MR. THOMPSON: The round number of 168 million? 240 MR. ROSS: Yes. 241 MR. THOMPSON: And that's based at a tax rate at that point in time of, what? 242 MR. BOYLE: It would have been based on a tax rate of 44.72 percent. 243 MR. THOMPSON: And then that liability was effectively transferred to ESI on October 1, 1999? 244 MR. BOYLE: Yes. 245 MR. THOMPSON: All right. And then on October -- sorry, on December 23, 1999 -- before I get there, and then ESI had some additions to rental program assets before December 23, 1999; correct? 246 MR. BOYLE: That's correct. 247 MR. THOMPSON: So before the transfer of part of the assets to Rentco, what was the liability in ESI? Do you have to get that by way of undertaking? 248 MR. BOYLE: We'll have to take an undertaking on that, Mr. Thompson. 249 MR. THOMPSON: Why don't I just run through this scenario and maybe the best way to do it is to take an undertaking and give us a chart that just enables us to track this. If there are numbers that you can provide, I suggest you respond to the questions, but we sum it up with a chart just so that we can follow this. 250 All right. And then so the liability would -- with additions would likely increase; is that fair? Would cross over and get pushed out as opposed to -- 251 MR. BOYLE: Not necessarily, because I'm not sure we had claimed any CCA depreciation, so it depends how much had been claimed. So we'd have to look at that 252 MR. THOMPSON: All right, let's leave it at that. And then part of the liability was -- sorry, all of that liability was then transferred to Rentco. 253 MR. BOYLE: Yes. It wouldn't have been much different than the 168, but it was all transferred to Rentco. 254 MR. THOMPSON: Let's, for the sake of argument, say it's 170 million, subject to check, and then Rentco had a September 30 year end; am I right? 255 MR. BOYLE: Yes, it did. 256 MR. THOMPSON: And so the liability in Rentco would be recorded as of September 30, 2000? 257 MR. BOYLE: Well, it would have been recorded on transfer in on December 23rd, 1999. It would have then been a different number on September 30th, 2000. 258 MR. THOMPSON: Okay. And so that number would then reflect the tax rates that were in effect at that time; is that right? 259 MR. BOYLE: And the forecast, yes, as the 168 would have represented whatever the forecast tax rates were at that point in time as well. 260 MR. THOMPSON: So the September 30 amount in Rentco was what? I thought that was some of the numbers that you were discussing with Mr. Shepherd yesterday. 261 MR. BOYLE: I believe I have that number. As of September 30th, 2000, it was 147.0 million. 262 MR. THOMPSON: Okay. And that reflected a tax rate of what? 263 MR. BOYLE: It would have been a tax rate of 44.1 percent plus whatever forecasts were available at that time based on government budgets. 264 MR. THOMPSON: All right. Then we move forward to September 30, 2001 in Rentco. 265 MR. BOYLE: Yes. 266 MR. THOMPSON: The liability was what? 267 MR. BOYLE: 102.0 million. 268 MR. THOMPSON: And the tax rate? 269 MR. BOYLE: Sorry, at September 30, 2001, and the tax rate was 42.5 percent for the fiscal 2001 year, again, plus whatever forecast would have existed at that time. 270 MR. THOMPSON: And then at May 6, 2002, the number that you've provided to IGUA in an interrogatory response is 111 million and some odd and I think you were discussing that yesterday with Mr. Shepherd. Do you have that number? 271 MR. BOYLE: Yes, 111.2 million. 272 MR. THOMPSON: And that reflects the assets merging in Rentco the day before the transaction closed. 273 MR. BOYLE: Yes, it does. 274 MR. THOMPSON: And the tax rate at that point? 275 MR. BOYLE: For the October 1st, 2001 to May 6th, 2002 period, the average effective tax rate was 39.47 percent. 276 MR. THOMPSON: Okay. And the other piece of it is -- those numbers capture the assets that existed as of October 1, 1999 plus the assets that were acquired between October 1 and December 23. 277 MR. BOYLE: The numbers for 2000 and 2001 and the numbers for 2002 also include the 2000 to 2002 new non-utility rental asset additions. 278 MR. THOMPSON: And within ESI, the -- I just want to put this into context. The number in ESI as of December 23, 1999 would be zero, right, with respect to rental equipment? 279 MR. BOYLE: Yes. 280 MR. THOMPSON: And in your answer to IGUA 89, this is Exhibit I, tab 13, schedule 89, on page 2, you tell us the purchase of the business assumed a deferred tax liability of $111,178,648 from Rentco, and then you have the number $4,260,289 from ESI. And I was in interested is if you could track, give us how we get to that final number in ESI. ESI was on a calendar year-end; is that right? 281 MR. BOYLE: It was, but it also had other assets in addition to rental assets. It had other capital additions or capital assets that it used in its businesses that were not related to rentals. 282 MR. THOMPSON: So is that number in ESI a "other asset" deferred tax liability number? 283 MR. BOYLE: Yes. 284 MR. THOMPSON: Okay. Then I don't think we need the ESI numbers then. Well, do you think it would be helpful to put that in a chart, what we've just done here, because the only thing that's outstanding is the number at December 23, 1999? 285 MR. BOYLE: Yes, I could do that. 286 MR. SCHUCH: Mr. Chair, that would be Undertaking J.9.1. 287 UNDERTAKING NO. J.9.1: TO TRACK THE DEFERRED TAX LIABILITY FROM EGD WITH RESPECT TO RENTAL PROGRAM ASSETS FROM SEPTEMBER 30, 1999 TO MAY 7, 2002 288 MR. BETTS: Can we have a description for that. 289 MR. SCHUCH: Perhaps Mr. Thompson could give a brief description. 290 MR. THOMPSON: It's just tracking the deferred tax liability from EGD with respect to rental program assets from September 30, 1999 to May 7, 2002. 291 Does that capture it, Mr. Boyle? 292 MR. BOYLE: I think that will do it. 293 MR. THOMPSON: Okay. Thanks. 294 MR. BETTS: Thank you. 295 MR. THOMPSON: Well, I want to, in my next series of questions, try and summarize the various sort of recovery, no-recovery scenarios that have emerged in the evidence here just so we can get them in one place and make sure that we're not missing something. And they fall into two -- 296 MR. BETTS: Mr. Thompson, just looking at the clock, would you, look are for a time to break and I don't want to interrupt -- 297 MR. THOMPSON: This would be the best time, Mr. Chair. 298 MR. BETTS: This is a reasonable time? How long do you expect you would be. 299 MR. THOMPSON: I think I would be half to three-quarters of an hour. 300 MR. BETTS: When we return. Thank you. We will recess at this point and resume cross-examination at 20 minutes past 11:00. 301 --- Recess taken at 10:56 a.m. 302 --- On resuming at 11:23 a.m. 303 MR. BETTS: Thank you, everybody. Please be seated. 304 Thank you. Before we resume cross-examination from Mr. Thompson, are there any preliminary matters? 305 PRELIMINARY MATTERS: 306 MR. SHEPHERD: Mr. Chairman, I've received a communication from Ms. DeMarco with respect to the cross-examination of Mr. Fournier. I understand that Mr. Fournier will be starting after lunch, perhaps. She has advised that she's unable to be here until later this afternoon and she's hoping that if she's here at 3 or 3:30, that that will be okay with the Board. She was expecting Mr. Fournier to go tomorrow and so she's had to rejig her schedule to get here on time. 307 MR. BETTS: Assuming we haven't concluded by then, she will be able to cross-examine. I appreciate that you're only the messenger in this case, Mr. Shepherd, so I appreciate the message anyway. 308 Perhaps I could ask Board Staff to just communicate with Ms. DeMarco that we will try to accommodate that schedule of hers, but if there's nobody in the room, she'll know that we concluded early. 309 MR. SCHUCH: Certainly, Mr. Chairman. 310 MR. BETTS: Then are there any other preliminary matters? 311 Mr. Thompson -- oh, sorry, Ms. Girvan. 312 MS. GIRVAN: I just wanted to be clear, Mr. Chair, that I will have a couple of clarification questions, so I'll try and fit in at the end. 313 MR. BETTS: Thank you. 314 Mr. Thompson, please proceed. 315 ENBRIDGE GAS DISTRIBUTION INC. PANEL ON DEFERRED TAXES - BOYLE, ROSS, JOZSA, SPEVICK; RESUMED: 316 B.BOYLE; Previously sworn. 317 B.ROSS; Previously sworn. 318 J.JOZSA; Previously sworn. 319 T.SPEVICK; Previously sworn. 320 CONTINUED CROSS-EXAMINATION BY MR. THOMPSON: 321 MR. THOMPSON: Mr. Boyle, I just wanted to back up one second here, dealing with the nature of the relief that the board initially granted and then the dispute over that and the Board's subsequent decision in the 0135 case. We call the nature of the relief granted as indemnity relief. Do you accept that characterization now? 322 MR. BOYLE: Well, I would accept the characterization. What I would indicate is that the Board has indicated that we are entitled to recover the amount of deferred taxes payable that actually occurred from October 7th -- sorry, October 7th, 1999 to May 7th, 2002. 323 MR. THOMPSON: Okay. Well, this comes to the point where you were talking about matching benefits with costs. What I suggest to you is we're not -- when we're dealing with indemnity relief, what we're talking about is whether the claim that you make falls within the scope of the indemnity granted. Would you agree with that characterization? 324 MR. BOYLE: Well, I'm looking at the benefits of the deferred tax loan amounts, if you will, that occurred with the utility rental assets and the cost associated with that deferred tax liability or the deferred taxes payable with the utility rental assets. 325 MR. THOMPSON: Yes. You relied on this matching of costs and benefits to justify your claim, but I'm suggesting to you that the real issue is does the claim fall within the ambit of the indemnity? It may have nothing to do with benefits and costs. 326 MR. BOYLE: Well, that sounds like an interpretation issue. I'm just trying to read what I see in the clear words and direction of the Board. 327 MR. THOMPSON: Well, just at a high level with respect to indemnity, my understanding of indemnity is you get an indemnity for actual out-of-pockets that you've incurred. Is that your understanding of an indemnity? 328 MR. BOYLE: It is being reimbursed or compensated, essentially, for the costs, and in this case there were the costs of the deferred tax liability on the utility rental assets. It was a hard cost to the company, an economic cost, absolutely. 329 MR. THOMPSON: All right. Well, we'll argue whether economic costs are out-of-pocket costs. Let's move on. 330 The other fact in the history that I just wanted to get on the record was -- and it's found in K.7.3, at page 14. This is a paragraph in Mr. Fournier's affidavit on the motion and it deals with rent increases after -- it says "equipment rent increases after October 1, 1999." 331 You and I discussed yesterday the picture that the company was painting in the 179-14/15 case to the effect that the rental program business was not viable, and then as time passed you developed some forecast based on the continuing-business scenario which we discussed yesterday; do you remember that? 332 MR. BOYLE: I recall that, yes. 333 MR. THOMPSON: And I just wanted to factor into the equation the rent increases that occurred after the program was transferred to ESI and then subsequently to Rentco, would you take subject to check that the rents were increased by about 19 percent in March 2000? 334 MR. BOYLE: I would take that subject to check, yes. I think I can elaborate there a little bit about that as well, though, Mr. Thompson. 335 At the time we were looking at this program in the summer and early fall of 1999, as we discussed yesterday, the company's plan was to convert the rental program to a finance program, essentially a finance and lease program. The reason for that was twofold: One, the rental program did not have contracts and a finance program did have contracts. The second element was the rental program was not as profitable as a finance program. The reason for that is that on a finance program, the lenders or banks will allow you to borrow up to about 90 percent of your receivable as debt and you only require about 10 percent equity. On a rental program where you have assets and risks associated with assets, the banks or lenders will only typically allow you to lend about 65 percent of the capital as debt and the balance as equity. 336 What that does is that it makes the finance program much more profitable from a return-on-equity standpoint than a rental program, and as well you have the contracts, signed contracts with the finance program. So our plan was to convert the rental program to a finance program because it wasn't as profitable and because it allowed us to get contracts signed from customers. 337 The plan we thought was good. The fly in the ointment was the intermediary, and that was the homebuilder, because the homebuilder in the rental program did not put out any capital and in the finance program the homebuilder didn't put out any capital either, but it did affect the homebuilder's balance sheet because the homebuilder would have to put the rental asset on its books and also put the loan from Enbridge financing that rental -- sorry, that water heater, on his books. So it was neutral from a cash standpoint, but it did have a balance sheet effect. And what we discovered was that it was adverse to the credit quality of the homebuilder's balance sheet because it put debt on his books, and the homebuilder relied on its banks for its financing of its home construction and that would restrict the amount of debt that the bank would loan to the homebuilder. So the homebuilder said, Well, if you're going to do that, even though it's cash neutral, it affects my debt that I can borrow from my bank and I won't use your water heater such that I will not install your water heater. 338 So that was our plan and that was our theory because of the profitability of the program. Now, it turns out that we couldn't do that and we had to go back to the rental program concept. In order to make that profitable, we had to risk raising rates to see how we could generate the sufficient profitability to support running that program on an ongoing basis. So that's what this intended to do when we realized that we could not convert it to a finance program. 339 MR. THOMPSON: Right. So all of that planning took place when, through 1999 and up until March 2000? 340 MR. BOYLE: Yes. 341 MR. THOMPSON: Okay. But the bottom line was, rents were increased by 19 percent, give or take, on March 2000. 342 MR. BOYLE: Yes. 343 MR. THOMPSON: Subject to check. 344 MR. BOYLE: Subject to check, yes. 345 MR. THOMPSON: And then the evidence, Mr. Fournier's evidence indicates that there was a further rent increase January 2002 of about 5.5 percent. Could you take that subject to check? 346 MR. BOYLE: Yes, I would. I would also note, though, that at that point the program was operating on a stand-alone basis with stand-alone costs, not the allocated costs that existed when it was in the utility entity, so that had a significant impact again on its profitability, and the only way we could attempt to support the ongoing nature of the program was to try and increase rates. We had reduced costs as much as we could, but we needed to look at the other side of the equation. 347 Now, it turns out that the market or economy at that point in time was quite favourable and quite strong and we were able to actually put through the rental increases without any material impact on the business. But it was based on the market conditions that existed at that time and it was basically a non-utility business that we took the risks and rewards for at that point in time. 348 MR. THOMPSON: Well, at that point in time, January 2002, you had actually -- you were actually in the midst of agreeing to sell the business to Centrica. 349 MR. BOYLE: In January 2002, that's correct. 350 MR. THOMPSON: All right. Was that rental increase imposed as part of that arrangement, or is it a separate ... 351 MR. BOYLE: No, it was totally separate. 352 MR. THOMPSON: But if you add the two together, it's almost a 25 percent increase over two years, and my question is this: Have these increases been factored into the rental program calculation that you did in appendix A of attachment 9, when you were deriving the fair market value of the program? 353 MR. BOYLE: There were some increase -- rental increases contemplated in that. I can't recall the exact nature of them, but there were increases contemplated, yes. 354 MR. THOMPSON: Well, was an increase in 2000 of 19 percent factored into this calculation? 355 MR. BOYLE: Excuse me, I'm just trying to look through here to see if I can find any information on that. 356 I don't see information on the exact amounts that were built into here, but there certainly were rental rate increases, at least at the rate of inflation and perhaps beyond built in. I don't know the exact levels. 357 MR. THOMPSON: Could you do this for me: Check to see what the rental revenue increase is that is reflected in this calculation 1999 -- sorry, 2000 over 1999, a percentage increase. 358 MR. BOYLE: I'll undertake to see if I can determine that. I may or may not be able to, but I'll try my best. 359 MR. THOMPSON: All right. Well, use your best efforts. And secondly, if you find out what it is and it's less than 19 percent, then put 19 percent in the numbers for 2000, a 19 percent increase, and then for the 2002 over 2001, factor in a 5.5 percent increase. It's clearly less than 5.5 percent shown in this document. 360 MR. BOYLE: Yeah, I would not be able to do that at all. I don't have this model. It's not a company model anymore. I could not do that in any way, shape or form, unfortunately. 361 MR. THOMPSON: I see. Well, would you agree that if those percentage increases were factored in, the fair market value on appendix B, page 1, would be considerably higher, on the basis of the approach that's been used to value the business in this model? 362 MR. BOYLE: Well, I can indicate directionally, but I would have no way to know what the amount is. 363 MR. THOMPSON: Now, if you were planning these -- this 19 percent increase in 1999, as you've described, why wasn't it factored in? 364 MR. BOYLE: I don't think we were planning this amount, actually. What we determined was we had to try and do that to make the business profitable at the level sufficient for the risks that were being taken in a non-utility context with stand-alone costs. We didn't know if it would stick or not or if we would lose a lot of rental water heater customers. But that was only the option available to us in order to make it sufficiently profitable. Whatever occurred, that was the risks and the rewards, again, of the non-utility asset and the non-utility business, and the risks and rewards that we took on. If it didn't stick or we lost a lot of customers and there were a lot of removals, there would have been significant costs that the non-regulated business would have incurred and that was our risk. 365 MR. SCHUCH: Mr. Chair, I'm not sure if we're still scoping an undertaking or if we've moved on. 366 MR. THOMPSON: We've moved on. I accept that Mr. Boyle says he can't do it. I accept that. So I'll move on and argue at a high level. 367 MR. SCHUCH: Thank you. 368 MR. THOMPSON: You do point out in your evidence, though, that the transfer to the affiliate, the utility to the affiliate, had to take place under tax laws at fair market value. 369 MR. BOYLE: Yes. 370 MR. THOMPSON: And had -- 371 MR. BOYLE: Sorry, I would say for accounting purposes. For tax purposes, it was allowed to be transferred at tax costs. 372 MR. THOMPSON: Sorry, for accounting purposes. Thank you. 373 And if the fair market value were greater than the book value, does that mean ratepayers would have benefited on the transfer to the affiliate? 374 MR. BOYLE: No. There was nothing in respect of the transfer of the value of the assets that had anything to do with ratepayers, in my understanding. 375 MR. THOMPSON: All right. Let's move on. I wanted to move -- well, just one further point. In terms of the operation of the business after October 1, you told Mr. Shepherd that, I think the phrase you used, on a consolidated basis, we didn't wind it down, we continued to operate it as a going concern. Is that the way you described it? 376 MR. BOYLE: Essentially, yes. As I said even earlier here, the rental program did continue to run because we had planned to turn it into a finance program but we were not able to do that so we did continue to operate on a combined basis the rental program. 377 MR. THOMPSON: And the phrase that's used in this attachment 9 to Exhibit 15 -- School's 155, is continuing-business scenario in appendix A, which differs from a phrase used in appendix C called wind-down business scenario. 378 MR. BOYLE: Yes. We looked at both. We looked at a lot of scenarios around this business to determine what the best strategy might be. 379 MR. THOMPSON: And what transpired after October 1 when you look at the business as a single business was not a wind-down scenario but a continuing-business scenario; am I correct? 380 MR. BOYLE: Yes. 381 MR. THOMPSON: Thanks. Let's move from there, then, to try to get in one place the various, what I call recovery/no-recovery scenarios that have come from the evidence, and first of all they appear to fall into two categories. One is what I label the pre-October 1 assets-only type of calculation, and then the second category includes all rental program assets and installation costs between -- well, to May 7, 2002. Are you with me so far -- 382 MR. BOYLE: Yes, I am. 383 MR. THOMPSON: -- in the two sort of boxes here. Let's start with the pre-October 1 assets-only box. I take it there are a number of scenarios that have emerged here. One is what I call the taxes-attributable approach, that's your approach, and that produces a claim of $23.9 million; correct? 384 MR. BOYLE: Yes. 385 MR. THOMPSON: Okay. Then the next scenario that's emerged is what I've called the actual taxpayer deferred tax drawdown, and that's a reference to Rentco, and the numbers, as I wrote them down, I may not have this right because it came out of Mr. Shepherd's cross-examination yesterday, and I think they're about $12.2 million. Did I get that number right? 386 MR. BOYLE: No. That was a combination of a number of elements that resulted in the Rentco drawdowns which involved both the utility rental assets and the 1999 new non-utility additions and the 2000-2002 additions that actually occurred in Rentco. Now, some of them also occurred in ESI. That was a combination of a lot of different elements. 387 MR. THOMPSON: I appreciate that, but in looking at the actual taxpayer that had the October 1, 1999 assets, that's Rentco. It had some other stuff, but that's Rentco. 388 MR. BOYLE: Yeah. 389 MR. THOMPSON: And the actual taxpayer drawdown for Rentco was 12.2 million. 390 MR. BOYLE: Yes, it was. 391 MR. THOMPSON: Okay. And then the third scenario is the actual taxes paid by Rentco, again this is the company that has the October 1 assets and some other stuff, but that amount is $10.9 million. 392 MR. BOYLE: Yes, it is. 393 MR. THOMPSON: And all of these amounts would reduce to zero if the refund of $42 million applies. I appreciate it's an argument whether it does or it doesn't. Assuming it applies, those numbers go to zero. 394 MR. BOYLE: They are less than 42 million, yes. 395 MR. THOMPSON: Right. And the fifth line I have is, all reduced to zero if the gain can be considered. Again, it's a matter of whether the gain on the sale can be considered. 396 MR. BOYLE: Well, I'm not sure where that plays up in this because that's a whole different exercise. It involves businesses beyond the rental program, as are listed in the undertaking we provided earlier today. And I don't know how you could allocate that to determine what would be associated with the rental assets. 397 MR. THOMPSON: Well, you gave us the book value of the rental assets versus the total assets in evidence yesterday, as I recall. 398 MR. BOYLE: Yes, but that in no way necessarily relates to the value of those businesses and any gain that may apply to those businesses over that time frame. 399 MR. THOMPSON: Okay. Let's move to what I call the other side of the ledger where we're taking into account all rental program assets and we're considering installation costs with respect to rental program assets. You've discussed that, I think, in your testimony yesterday and it's in your prefiled as well. 400 MR. BOYLE: Yes. 401 MR. THOMPSON: Okay. And the first scenario I have here is the taxes-attributable approach that you advocate with no installation costs, and that produces a number that is slightly in excess of $18 million; is that right? 402 MR. BOYLE: Yes, about 18.7 million. 403 MR. THOMPSON: And then if we look at -- again, this is in my perception of indemnity, you can't get more than what's actually been paid by a taxpayer, so if you look at a second scenario here where taxes for Rentco are capped at what was paid, so the taxes paid by Rentco capped at 10.9, that's the actual payment, and then the taxes attributable to rental assets in ESI, excluding installation costs, that produces a reduction of about $5.3 million, as I understood the evidence. 404 MR. BOYLE: Yes, actually 5.2, which is shown on my Exhibit K.7.1. 405 MR. THOMPSON: Right. And just to identify how you got that, I believe if we look at one of your prefiled schedules, we can find the depreciation in ESI and installation costs in ESI -- sorry, the depreciation in ESI, it's Exhibit A8, tab 5, schedule 2, appendix 3.1; is that right? 406 MR. BOYLE: Perhaps the easier way to look at it is Exhibit A8, tab 5, schedule 2, appendix 3 and appendix 3A, and compare those to our submitted schedule in Exhibit A8, tab 5, schedule 1, schedule 1 again. Basically, our $23.9 million figure that's shown there -- 407 MR. THOMPSON: Yes. 408 MR. BOYLE: -- if you compare the $23.9 million figure at Exhibit A8, tab 5, schedule 1, schedule 1 again, to the $18.7 million figure shown at Exhibit A8, tab 5, schedule 2, appendix 3, that difference, the 23.9 less the 18.7 is the $5.2 million that's attributable to the deferred tax credit associated with the new non-utility rental asset additions from 1999 to 2002. 409 And extending that to also include installation, delivery and inspection for the new 1999 to 2002 non-utility asset additions reduces the number to the $5 million shown on appendix 3A of Exhibit A8, tab 5, schedule 2. 410 MR. THOMPSON: Okay. 411 MR. BOYLE: Again, those numbers tie into Exhibit K.7.1 that I had talked about earlier. 412 MR. THOMPSON: Okay. Just on the initial calculation you mentioned, can I just confirm, if I go to Exhibit A8, tab 5, schedule 2, appendix 3.1 -- 413 MR. BOYLE: Yes. 414 MR. THOMPSON: -- I can derive the 5.2 million number that you've mentioned, or something close to it, by taking the extent to which CCA on the 1999 rental additions and on preclosing rental assets, totaling about 24.8 million, exceeds the depreciation for those assets of about 12 million, and multiply it by the weighted tax rate. 415 MR. BOYLE: That's correct. It's not exactly the weighted tax rate because you have to do it individually in each year, but it turns out that that will equal the $5.2 million figure. 416 MR. THOMPSON: And so that's a scenario, all rental program assets, taxes paid, capped at the numbered company, and then we develop a tax attribution to ESI with no installation costs and that produces a net recoverable amount of 5.6, 5.7 million? 417 MR. BOYLE: Yes, 5.7 million. Correct. 418 MR. THOMPSON: And then the third scenario under everything being considered is what I call the taxes attribution approach but including installation costs, and that's the appendix 3A that you've described. 419 MR. BOYLE: Yes, it is. 420 MR. THOMPSON: And that produces a number of slightly less than $5 million. 421 MR. BOYLE: Sorry, that's the $13.7 million change. 422 MR. THOMPSON: All right. But in appendix 3A, I thought you said the two -- 423 MR. BOYLE: Oh, sorry, yes -- 424 MR. THOMPSON: -- the pooled assets, if you take them, as you explained to Mr. Shepherd, these are the actual pools, and do the math, you come up with something slightly less than the $5 million. 425 MR. BOYLE: That is essentially the $23.9 million deferred taxes payable on the utility rental assets less the deferred taxes payable credit on the new non-utility assets of 5.2 million less the installation credit on the 1999 to 2002 new non-utility assets of 13.7 results in $5 million. 426 MR. THOMPSON: And these amounts are less than $42 million. 427 MR. BOYLE: Yes, they are. 428 MR. THOMPSON: So if the refund applies, they will head to zero. I won't mention the gain again. There's one scenario that I thought emerged from the evidence under this category, all assets being considered, and that would be the taxes-attributable approach, installation costs included but taking CCA in ESI to December 31, 1999 instead of the December 23 arrangement that was implemented. And that, I understood you to say to Mr. Shepherd, produces an amount of zero, or less than zero. Did I understand that correctly? 429 MR. BOYLE: No, I don't think so. That is a hypothetical case that -- what would have happened if that had occurred and there would have been no change in the deferred tax liability, over time, it would have been a timing difference issue and the amount would not have changed. The permanent tax savings that we recognized would not be thereand there would be a cost on the timing difference, essentially. 430 Again, it's a hypothetical that didn't occur, but there would have been a timing difference that would have occurred between essentially October 1999 and May 2002 of $11 million. 431 MR. THOMPSON: All right. Is that a scenario, though, that applies in the all assets and installation costs being taken into account as opposed to October 1 -- pre-October 1 assets only? 432 MR. BOYLE: Well, it only really applies to the pre-October 1 assets because the other assets didn't exist at that time. 433 MR. THOMPSON: Okay. So I just have to put over on my pre-October 1 list Shepherd's alternative to be explained by Shepherd. All right, thanks. 434 Now, just, Mr. Spevick, to nail down KPMG's role in this process, I read that KPMG was simply retained to verify numbers; is that right? 435 MR. SPEVICK: We were retained to apply specified audit procedures on the schedules prepared by the company. 436 MR. THOMPSON: Right. So these schedules are the company's schedules. 437 MR. SPEVICK: Correct. 438 MR. THOMPSON: And as I understand it, you were not asked and have no opinion on these questions of interpretation that are before the Board. 439 MR. SPEVICK: No, we were not. We had no basis for interpreting what the Board's decision meant and we did not do enough work on the schedules to give an opinion. 440 MR. THOMPSON: Okay, thanks. 441 Then I'd just like, if I could, then, Mr. Boyle and panel, ask a few questions with respect to this issue, is it appropriate or inappropriate to confine the calculations to pre-October 1 assets only. And Mr. Boyle, can you recall whether, in 179-14/15, the company was forecasting additions after September 30th, 1999 in the scenario that it was presenting there with respect to wind-down? 442 MR. BOYLE: I'm not sure if at that time we developed the finance program concept or not, but there were a number of scenarios that looked at the program, whether it was wound down within the utility or outside the utility or operated on some continuing basis, or, as I said, converted into a finance program. Certainly at the time of the summer or fall of 1999, we were looking at converting it into a finance program. 443 MR. THOMPSON: All right. Well, my recollection is that there were some additions being forecast in the wind-down within the utility concept that was being discussed and that pushed the crossover date out to sometime in 2000; is that -- can you take that subject to check, or check on it? I'm happy with an undertaking if that's easier, if you could just ... 444 MR. BOYLE: I'm just reading from the Board decision in EBO 179-14/15: 445 "The Proposal to Wind Down the Program. The Company has stated --" this is paragraph 3.2.7, sorry, of that decision entitled "The Proposal to Wind Down the Program." 446 "The Company has stated that it does not wish to continue the Rental Program as a going concern partly because it is unprofitable to do so under fully allocated costs. While the Company provided in a transcript undertaking response a high-level summary of its analysis of options leading it to conclude that its proposal was optimum, the Board was not provided with detailed information and options and their consequences." 447 So it looks like, again, we were looking at a number of scenarios there at that point in time as well. 448 MR. THOMPSON: Right. But my point is that in the evidence you're presenting to the Board in that case, my recollection is that you were presenting a forecasted crossover date that was not October 1, 1999, it was something further out and there was a great debate as to how much further out it could go if there were more additions than what you were forecasting. And my recollection of the date was it was in 2000 or later. Can you undertake to check that? 449 MR. BOYLE: I can undertake to check what the evidence was, yes. 450 MR. THOMPSON: All right. 451 MR. SCHUCH: Mr. Chair, that would be Undertaking J.9.2. 452 MR. BETTS: And a description? 453 MR. THOMPSON: It would be the company's estimate of the crossover date in EBO 179-14/15, and whether additions were forecast in periods beyond September 30, 1999. 454 UNDERTAKING NO. J.9.2: TO PROVIDE THE COMPANY'S ESTIMATE OF THE CROSSOVER DATE IN EBO 179-14/15, AND WHETHER ADDITIONS WERE FORECAST IN PERIODS BEYOND SEPTEMBER 30, 1999 455 MR. BETTS: Thank you. 456 MR. THOMPSON: My point, Mr. Boyle, is that confining the calculation to pre-October 1, 1999 only really assumes a crossover date of October 1, 1999 and is therefore -- appears to me to be inconsistent with what you were presenting in the 179-14/15 case. 457 MR. BOYLE: No, I would not agree with that. It depends on how long you're being considered as part of the utility operations. Now, I think we're proposing to wind down in the utility at that time and so it would not -- it would depend on a number of factors at that point. 458 MR. THOMPSON: But you're asking the Board to calculate on the basis there have been no additions -- no additions after October 1, 1999 should be brought into account. That's your calculation of 23.9 million. 459 MR. BOYLE: Yes, because at that point it became a non-utility program, but there were scenarios that we were looking at prior to that where it did remain as a utility program. The Board rejected those proposals. So then we said, Fine, it must become non-utility at that point, October 1, 1999, and yes, there would no longer be additions to the utility rental asset bucket. 460 MR. THOMPSON: All right. Let's move forward, then, with the appropriateness of confining this calculation to October -- to pre-October 1, 1999 assets in the context of the reality that there has been no wind-down of the business. There has been no wind-down of the business; correct? Or there was no wind-down of the business. 461 MR. BOYLE: There was no wind-down of the ongoing rental program, that's correct, but there was a wind-down of the costs and benefits associated with the utility rental assets. All of the new assets were non-utility, non-regulated assets. The risks and rewards and costs and benefits, all of which belonged to the non-utility businesses and operations and should not related to the utility rental asset pool that generated the benefits to ratepayers. 462 MR. THOMPSON: But the expansion of the business that took place after October 1, 1999 and the rent increases that were imposed, all of that was used to support the viability of the business and was eventually sold to Centrica on May 7, 2002. Everything transferred to Centrica. 463 MR. BOYLE: Yes, they did. All the businesses, the businesses noted in my undertaking response to Mr. Shepherd earlier today. 464 MR. THOMPSON: And the other area I just wanted to finish up on is this business of installation cost versus no installation cost. Again, this assumes that we're in the everything-being-taken-into-account side of the ledger and not pre-October 1, 1999. And the installation costs, are they related to the equipment -- the rental equipment? 465 MR. BOYLE: Yes, they are. They are related to the new 1999 through 2002 non-utility rental asset additions. 466 MR. THOMPSON: So they are clearly related, then, to these assets. 467 MR. BOYLE: Yes, they are. 468 MR. THOMPSON: Okay. And this, then, brings me to Ms. O'Connor's letters. This is Exhibit K.7.7 and K.7.8, the letters from Trish O'Connor to my firm October 30, 2002 and then November 11, 2002. 469 MR. BOYLE: Yes. 470 MR. THOMPSON: Were these calculations screened by you, Mr. Boyle, before they were provided? 471 MR. BOYLE: Not at that time, no. I wasn't aware of those. 472 MR. THOMPSON: But you're familiar with them now? 473 MR. BOYLE: Yes, I am. 474 MR. THOMPSON: Trish O'Connor was the Director, Finance of EGD and Mr. Ross's predecessor; is that correct? 475 MR. ROSS: That's correct. 476 MR. THOMPSON: All right. And if you just look at the first letter, please, we were looking for actual cash taxes paid by the numbered company and then cash taxes that would have been paid by ESI, that all the assets remain within one corporation. And Ms. O'Connor responded to that inquiry by letter of October 28, 2002 and her calculations are appended. Do you see that? 477 MR. BOYLE: Can you give me that reference again? 478 MR. THOMPSON: Yes, it's Exhibit K.7.7, the October 30 letter, and then Exhibit K.7.8, the November 11th, 2002 letter. 479 MR. BOYLE: I'm sorry, I don't have that. I don't have the specific copies of that. I'm familiar with the numbers on one of those exhibits at least. 480 MR. BETTS: I think there's a copy coming to the witness stand. 481 MR. BOYLE: Okay. I've got 7.7. 482 MR. THOMPSON: And 7.8 is a further refinement, as I understand it, of 7.7. The point I wanted to -- two points I wanted to make with respect to these calculations. 483 First of all, Ms. O'Connor is providing us with cash taxes payable by 3696669 in October 28, 2002, and stating those were $17 million. This compares to the evidence that Mr. Shepherd referred you to in your prefiled testimony in the 2001-0032 case where you had the number much higher. But we now know that the total taxes paid in May 7 was $10.9 million. Can you help me with these differences? 484 MR. BOYLE: Yes. If you start with Mr. Shepherd's interrogatory, Exhibit I, tab 16, schedule 155, and if you look at page 8 of that exhibit, and you'll also need to reference IGUA interrogatory, Exhibit I, tab 13, schedule 89, page 2. 485 MR. THOMPSON: Okay. 486 MR. BOYLE: And if you look at the 2000 year in Exhibit I, tab 16, schedule 155, the cash taxes before planning and the cash taxes before carry-back, the number of 21.3 million. 487 MR. THOMPSON: Yes. 488 MR. BOYLE: And you add to that the 1.5 million shown in the year 2000 at Exhibit I, tab 13, schedule 89, so if you go to Exhibit I, tab 13, schedule 89, under the year 2000 and under the category 3696669 Canada Inc., in 2000 there's a capital tax of 1.479 million. 489 MR. THOMPSON: Yes. 490 MR. BOYLE: You add the 21.3 and 1.5 million and you get 22.8 million. 491 MR. THOMPSON: Right. 492 MR. BOYLE: And that was referred to in my earlier evidence of $23 million, so that's the total of $23 million shown as the total cash taxes paid by Rentco in 2000, because at that time we had not entered into the carry-back transaction. 493 MR. THOMPSON: So you were including income and capital tax in your numbers, were you, in the -- 494 MR. BOYLE: Yes, I had. 495 MR. THOMPSON: -- in your evidence. 496 MR. BOYLE: Yeah. If you look at 2001, we had put in the planning reductions at that point in time, and the cash taxes before carry-back on Exhibit I, tab 16, schedule 155 of 3.9 million in 2001, then you add back to that, going back to Exhibit I, tab 13, schedule 89, under the category 3696669 Canada Inc. for 2001, the capital tax of $2.3 million, you add those two together and you get $6.2 million, I believe, and that's the $6 million I referred to in my evidence in the earlier case. So those were the two actual amounts that we had paid at that point in time. 497 MR. THOMPSON: But the notional utility account doesn't cover capital tax, does it? 498 MR. BOYLE: It was recovering the $50 million benefit that ratepayers had received. The issue was how was that going to be recovered. 499 MR. THOMPSON: It's limited to income taxes; right? Am I right or wrong? 500 MR. BOYLE: At that point in time, we were looking to recover $50 million related to the notional utility account for the benefits that were received by ratepayers. It was our view that it should apply just to the taxes payable and would have nothing to do with cash taxes or capital taxes. But we developed a proposal that we were prepared to go forward with, that as long as we paid $5 million in total cash taxes, that that would be a basis for recovery of $5 million a year, so that was included in that proposal. 501 MR. THOMPSON: All right. So your numbers included capital tax. 502 MR. BOYLE: As part of cash taxes paid by Rentco, yes. 503 MR. THOMPSON: All right. And they didn't take into account the loss carry-backs from 2002 that are shown up -- well, that have been discussed in evidence previously. 504 MR. BOYLE: Yes, because we hadn't done those at that point in time. But that was part of our proposal at that point in time. 505 MR. THOMPSON: All right. Can you help me understand, then, how Ms. O'Connor got to $17 million, which I understand is income taxes? This is in -- you can go to the November the 11th, 2002 number, which I think are more recent. She's got for the numbered company, 2002 actual, 2.6 million; 2001 actual, 8.8 million; 2001 actual, 8.8 million; 2002 actual, 5.573 million; for a total of $17 million. 506 MR. BOYLE: Yes. 507 MR. THOMPSON: How does that come out? We're now in October of -- November of 2002. 508 MR. BOYLE: Yes. I can reconcile those for you, Mr. Thompson, to the numbers that we have in our evidence. 509 If you -- there's two elements to this. First of all, Ms. O'Connor's numbers are for the legal entity and we have segmented that slightly into the utility rental assets and the 1999 new addition rental assets, so there is a bit of a difference between those two elements as to which entity it's in. But those numbers do reconcile with one exception because Ms. O'Connor had forecast information in one case that was inaccurate, as it turned out, with respect to the final information. 510 If you go back to Exhibit A8, tab 5, schedule 1, and our schedule 1 which shows the $23.9 million, and as well to the Exhibit A8, tab 5, schedule 2, appendix 3 and appendix 3A, exhibits that we were referring to earlier, I can tie in all those figures save for, as I said, one item in 2000. 511 MR. THOMPSON: Well, when was the tax return for 2002 signed? This is the one that kicks up the loss carry-back and then changes everything for 2000 -- for 2000. 2001 stays the same, and 2002 becomes zero. When was all that done? 512 MR. JOZSA: That tax return would have been signed in November of 2002. 513 MR. THOMPSON: Okay. So this is November of 2002. So does this document predate the tax return? 514 MR. BOYLE: It may, but the numbers generally tie in aside for, as I said, one item. 515 MR. THOMPSON: Tie these in for me because I don't understand. 516 MR. BOYLE: Sure. If you look at the -- let's start with the 2001 numbers in Ms. O'Connor's exhibit that -- sorry, start with the 2000 numbers in the bottom part of her second page. And if you see the first column that shows 3696669 Inc. and the statutory rates number of 2.626 million, and up above you've got -- you've got the depreciation and the capital cost allowance and the rental installation cost figures. If you look at the total for 2000 and you look at the total capital cost allowance for ESI and 369, the 36,273,081; do you see that figure? 517 MR. THOMPSON: Yes. 518 MR. BOYLE: If you go back to Exhibit A8, tab 5, schedule 2, appendix 3A, and you look at column 2, December 24, 1999 to December 30th, 2000, there's a total capital cost allowance of 26,273,081. 519 MR. THOMPSON: I think what's -- what you're doing here and what's confused me is this: In the October 28, 2002 letter, Ms. O'Connor said actual cash taxes paid by the numbered company were approximately 17 million. I think what has actually been calculated is taxes attributable, not taxes paid; is that right? And I think this is what you're taking me through here now. 520 MR. BOYLE: Well, yes, trying to reconcile it to a segment between the attributable elements and which legal entity those were in. 521 MR. THOMPSON: Right. But this document, in fact, doesn't tell us actual cash taxes paid because those were known to be a total of $10.9 million by November of 2002, and the amounts are shown in this IGUA Interrogatory No. 89 that you've provided to me; 7 million roughly in 2000, 3.9 million in 2001, and 10.9 total. 522 MR. BOYLE: That's correct. 523 MR. THOMPSON: All right. Then I think -- I don't think you need to walk me through this now. That was the difficulty I was having. 524 But in this response, the other aspect of this that is of interest to me that Ms. O'Connor thought it appropriate to include rental installation costs in her calculations dealing with the everything-in scenario. 525 MR. BOYLE: Yes, on the new rental asset additions. 526 MR. THOMPSON: And does the company accept that if we're into the everything-in scenario, i.e., including assets after October 1, 1999, it's appropriate to include rental installation costs in the calculation? 527 MR. BOYLE: Well, there are some similarities but there are some differences. It is not a CCA item, it's a deduction. It's a tax deduction. It's not a capital asset from that extent. It's an expense that you can deduct for tax purposes, but it does get capitalized for accounting purposes, so there are some similarities and there are timing differences. They are, as I said, two different elements of the equation, if you will. 528 MR. THOMPSON: Well, should they be brought into account if we're dealing with the taxes-attributable approach, everything in, up to May 6, 2002, or should they not be brought into account? What is the company's position? 529 MR. BOYLE: I would argue they should not be brought into account because the benefits there are -- need to be aligned with the costs and the costs will be borne by the non-utility, non-rental businesses or the shareholder and therefore it would not be appropriate to include them in that calculation. 530 MR. THOMPSON: But they are directly related to rental program assets. 531 MR. BOYLE: They are related to the rental assets. Yes, they are. 532 MR. THOMPSON: Thank you very much, Mr. Chairman. Those are my questions. 533 MR. BETTS: Thank you. 534 Mr. MacIntosh, you were supposed to keep Mr. Dingwall informed and vice versa -- 535 MR. MacINTOSH: I'm going to go in and, as he said, grab him by the scruff of the neck. 536 MR. BETTS: Thank you. I'll allow you to do that, then. 537 Yes, Ms. Girvan, you had some questions. 538 CROSS-EXAMINATION BY MS. GIRVAN: 539 MS. GIRVAN: Just a couple of questions, and this is really for clarification on the record. What I have done, because I don't think this panel can actually directly answer these questions and we may need an undertaking, so I've copied Exhibit G2, tab 5, schedule 3, just for ease of reference at the moment. You don't need to pull it up. And then I can just ask my question once you've got this in your hand. Thank you. 540 Just really to clarify for the record, and my clients are certainly interested in the amount, the total amount of deferred taxes that the company's seeking to recover and breaking that out in terms of rate class. 541 Now, if you look on this Exhibit G2, tab 5, schedule 3, page 1, line 5.11, there is a cost allocation set out and the total of 18.4 million is broken out amongst the various rate classes. 542 What I'd like the company to provide in an undertaking is for the proposed deferred tax recovery in total for each of the rate classes, so we have a total amount of $37 million EGD's proposing to recover, and of that 37 million I'd like that broken down by rate class. 543 MR. ROSS: Mr. Chair, we'd have to take an undertaking for that. 544 MR. BETTS: We'll pause for a moment and let our court reporter catch her breath and take some water there. 545 MR. SCHUCH: Mr. Chairman, that would be Undertaking J.9.3, and independently Ms. Girvan gave a nice, concise description of it. 546 MR. BETTS: You're going to allow her to repeat that, aren't you. 547 MS. GIRVAN: Would you like me to repeat it? 548 MR. BETTS: Could you describe the undertaking for us. 549 MS. GIRVAN: Sure. Of the total $37 million the company is seeking to recover from its customers related to their proposed deferred tax recovery, I'd like that broken down by rate class. 550 UNDERTAKING NO. J.9.3: TO PROVIDE A BREAKDOWN BY RATE CLASS OF THE TOTAL $37 MILLION EGD IS SEEKING TO RECOVER FROM ITS CUSTOMERS RELATED TO THEIR PROPOSED DEFERRED TAX RECOVERY 551 MR. BETTS: Thank you. 552 MS. GIRVAN: And just one follow-up question, and I don't know that the panel will be able to answer this. I apologize, it's really just not the right company representatives. CAC, and you don't even need to pull it up, but you can if you like, CAC Interrogatory 101, that's Exhibit I, tab 2, schedule 101, we posed a question asking the company what they would do specifically in terms of informing their customers about the deferred tax recovery, and the answer to that question is set out in that interrogatory. And I guess what we'd like clarification on is, they say that they're not specifically informing their customers about the deferred tax recovery and we'd just like to pose the question as to whether or not, given the fact that the amount is significant and given its extraordinary nature, why they wouldn't be willing to -- or if they would be willing to specifically inform their customers about the deferred tax recovery. 553 MR. ROSS: Mr. Chair, again, we would have to defer that to another panel and take an undertaking for that. 554 MR. BETTS: Thank you. 555 MS. GIRVAN: Those are my questions, thank you. 556 MR. SCHUCH: Mr. Chair, that would be Undertaking J.9.4, and perhaps I could get Ms. Girvan to give us a concise description of that again, please. 557 MS. GIRVAN: Again? Okay. 558 I guess referring specifically to CAC and CCC Interrogatory 101, I'd like to get the company's position, given that the amount of the deferred tax recovery is significant and given its extraordinary nature, whether they would be willing to specifically inform their customers about the deferred tax recovery in their customer notices at the end of the day. 559 MR. BETTS: Thank you. That's not a short description, but we'll allow everyone to read it from the transcript. You understand what's being asked? Thank you. 560 UNDERTAKING NO. J.9.4: TO PROVIDE THE COMPANY'S POSITION AS TO WHETHER THEY WOULD BE WILLING TO SPECIFICALLY INFORM THEIR CUSTOMERS ABOUT THE DEFERRED TAX RECOVERY IN THEIR CUSTOMER NOTICES AT THE END OF THE DAY 561 MR. BETTS: Thank you. Anything further, Ms. Girvan? 562 MS. GIRVAN: No, thank you. Those are my questions. 563 MR. BETTS: I know Mr. Dingwall is here. Ms. Street, do you have anything after Mr. Dingwall? 564 MS. STREET: I'm not going to have any questions, thank you. 565 MR. BETTS: And were there any other parties? 566 Mr. Dingwall. 567 MR. DINGWALL: Yes, sir. After reviewing the transcript yesterday and discussing with parties what they would be asking and had asked this morning, I've significantly reduced my many hours down to probably about 10 minutes. Shall I go ahead now, sir? 568 MR. BETTS: Yes, that would be fine. Thank you. 569 MR. DINGWALL: Okay. 570 CROSS-EXAMINATION BY MR. DINGWALL: 571 MR. DINGWALL: We've had a lot of discussion about what went in and out of deferred taxes over the two-and-a-half years in question. Were deferred taxes recorded as journal entries for accounting purposes? 572 MR. ROSS: Yes, they were. 573 MR. DINGWALL: Could you undertake to provide copies of the deferred taxes journals showing all entries from October 1, 1999 to May 2002 for each of ESI and Rentco, please? 574 MR. ROSS: We could undertake to take all the entries made certainly in EGD's books and Rentco's companies -- are those the companies you're referring to? 575 MR. DINGWALL: ESI as well. 576 MR. ROSS: And ESI. 577 MR. DINGWALL: So we have the undertaking in respect of ESI, Rentco, and EGD. 578 MR. CASS: I'm not an accounting person, Mr. Chair, so I'm not sure what this entails. Mr. Ross might know better. It sounds like it entails every accounting entry in ESI for -- that relates to deferred taxes for assets within that company, and I'm not just sure what the scope of that might be. 579 MR. DINGWALL: My understanding is there's a single journal for deferred taxes that's in existence. It's not a question of compilation, it's a question of photocopying. 580 MR. BOYLE: Sorry, Mr. Dingwall, with respect to Enbridge Services Inc. and Rentco, we don't have those journal entries any -- or those ledgers anymore. We have the financial statements that we've gone through that I spoke to Mr. Shepherd on. We identified those numbers. I believe Mr. Ross did indicate that he did have numbers for Enbridge Gas Distribution Inc. for their journal entries, but we wouldn't have anything for Rentco or ESI. 581 MR. SHEPHERD: Mr. Chairman, do you mind if I interrupt here? Mr. Dingwall asked this question at my request and so if you'll indulge me, I'll -- 582 MR. BETTS: I'll ask Mr. Dingwall whether that's okay, if Mr. Shepherd takes over your questioning at this point? 583 MR. DINGWALL: I have no qualms whatsoever about that. 584 MR. SHEPHERD: I'm not taking over the questioning. I just want to make a submission on Mr. Boyle's comment. It seems to me that when you file tax returns, you're required to keep your records for those tax returns, and I can't imagine that Mr. Boyle does not have the records for a company that he filed tax returns for. 585 MR. BOYLE: Sorry, we do have the financial statements, yes, Mr. Shepherd, that the tax returns are based on. Those are the numbers we walked you through. So the financial statements, yes, they do exist, and those amounts we have talked about and do have the financial statement amounts. Yes. 586 MR. SHEPHERD: Thank you for allowing me to interrupt, Mr. Chairman. 587 MR. BETTS: So you're saying at this point you would not have general ledger level detail on those transactions? 588 MR. BOYLE: No, we would not. 589 MR. BETTS: And they would be where, then? 590 MR. BOYLE: They would belong to Centrica. 591 MR. BETTS: Mr. Dingwall, do you want to pursue this request any further? 592 MR. DINGWALL: If you can give me one minute, sir, that would be helpful. 593 What backup material, then, did the company retain in order to keep safe its own financial records in the event of audit either by this Board or by Revenue Canada? 594 MR. JOZSA: If that taxpayer was subject to audit, the Canada Revenue Agency would actually attend the premises of Centrica in order to obtain and view those books and records, so they would not come to Enbridge. 595 MR. DINGWALL: My question was: What records did you retain? 596 MR. JOZSA: We have retained the financial statements. 597 MR. DINGWALL: Moving to another area, would you agree that another method of corporate planning to address situations where there are forecasted increased costs is to do what you can to increase revenue? 598 MR. BOYLE: Yes, I would. That's what we did with the rental program, as I indicated earlier in my discussion with Mr. Thompson. When we had cost increases, in order to generate the profitability that we thought was appropriate for the program, we had to try to cut costs and increase revenues. 599 MR. DINGWALL: And while the program was within EGD, did EGD make any efforts to increase rental rates specifically to address increased forecasted tax costs? 600 MR. BOYLE: When it was in the utility, it was targeting to earn the allowed rate of return and it would need to increase revenues and did so in order to meet that targeted rate of return, which included a number of costs, including operating costs and tax costs, yes. 601 MR. DINGWALL: And did the company specifically, in its 1997 fiscal year, increase rates with a view to offsetting some of the increased tax costs? 602 MR. BOYLE: I can't recall what the cost drivers were of the revenue increase in 1997, I'm sorry. Generically, as I said, we would look to increase revenues to offset cost increases in order to ensure that we could earn the allowed rate of return on those businesses. 603 MR. DINGWALL: So if one of the big drivers of a deficiency in return on that business was increase forecasted tax costs, then that would be something for which the program would specifically increase rates; is that the case? 604 MR. BOYLE: Or reduce costs, yes, we'd look to do that. 605 MR. DINGWALL: Thank you. Those are my questions. 606 MR. BETTS: Thank you, Mr. Dingwall. 607 Am I correct, then, that there are no further questions in cross-examination from intervenors? I appreciate Board Staff may have a few. 608 Are there any questions from Board Staff? 609 MR. SCHUCH: Board Staff has no questions. 610 MR. BETTS: Thank you. 611 Any questions in re-examination, Mr. Cass? 612 MR. CASS: I have some, Mr. Chair, yes, thank you. 613 MR. BETTS: Please proceed. We may have a few questions. We'll allow you to reply after that as well. 614 RE-EXAMINATION BY MR. CASS: 615 MR. CASS: I'm going to start by going back to a few areas that were covered in Mr. Shepherd's cross-examination yesterday. I don't know if any of you have yesterday's transcript, but it might be helpful if you did. 616 MR. BOYLE: I do have a copy, Mr. Cass. I believe the rest of the panel does as well. 617 MR. CASS: Now, without the transcript, you'll probably recall, Mr. Boyle, that Mr. Shepherd had asked you about a tax-planning approach that, as I understand it, the company looked at but did not actually take, and you referred to it's aggressive tax planning. That's at transcript 474. I just wanted you to explain why you considered that to be -- your words, actually, were "That is an aggressive position." Can you just explain, please, why you called that an aggressive position. 618 MR. BOYLE: Yes. The reason being is that you're claiming capital cost allowance for a period that's in excess for the number of months you're claiming depreciation for, so you have a mismatch of CCA and depreciation time periods. We believe it's permitted by Revenue Canada, but you don't know until you do it and get audited. But we did not do that. 619 MR. CASS: Thank you. And then another area that Mr. Shepherd covered and then actually was alluded to by Mr. Thompson today is at transcript 659 to 667, and this were the questions about the drawdown in Rentco and Mr. Shepherd came to an actual number of $12.2 million. What I was hoping that you might be able to do, Mr. Boyle, is explain how that $12.2 million compares to the $23.9 million that the company is putting forward in this case. 620 MR. BOYLE: Sure. The $12.2 million is the amount of deferred taxes payable, if you will, that occurred in the legal entity Rentco over the time frame, but that amount related to both the utility rental assets and the 1999 through 2002 new non-utility additions as well, which, our view is that those are separate cost and benefit issues, so it's combining all of the deferred tax elements that actually occurred in the legal entity Rentco over that time frame. 621 MR. CASS: Thank you. Also during Mr. Shepherd's cross-examination, you were asked some questions about consolidation of corporate financial results, and at transcript 687 you talked about how, for tax-planning purposes, you can move deductions around but that there would not be an offset elsewhere as in a U.S. tax return. I just would appreciate it if you could explain the implications of that difference that you were describing there. 622 MR. BOYLE: Sure. In Canada, we don't have corporate income tax consolidation, so if we show a cash taxes payable in a legal entity, then that will flow up to the consolidated level. You can't offset that cash taxes payable in that legal entity in another entity when you consolidate up the chain. 623 In the U.S., though, or other jurisdictions that permit consolidation, a cash taxes payable in one entity may be offset actually in another entity up above or part of the group that at the consolidated level there were no cash taxes payable. So that's the distinction, that in Canada, when you consolidate, you cannot avoid the cash taxes payable on consolidation, but in the U.S. or other jurisdictions you can. However, before you get to the cash taxes payable amount in Canada, you can do tax planning to move amounts around. But once you've done that, it stays there. 624 MR. CASS: Thank you. Then I'm going to move to some questions flowing out of Mr. Thompson's cross-examination. At the very beginning of his cross-examination yesterday, and this is transcript 1096 to 1099, Mr. Thompson asked about if the claim by the company for recovery from the notional utility account is successful, whether that would go to earnings. I wonder if someone could answer the reverse question. What if the claim were to be unsuccessful, what would the effect of that be? 625 MR. ROSS: If we were unsuccessful in this claim, we would have a write-down of earnings in the year. 626 MR. BETTS: I'm sorry, I didn't hear that. Could you repeat that. 627 MR. ROSS: Yes. If this claim were unsuccessful, EGD would have a write-down of earnings in the year concerned. 628 MR. CASS: Could you explain what that write-down would be, and why. 629 MR. ROSS: The write-down would be the $24 million. The reason for that is that is the amount that is still on our books at the moment as a regulatory receivable. 630 MR. CASS: Now, Mr. Thompson had asked some questions about the recording of deferred taxes from October 1, 1999 forward. This was during his questions today so I don't have a transcript reference. And so I'd like to follow up with what you said, Mr. Ross, and have you explain the recording that would occur within Enbridge Gas Distribution. 631 So as a starting point, could I ask you to turn up Exhibit K.7.4, please, and then go to tab D, page 2 at tab D, paragraph 3. Can you start by explaining what is happening with the recording of accounting entries described in this paragraph. 632 MR. ROSS: Yes, Mr. Chair. These entries relate to the initial recording of the transaction on October 1st, 1999. And if we take these in turn, the -- what we were trying to record is the effect of recording the whole liability of deferred taxes which totals $168 million, so that is seen as a liability and is booked as a credit on the balance sheet. 633 In turn, then, we also have a deferred credit and we debit that to the tune of $42 million and that relates to, as we discussed earlier in evidence, is the credit that we actually received on installation costs. The third item is $50 million being the regulatory asset, and this follows the decisions by the OEB, giving the company the right to recover taxes that became payable as a result of the rental program. The balance is $76 million and this was put into retained earnings as a debit. And all of these entries were in compliance with Canadian accounting standards. 634 MR. CASS: What does that mean, a debit to retained earnings, in non-accounting terms? 635 MR. ROSS: That means that it's a loss to the company. 636 MR. CASS: Okay. And then first, has that effect of impact on retained earnings been changed by anything that's happened since these entries? 637 MR. ROSS: No, it has not. 638 MR. CASS: Has there been any effect of other Board decisions since 179-14/15 on the Enbridge Gas Distribution accounting entries? 639 MR. ROSS: As a result of the Board decision on December 3rd, 2003, EGD wrote down the $50 million regulatory receivable by $26 million, and that was another loss to earnings in that year. 640 MR. CASS: All right. Now, again, following up on some questions Mr. Thompson asked this morning, Mr. Boyle, Mr. Thompson made a reference to the gain on the sale of Centrica and some reference to whether the book value of businesses is an appropriate thing to look at in considering that gain, and you said, the book value in no way relates to the value of businesses and gain on the sale. Can you explain that, please. 641 MR. BOYLE: Yes. When you're looking at valuing businesses, you're looking at valuing their future cash flows and that is independent of what the asset base may be for that business. So for a service business, for example, it tends not to have a lot of assets and has a certain cash flow stream that would get valued. For an asset-intensive business, it has its own specific set of cash flows, so it may be worth more or less than the asset value. It just depends on the cash flows, not the asset value themselves for any business that you're looking at valuing. So the fair market value of any business is not necessarily related to its assets. In fact, it's not. It's related to the cash flows. Now, depending on the strength of those assets and how useful they are will affect those cash flows, but their book value is not in any way related to the cash flows that can be generated from them. 642 MR. CASS: And then finally, at the very end of Mr. Thompson's cross-examination, he had some questions about installation costs and you agreed, Mr. Boyle, that those were related to the rental assets. Could you be clearer, please? Which rental assets were you talking about? 643 MR. BOYLE: They were relating to the 1999 to 2002 new non-utility rental assets. They did not relate in any way to the utility rental asset box that we have identified on our chart. They were all exclusively related to the new non-utility rental asset additions from 1999 to 2002. 644 MR. CASS: Thank you, Mr. Chair. Those are my re-examination questions. 645 [The Board confers] 646 MR. BETTS: Ms. Nowina. 647 QUESTIONS FROM THE BOARD: 648 MS. NOWINA: Mr. Cass conveniently referred you to the accounting entry in Exhibit K.7.4 that we just looked at, so maybe we can go back here and you can help me understand a little bit more that $42 million credit and how it was accounted for. So help me understand: The $42 million credit has been accounted for in the tax liability, so you increase the tax liability as a result of recording that $42 million credit; is that correct? 649 MR. ROSS: That is correct, yes. 650 MS. NOWINA: But that is -- well, I'll ask the question: Is that because you expect at some future date to have to repay that credit? Is it still a liability? 651 MR. ROSS: The $42 million credit or increase to deferred taxes occurred as a consequence of Revenue Canada's decision at the time to allow the company to deduct installation costs for tax purposes, so the effect of that was, compared to the previous accounting entries that had been made, was to increase the timing differences or deferred tax liabilities. In other words, there was a larger timing difference as a result of this. 652 Previously, both for tax purposes and for accounting purposes, installation costs had been capitalized, so that increased timing differences and increased the liability. So the effect of the entry, really, is to increase the deferred tax liability and at the same time to put a deferral into a debit, into an account pending, then, recovery from Revenue Canada, and that's what this entry is. 653 MS. NOWINA: And you subsequently did recover that 42 -- 654 MR. ROSS: Once we recovered that, then we were able to clear it from -- 655 MS. NOWINA: Clear it from the liability? 656 MR. ROSS: That's right. 657 MS. NOWINA: So when you recorded this increase to the liability, that's essentially recognizing what you thought was a historic increase because the rules had changed, then. 658 MR. ROSS: Right. 659 MS. NOWINA: I guess the other treatment that you could have taken was simply to put a credit against retained earnings and therefore this 76 that you have could have been different. 660 MR. ROSS: Because of the nature of different taxes, the future income tax liability will reverse over a period of time; hence, it wasn't appropriate to put it into retained earnings because it would reverse naturally as timing differences actually materialized. In other words, as CCA deductions were lower than actual tax depreciation -- sorry, accounting depreciation, then that $168 million would actually reverse. 661 MS. NOWINA: Thank you. Those are my questions. 662 MR. BETTS: I think just one question. I'm trying to sort out in my mind Centrica's relationship to this deferred tax amount or liability. Do they have any liability with respect to these deferred taxes? 663 MR. BOYLE: Yes, they do. Because they go along with the assets, as they depreciate, those assets and the accounting depreciation associated with those and the tax depreciation continue to reverse on the utility rental assets, they will be required to pay those taxes. And on the new non-utility rental additions from 1999 to 2002 that generated the deferred tax credit and the installation credit, they are obligated to pay those amounts in the future. 664 MR. BETTS: I want to focus on the ones that were transferred from EGDI, not necessarily the new ones. 665 MR. BOYLE: Yeah. 666 MR. BETTS: I understood you correctly that they are responsible for those liabilities? 667 MR. BOYLE: Yes, they are. 668 MR. BETTS: And can you explain, because it isn't sinking in to me, why there should be recovery through rates for that same liability for EGDI or EI? 669 MR. BOYLE: Sorry, the 23.9 million, they're not liable for. Enbridge Inc. incurred that liability for the 23.9. It's the amounts beyond that. There's $111 million still on the books when we transferred it to Centrica. So the 168 came down through a variety of changes to 111 and -- through some asset additions, so went down below and came up above, but they assumed $111.2 million of the liability. So the 168 came down to 111, essentially, for all the assets, the utility rental assets plus the new additions, and that $111.2 million is what they assume. Part of that was related to the utility rental assets, part to the new, but they absorbed that. 670 What Enbridge absorbed in costs was the $23.9 million from October '99 to May 2002, so we've incurred the $23.9 million; they are responsible for the 111 that's left. 671 MR. BETTS: And why did you retain the liability for that? 672 MR. BOYLE: We didn't retain it, we actually paid it. We had to pay it over those times -- at the time we owned it. So we actually had to make those payments and that's what reduced liability, the actual payments for liability on those assets. 673 MR. BETTS: Thank you. That's helpful. 674 Did that prompt any further re-examination? 675 MR. CASS: No, sir, thank you. 676 MR. BETTS: Thank you. Then it's an ideal time, I think, to break for lunch. Are there any points anyone wants to leave with the Panel before we break? 677 MR. THOMPSON: Mr. Chairman, Mr. Fournier is here. I haven't spoken to him yet today. He's at the Radisson Hotel. He's not aware yet that he's likely to be expected this afternoon. So I just would like a little bit of flexibility in terms of starting with his evidence so I can get him up to speed on the issues that he's likely to be questioned on. I'm assuming I'm going to be able to reach him, but I think in his mind he thought he would be on tomorrow as well. 678 MR. BETTS: Now, I think I alluded to the fact that we were expecting him today in the transcripts yesterday. Did you miss that? 679 MR. THOMPSON: No, I didn't. He was here last night, but I haven't spoken to him since -- well, since -- I haven't spoken to him since he got here. He didn't call me and I was working on my cross. I'm going to call him right away and he'll be up here. 680 MR. BETTS: Okay. I think I'm going to leave the heat on to you to do that, Mr. Thompson. There is an expectation that he would be ready to appear today and that he would be -- you two would know exactly what you're going to be talking about. So I'm going to try and keep that pressure on you to do that. 681 It is the Panel's intent, unless something goes wrong or unless examination goes much longer than we expect, to try and conclude today with this witness panel of IGUA's, and so we'll work towards that goal if possible. I don't want to leave anybody short if they don't find sufficient time to deal with examination. 682 Does that raise any questions? 683 MR. SHEPHERD: Mr. Chairman, do I take it from that that we will not be sitting tomorrow? 684 MR. BETTS: We'll know at the end of the day, quite frankly. But at this point, that's certainly the hope of the Panel, that we will not be sitting. 685 MR. SHEPHERD: I think that I speak for all intervenors in saying thank you very much. 686 MR. BETTS: Okay. Well, I guess we'll all work toward that end, then. 687 With that, we will adjourn now, and I intend to be back here at 2:00 and hopefully we'll have a witness with us at that time. Thank you. 688 --- Luncheon recess taken at 12:58 p.m. 689 --- On resuming at 2:33 p.m. 690 MR. BETTS: Thank you, everybody. Please be seated. 691 Did any preliminary matters arise during the break? 692 PRELIMINARY MATTERS: 693 MR. CASS: Mr. Chair, there are two more undertaking responses that have been passed around. The first is the response to Undertaking J.5.5 which concerns the allocation factor for the CASDA. The second is Undertaking J.9.2, which relates to Ms. Girvan's question today regarding informing ratepayers about deferred taxes recovery. 694 MR. BETTS: Thank you. Any other preliminary matters? 695 MS. DeMARCO: Mr. Chair, it's Lisa DeMarco at the back of the room, in relation to J.5.3, the undertaking was to provide sample transaction documents for a transaction where EGS is selling commodity, bundled with TS, as agent of EGD for the TS portion and principle -- sorry, for EGS's agent of EGS for the TS portion and principle on account of EGD for the commodity portion. And what was filed were two confirmation notices not the complete set of transaction documents as requested and in addition, on the first confirmation notice filed, it's unclear who the seller is contrary to the actual undertaking request asking to show transaction documents where EGS is seller. 696 So I wonder if we can have that undertaking updated to reflect the actual terms requested? 697 MR. BETTS: So as to avoid any confusion, you were referring to J.5.3. 698 MS. DeMARCO: That's right, Undertaking J.5.3. 699 MR. BETTS: Mr. Cass. 700 MR. CASS: I'd have to take that back, Mr. Chair. The witnesses are not here at this point in time. I'd have to consult with them about what Ms. DeMarco has raised and see what further response, if any, can be provided. 701 MR. BETTS: Ms. DeMarco, any comment on that? 702 MS. DeMARCO: It's certainly our position that the undertaking has not been complied with. 703 MR. BETTS: Thank you. And Mr. Cass, if you can review that with your witnesses and let the Board Panel know what your position is as soon as possible. 704 MR. CASS: Yes, sir. 705 MR. BETTS: Thank you. In fact, first of all, do you understand clearly what Ms. DeMarco is looking for? 706 MR. CASS: Well, I did understand, I think, the first part that she's suggesting that there may be more transaction documents. I'd have to check into that and see what there is. 707 The second part I'm not sure I completely understood regarding something to do with the identity of the seller. 708 MR. BETTS: Ms. DeMarco. 709 MS. DeMARCO: Mr. Chair, the undertaking specifically requests a sample transaction document where EGS is selling commodity and if you look on the first confirmation notice, intervenors are unable to tell who actually is selling as those portions of the document are blacked out. So on the response to the undertaking, the first confirmation provided, it's uncertain who is selling, the buyer is Enbridge Gas Services Inc. but the seller is unknown. 710 MR. BETTS: Are you expecting that to be an Enbridge-family party? 711 MS. DeMARCO: That's right. 712 MR. BETTS: If it's not an Enbridge-family party, you wouldn't expect to know who that party was. 713 MS. DeMARCO: If it's not an Enbridge-family party, then the confirmation is irrelevant. 714 MR. BETTS: Are. 715 MS. DeMARCO: The confirmation is irrelevant to the request made, I believe. 716 MR. BETTS: So obviously, as far as you're concerned, it relates to a member of the Enbridge family? 717 MS. DeMARCO: One would think, Mr. Chair. 718 MR. BETTS: Mr. Cass. 719 MR. CASS: I think we have a real misunderstanding, Mr. Chair, because I don't think that transaction in which the name of the other party was redacted involves the redaction of a name of an Enbridge-family company. The reason it was redacted, and this was discussed actually in the undertaking, was to protect the name of another party that is not an Enbridge party. I'm looking at the actual undertaking which was to provide redacted sample transaction documents. 720 MS. DeMARCO: And Mr. Chair, if you continue reading the undertaking, it indicates for a transaction where EGS is selling commodity. And here we have EGS buying something. 721 MR. BETTS: Okay. I think I'm going to ask Mr. Cass to review the transcript for that and see if you can understand yourselves what is being looked for, and certainly, I'd welcome you discussing it with Ms. DeMarco and if there's a problem in providing the request Ms. DeMarco has made, then the Board Panel will try and deal with it. 722 MR. CASS: Thank you sir. 723 MR. BETTS: Thank you. Are there any other preliminary matters? 724 Ms. Nowina had one for the company. 725 MS. NOWINA: Mr. Cass, I apologize that this morning's panel has gone and I should have asked for this when they were here, but I would appreciate an undertaking - it shows that an hour to think doesn't help me much - I would appreciate an undertaking around that $42.3 million tax credit that has been discussed. I'd just like to understand in more detail what the basis of the tax credit was and how it was treated and why it was treated in that manner. And so as much information as you can give me to clarify that for us. We're certainly confused about that. 726 MR. CASS: That's fine. 727 MS. NOWINA: Thank you. 728 MR. SCHUCH: Mr. Chair, and we can assign Undertaking J.9.5 to that and I do believe it was fairly clear. 729 UNDERTAKING NO. J.9.5: TO PROVIDE MORE DETAIL AS TO THE BASIS OF THE $42.3 MILLION TAX CREDIT, HOW IT WAS TREATED AND WHY IT WAS TREATED IN THAT MANNER 730 MR. BETTS: Okay. 731 MR. THOMPSON: You couldn't say anything else. 732 MR. BETTS: That's very good then. So if there are no further preliminary matters, I think it's the time for Mr. Thompson to introduce his witness panel and we'll get on to the next phase. 733 MR. THOMPSON: Yes, thank you, Mr. Chairman. Before I introduce Mr. Fournier, let me thank the Board for granting us an extra half an hour for luncheon break so we could locate Mr. Fournier and get him here and get all the documents he has in his possession with the right exhibits numbers on them. We appreciate it very much. 734 MR. FOURNIER: I'm not sure I appreciate it. I was looking forward to reading all this stuff this afternoon. 735 MR. BETTS: Now that you brought up the point, did I misunderstand something? Did you gentlemen not realize that you would be on today? 736 MR. FOURNIER: The time table I had -- 737 MR. THOMPSON: I did, Mr. Chair, but I didn't know for sure, I wasn't sure how long we were going to take today, but I was certainly aware of that. But as I indicated, I didn't reach Mr. Fournier until the luncheon break. So that's -- 738 MR. BETTS: And as I went through it, I realized we didn't give any specific instructions, but to all interested parties, there's a -- I don't want to count the heads and estimate the value, but that half hour cost the ratepayers more money than I care to think about. So it's important that when people are expecting to provide evidence, that they have their panels ready at the call of the Board. Anyway, sorry to introduce the subject that way and Mr. Thompson, back to you. 739 MR. THOMPSON: Thank you. Peter Fournier, the president of IGUA will be the witness for IGUA and I'd ask that he be sworn, please. 740 MR. BETTS: Thank you, Ms. Nowina will do that. 741 INDUSTRIAL GAS USERS ASSOCIATION PANEL ON DEFERRED TAXES AND TRANSACTIONAL SERVICES - FOURNIER: 742 P.FOURNIER; Sworn. 743 MR. THOMPSON: Mr. Chairman, I did place on the dais the qualifications of Mr. Fournier. Perhaps I could have an exhibit number for that document and then I'll begin my examination in-chief. 744 MR. SCHUCH: Yes, Mr. Chair, that would be Exhibit K.9.1, the direct evidence of Peter L. Fournier on behalf of The Industrial Gas Users' Association. 745 MR. BETTS: Thank you. 746 EXHIBIT NO. K.9.1: DIRECT EVIDENCE OF PETER L. FOURNIER ON BEHALF OF THE INDUSTRIAL GAS USERS' ASSOCIATION 747 EXAMINATION BY MR. THOMPSON: 748 MR. THOMPSON: Mr. Fournier, you are the president of the Industrial Gas Users' Association. 749 MR. FOURNIER: That is correct. 750 MR. THOMPSON: Could you briefly describe to the Board your educational background, regulatory experience and your current responsibilities? 751 MR. FOURNIER: I have a BA in economics and geography, really in resource economics, from UBC. After I spent some time in the army, I joined the Canadian Petroleum Association in 1981 and I've been doing regulatory stuff really since 1970 but in detail since 1981. At IGUA, I act as the policy advisor, if you like, to my board of directors from whom I receive instructions on our positions, and I direct our lawyers on positions that we are to take. In these proceedings, I oversee the evidence that is drafted and the arguments that are to be presented. 752 MR. THOMPSON: Thank you. Now, the prefiled evidence of IGUA in these proceedings is marked, I believe, as Exhibit L, tab 13.1, and there are two aspects of that prefiled evidence that fall within the ambit of unsettled issues. Just dealing with the evidence generally, was it prepared under your direction and supervision? 753 MR. FOURNIER: Yes. 754 MR. THOMPSON: Turning, if I might, specifically to the topics in the prefiled evidence that refer to unsettled issues, the first is found at page 10 under the heading, "Notional Utility Account." 755 MR. FOURNIER: Correct. 756 MR. THOMPSON: Now, before I ask you some questions about this section of IGUA's evidence, are you an accountant? 757 MR. FOURNIER: I am not an accountant and I'm not an income tax expert. 758 MR. THOMPSON: Do you profess to possess any expertise with deferred income taxes? 759 MR. FOURNIER: No. 760 MR. THOMPSON: Now, in this prefiled testimony, in paragraphs 21 and 22, there is described what I'll call a deferred taxes recovery scenario. In paragraph 22, there are some amounts that are set out. 761 First of all, was this scenario described in this testimony based on EGD's evidence and responses to interrogatories? 762 MR. FOURNIER: Yes. You see at the top of page 11 we refer to the evidence that was provided by EGD -- the answer is yes. 763 MR. THOMPSON: And I understand that there are some corrections to be made to paragraph 22 and Mr. Cass is comfortable with me just leading you on these points. 764 First of all, I understand that the amount of 10.3 million in line 3 of paragraph 22 should be 5.2 million? 765 MR. FOURNIER: That is correct. 766 MR. THOMPSON: And that makes the number in the third last line of the paragraph not 600,000 but 5.7 million. 767 MR. FOURNIER: 5.5 or 5.7? 768 MR. THOMPSON: I think it's the difference between the 10.9 and the 5.2. 769 MR. FOURNIER: It must be 5.7. 770 MR. THOMPSON: And subject to those two corrections, are there any further corrections to be made to paragraphs 21 and 22 of IGUA's prefiled evidence? 771 MR. FOURNIER: I believe not. 772 MR. THOMPSON: And moving to the second area of the testimony that still relates to an unresolved issue that's in the next section entitled "Competitive Market Risks," subheading 1, "Commodity Trading Risks and Costs," are there any corrections to be made to that paragraph in the testimony? 773 MR. FOURNIER: No. 774 MR. THOMPSON: Could you just explain, briefly, IGUA's position with respect to this issue. 775 MR. FOURNIER: I think it's clearly stated in the second sentence. It starts on the third line: 776 The regulated utility, in IGUA's view, should not have any direct or indirect exposure to unregulated commodity trading risks." 777 I think the regulated utility can, and indeed probably should, be responsible for the purchases of its own gas supply requirements, that is, gas sales to its residential/commercial customers, and its own system use gas. But beyond that, it is IGUA's view that the regulated utility should not be in the commodity trading or speculative game. That's for an unregulated entity that can take its own risks. 778 But I think that, among other things, if Enbridge Gas Distribution were to take on new risks in the purchase of gas for the commodity trading activity, the next thing we would probably see is a request for a greater return on equity because it now has greater risk. That's a side consideration, but the bottom line is that IGUA opposes the regulated utility purchasing any gas other than its own system gas needs. 779 MR. THOMPSON: Thank you. Those are my questions, Mr. Chairman. 780 MR. BETTS: Thank you, Mr. Thompson. 781 Can I have an indication from parties who would like to cross-examine Mr. Fournier on his evidence? 782 Ms. DeMarco. And that's the only party? Ms. DeMarco, please proceed. 783 MS. DeMARCO: Thank you, Mr. Chair. 784 MR. CASS: I'm sorry, Mr. Chair. Was it understood that the applicant was to cross-examine? 785 MR. THOMPSON: Too late. I understood it. 786 MR. CASS: Sorry, my mind was elsewhere thinking that it would have been my submission to the Board that the applicant's cross-examination come after others who may have cross-examination with the exception of Board Staff and the Board itself and consequently I didn't respond directly to your question. I'm sorry. 787 MR. BETTS: That's okay. I understand that and that's fine. 788 Ms. DeMarco, please proceed. 789 MS. DeMARCO: Thank you, Mr. Chair. 790 CROSS-EXAMINATION BY MS. DEMARCO: 791 MS. DeMARCO: Mr. Fournier, if I can just follow up on the last point that you started with, you indicated that the regulated utility should not be in the unregulated commodity trading market; is that fair? 792 MR. FOURNIER: That's correct. 793 MS. DeMARCO: And specifically, would you consider the regulated utility to be in the market if it entered into commodity transactions in its own name? 794 MR. FOURNIER: Well, it has to be. If it's entering into commodity transactions in it's own name, it's got to be purchasing gas in the natural gas market. 795 MS. DeMARCO: And what about if it played in those markets through an agent, would that be involved in those commodity trading markets? 796 MR. FOURNIER: I'm not hearing you well. Can you say that again. 797 MS. DeMARCO: What about if it played in those, -- 798 MR. FOURNIER: I thought you said played. 799 MS. DeMARCO: -- using your words, unregulated commodity trading market through an agent. 800 MR. FOURNIER: No. The regulated utility should not be engaged in the trading of gas. It should be merely -- it should be allowed to if it needs to purchase gas for its system requirements. 801 MS. DeMARCO: So then is it fair to say, then, that I've interpreted your terms directly -- direct or -- sorry, I'm in paragraph 23 of what's been marked as Exhibit L.13.1, which would be page 11 of your direct evidence. 802 MR. FOURNIER: Right. 803 MS. DeMARCO: Prefiled evidence, sorry. And the third line down in paragraph 23, your statement that the regulated utility should not have any direct or indirect exposure to unregulated commodity trading risks would include a situation whether they entered into those transactions directly as principal; is that fair? 804 MR. FOURNIER: That would be a direct exposure. 805 MS. DeMARCO: And an indirect exposure would be when they entered into those commodity transactions as agent? 806 MR. FOURNIER: That is correct, or if they were acting in -- they were acting in the name of, say, Enbridge Gas Services. 807 MS. DeMARCO: Or if somebody acted on their account; that's fair? 808 MR. FOURNIER: Yes. 809 MS. DeMARCO: Thank you. 810 Mr. Fournier, as part of your role in IGUA as president of IGUA, would you interact regularly with your individual members? 811 MR. FOURNIER: Well, the obvious answer is yes, but it depends on which -- when you say interact, I mean, obviously, an association of your members you follow their instructions and so on. 812 MS. DeMARCO: And would the instructions that you would be following pertain to issues such as gas supply? 813 MR. FOURNIER: No, we do not -- I'm only peripherally aware of the kinds of gas supply actions my members participate in. That's a contractual matter between them and their gas suppliers. I was trained early as an association employee to be sensitive to market matters where contractual terms may be raised because you can get into -- it used to be combines, it's now a competition concern. So I try and avoid knowing very much about their contractual matters. 814 MS. DeMARCO: When you say their gas suppliers, are you meaning someone other than the utility? 815 MR. FOURNIER: To my knowledge, virtually all the gas that is used by my members, and I appreciate my members are many of the larger users of natural gas, either as a process fuel, let's say, raising heat or steam in their processes or as a feedstock as some of my chemical or fertilizer producers do. At the same time, most of them have warehouses or detachments where they will heat those buildings and I don't know whether under industrial rates or whether they're buying under commercial rate from Enbridge or Union Gas. 816 So there will be some direct purchase from the utility but not very much. And I think there could be, as part of the services that Enbridge provides, balancing. Maybe at the end of the year, I'm not very expert on this, but there may be some gas supply that they end up paying Enbridge for. 817 I don't know, sir, whether I should be facing the Panel answering Ms. DeMarco's questions or ... 818 MR. BETTS: That's quite all right, there's no particular problem either away. Go right ahead. 819 MS. DeMARCO: So you described specifically one of the transactional services that your clients might purchase. Is it fair to say that load-balancing might be a service that they might purchase directly from Enbridge Gas Services? 820 MR. FOURNIER: You're getting me into territorial water that I'm not -- don't claim to be an expert in. 821 I understood they have a -- these I'm talking are really interruptible customers, they supply the gas. Enbridge normally provides the transportation and brings it down and then whether they take more or less on a given day of the gas that they've delivered to Enbridge, at the end of the year, there's a balance. So if their purchased gas account is negative, they have to then pay Enbridge and bring themselves back up to even. If they are -- if they took less than they gave, then I think it would be a better balance, but I don't think that's particularly relevant to this transactional services. 822 MS. DeMARCO: Would it be fair to say, Mr. Fournier, that the majority of your members purchase gas commodity from someone other than Enbridge? 823 MR. FOURNIER: Yes. 824 MS. DeMARCO: And they've done so for approximately how long? 825 MR. FOURNIER: Since about 1985, when deregulation of the gas market same into play. 826 MS. DeMARCO: Can you just tell me a bit about that market, has that market grown or shrunk? 827 MR. FOURNIER: The direct-purchase market? 828 MS. DeMARCO: Yes. 829 MR. FOURNIER: Well, I think the industrial market, which was the first direct-purchase market, I really can't tell you if it's grown -- I think it's shrunk mainly because of commodity things and plant closures and mergers and amalgamations, but on the other hand, the direct-purchase market has expanded as marketers have come in, such as a Direct Energy for example, as a gas supplier to the residential/commercial sector. So I would say overall, it's expanded. 830 MS. DeMARCO: Is it your opinion then, Mr. Fournier, that that market is fairly liquid? 831 MR. FOURNIER: I can't tell you that. I know as far as an industrial goes, he buys his gas in a portfolio, you'll have some high percentage, 60, 70 percent of his annual requirements probably under a one-year supply deal then he'll buy the balance in monthly or quarterly contracts. He's certainly not -- I don't think any industrials engage in trading from day to day, playing in the spot market. 832 MS. DeMARCO: Let me rephrase my question then. Is it fair to say that there are a number of supply choices out there for your members? 833 MR. FOURNIER: When you say "choices," obviously there are probably I don't know how many hundreds of producers and marketers out there selling gas. There are various different supply points they can buy it at. So is that responsive? 834 MS. DeMARCO: So there are a number of suppliers and marketers from whom they can buy gas, you can buy gas? 835 MR. FOURNIER: Yes. 836 MS. DeMARCO: Thank you, those are my questions. 837 MR. BETTS: Thank you, Ms. DeMarco. Anybody else apart from Board Staff and the applicant? Are there any questions from Board Staff? 838 MR. SCHUCH: No, Mr. Chair. 839 MR. BETTS: Mr. Cass, you have some questions. 840 MR. CASS: I do, yes, thank you, Mr. Chair. 841 MR. FOURNIER: You wouldn't want to disappoint me. 842 MR. CASS: Exactly. 843 CROSS-EXAMINATION BY MR. CASS: 844 MR. CASS: Mr. Fournier, I'm going to ask a few questions about the evidence from IGUA dated May 5, 2004. Do you have that with you? 845 MR. FOURNIER: Yes. 846 MR. CASS: Would I be right in thinking, Mr. Fournier, that this evidence represents actually the evidence of IGUA itself as opposed to the personal views of Peter Fournier? 847 MR. FOURNIER: Very much so. 848 MR. CASS: And I think you alluded in your examination in-chief that you have some sort of process for presenting the issues in a particular case to your organization and then getting authority from IGUA as to what issues to bring forward; is that right? 849 MR. FOURNIER: Yes, that is correct. 850 MR. CASS: Can you explain how that occurs? 851 MR. FOURNIER: I have two avenues I can follow in this particular case, the other avenue I can follow is taking evidence which I judge to be of particular policy importance so I take it to my board of directors. As an example of that is the evidence we've just filed in the National Energy Board's North Bay Junction Application. It, to me, is a very important proceeding so I'm taking that evidence to my board of directors. 852 In the case of -- more specific to the issues that we deal with with a given LDC, I have three committees of members, mainly of directors but of other members included, I have a Gaz Metro committee, I have a Union Gas committee, I have an Enbridge committee, so in this case, I took the draft evidence to my Enbridge committee and they signed off on it. 853 MR. CASS: When would that have been? 854 MR. FOURNIER: I would imagine, going back, it would be late April, probably the last week of April, something like that. 855 MR. CASS: And have you been back to the committee or the board of directors since then in relation to the authority in case? 856 MR. FOURNIER: We had a board of directors meeting on the 5th of May, so that was described to them. I communicate from time to time to both my committees and to my board as developments occur. So, for example, in this evidence as we plainly stated upfront, our major concern dealt with the cost- allocation upstream-transportation issue and also with the unauthorized overrun gas penalty charge. So when those were settled, I was able to report that to my members that they have been settled. It wasn't settled precisely in line with the position that we had advocated, but they -- I got concurrence on the wisdom of the settlement, if you like. 857 MR. CASS: After the meeting with the board of directors on the 5th of May that you referred to, have you been back for authority on any other issues not included in the evidence? 858 MR. FOURNIER: No. 859 MR. CASS: So looking at the evidence as I think you just indicated yourself, Mr. Fournier, it starts out in paragraph 2 indicating that the following paragraphs describe IGUA's major concerns with respect to matters in issue in these proceedings? 860 MR. FOURNIER: Correct. 861 MR. CASS: That's right? And that continues to be the case today, does it? 862 MR. FOURNIER: I look at each application filed by an applicant and I identify the issues that I think should be the focus of our attention, but at the same time, it doesn't mean that everything else is pushed to the backburner or is of no interest to us. So I prioritize. In this case, I gave Mr. Thompson back in, I think it was, January a letter setting out the issues we wanted to address. This evidence follows, in some ways, not all of the issues that were in that, but this correctly sets out, I think, the facts that we had two major concerns and then others. 863 MR. CASS: Well, are there any major ones that are not set out in the evidence? 864 MR. FOURNIER: No. I just said we had two major ones, and the two primary ones are the ones that have now been settled. 865 MR. CASS: Okay. I'm sorry, I misunderstood. 866 Well, what I don't see there is anything to do with the year-end change by Enbridge; is that right? 867 MR. FOURNIER: It wasn't addressed in this evidence. 868 MR. CASS: Right. And I take it that since you haven't been back to the IGUA board of directors or the Enbridge committee that you referred to since May 5th, that you haven't been back to them for any authority in respect of that year-end change issue. 869 MR. FOURNIER: No, the opposite. The same letter that I gave to Mr. Thompson back in January, also before it had gone, it had gone to my Enbridge committee and they agreed with the issues we addressed. And I think one of the -- I haven't got a copy of that, but I recall and perhaps if this -- if anything hangs on this, if you want me to give you an undertaking to check and see if that was in there or not, but I recall, I believe, that one of the issues that I advised Mr. Thompson that we should address, not as the number one priority, but was the 15-month test year. 870 MR. CASS: Would you be able to check and let us know whether that was the case? 871 MR. FOURNIER: I'd have to ask him if he's got a copy of that letter. I'm not sure my filing system would dig it out. 872 MR. THOMPSON: I don't have one with me, but yes, we'll undertake to check and produce a copy of the letter and -- 873 MR. FOURNIER: I don't know if I -- I think we should just confirm whether or not that that was stated in there. 874 MR. THOMPSON: I didn't quite finish. The letter, to the extent that it addresses the stub period issue, that's all, for the 15-month test year. Is that satisfactory? 875 MR. FOURNIER: Yes. 876 MR. BETTS: Is there some reference? Is there a date or anything that anyone can recall, or just the rough timing of the letter, if you could. 877 MR. FOURNIER: I believe it was early -- it may have been December, but I think it was early January. 878 MR. BETTS: Thank you. That's fine. 879 MR. FOURNIER: It was sometime after application -- Enbridge's application was filed and I had had a chance to get through it, and the Christmas period was in there too, so I'm not certain exactly when. 880 MR. BETTS: Mr. Schuch, a number, please. 881 MR. SCHUCH: Mr. Chair, that would be Undertaking J.9.6. 882 MR. BETTS: Thank you. 883 UNDERTAKING NO. J.9.6: TO PROVIDE THE LETTER FROM IGUA TO MR. THOMPSON TO THE EXTENT THAT IT ADDRESSES THE STUB PERIOD ISSUE FOR THE 15-MONTH TEST YEAR 884 MR. CASS: Mr. Fournier, in advance of this particular rate case, Enbridge Gas Distribution held a number of stakeholder consultations where it passed on to stakeholders information about issues in advance of the case; are you aware of that? 885 MR. FOURNIER: You say stakeholder. Certainly, we met, I don't know how many times exactly, I would guess four or five times with Mrs. Hare and with some of her staff. 886 MR. CASS: There were meetings with stakeholders at large, not just individual meetings with IGUA. But I believe IGUA had representatives at these meetings; do you recall that? 887 MR. FOURNIER: Not that I attended. There may have been members. Enbridge doesn't always tell me when they have these stakeholder meetings. 888 MR. CASS: Well, would it ring any bells with you if I were to suggest there were stakeholder meetings that you -- 889 MR. FOURNIER: There was one in Ottawa I attended. 890 MR. CASS: I'm sorry, not in Ottawa? 891 MR. FOURNIER: There was one in Ottawa that I attended. 892 MR. CASS: I think you're referring to a large-volume customer meeting. 893 MR. FOURNIER: Yeah. 894 MR. CASS: I'm talking about meetings with intervenors, rate case intervenors, in advance of the case and where I think IGUA might have been represented by one or more of its lawyers. 895 MR. FOURNIER: Well, when you talk of stakeholder meetings, certainly there were a number of occasions when we met -- myself and several of my directors and the chairman of my Enbridge committee, we met with Mrs. Hare and some of her staff. It was primarily on the cost-allocation issue and the UOG issue. In fact, I think it was as a result of the discussions we had in particular on the UOG issue that Enbridge, Jody Sarnovsky specifically, came up with a solution, and we appreciate their cooperation and willingness to address the issue. So certainly I attended those. 896 Now, I don't know what others. There's all -- the process, of course, of the ADR process, but I don't think you're referring to that. 897 MR. CASS: No, I'm not. I'm referring, Mr. Fournier -- there were stakeholder consultations on October 16th, November -- 898 MR. FOURNIER: Oh, that's way back last year, my goodness. 899 MR. CASS: Yes, before of the application, that's right, and I believe IGUA had representatives at the stakeholder consultations on October 16th, November 11th, and November 24th. Can you just check into that and confirm that? 900 MR. FOURNIER: Can you -- it would help me to do that if you told me who the IGUA representative was. 901 MR. CASS: I believe Mr. Thompson was at least one of them. I don't recall all three of them. 902 MR. FOURNIER: When you said IGUA representatives, I have 50-odd members and some of them are on my Enbridge committee. Counsel, of course, is there as counsel. So yes, okay. I don't dispute that may well be the case. 903 MR. CASS: I had intended to ask you, Mr. Fournier, if IGUA considered that this was a useful process that the company undertook, but perhaps that question is futile without a little more information about the consultations. 904 MR. FOURNIER: It's an excellent question and I know it's a question that the Board has under review at the moment of its regulatory process, and I've had some discussions with Mrs. Ferrante, as the Chief Operating Officer, and with the chairman on -- not on this case, but on the -- sort of the overall OEB process. I have my views. I submitted a letter to the chairman last fall in response to the request for comments on the process and that was on their web site. 905 I don't think the current OEB process is efficient. I think it's expensive. I would turn it on its head and I would adopt a process that the Regie has adopted. But let's save that discussion for another day, another time. I don't think I need to take up your time this afternoon. 906 MR. CASS: All right. Mr. Fournier, I have just a couple of questions to come back -- 907 MR. BETTS: Mr. Cass, just before you leave, was there any expectation of an undertaking in there? 908 MR. CASS: Well, I'm not sure that it's going to lead anywhere, Mr. Chair, because I had intended to ask Mr. Fournier about the extent to which these consultations were useful. But given that he doesn't seem to have a great extent of knowledge about them, I'm not sure that it's going anywhere. 909 I did just want to come back with only a couple of questions where I was on this year-end issue. I wanted to suggest to you, and you can take this subject to check, Mr. Fournier, that at the consultation on November 24, the company made -- brought forward its plans in relation to the change in year-end. Can you take that subject to check? 910 MR. FOURNIER: I'll accept that. 911 MR. CASS: All right. And can you just let me know when, for the first time on the record in this proceeding, IGUA would have brought forward any issue about looking at the three-month stub period on the basis of a Board-approved 12-month ROE? 912 MR. FOURNIER: I want you to run that question again because there was -- can you repeat it? 913 MR. CASS: Yes. When, for the first time on the record in this proceeding -- 914 MR. FOURNIER: Yes. It's on the record, okay? 915 MR. CASS: Yeah. 916 MR. FOURNIER: Now, what do you mean by "on the record"? Obviously -- the application, obviously, is something that is on the record here. 917 MR. CASS: No, something brought forward by IGUA. You referred me to a letter which you wrote to your lawyer which doesn't take me very far. So in relation to the record of this proceeding, documents that are available to us to see, can you just let me know when IGUA, for the first time, would have brought forward an issue about looking at the stub period on the basis of 12-month Board-approved ROE? 918 MR. FOURNIER: I don't think we brought forward something for the record. I don't think we are -- we have to bring things forward before we address them. Mr. Thompson addresses many issues, for example, surrounding O&M, so if the cost of library books purchased by Enbridge is an issue in the hearing and if I haven't brought forward a document to the OEB that says we are concerned about the cost of library books, doesn't mean that Mr. Thompson can't ask them. 919 So the first time that I, I think, got into discussions sort of in the OEB process was the intervenor day before the ADR process began, but we -- Mr. Thompson and I had had a number of discussions beforehand. I have past experience with TransCanada PipeLines when, I can't give you the year, but I'm guessing it's around 1984, TransCanada PipeLines had been put on to normalized taxes and was on a 1 November, 31 October test year and about the same time they were taken off normalized taxes to go back on flow-through, they were ordered to go under a calendar-year basis and the lawyer who represented me at the time, who now represents TransCanada, came up with the term of stub period stuffing because the two months, November and December, TransCanada managed to stuff all kinds of weird and wonderful costs in there. 920 So I was aware of the potential that if one didn't look at the extra period under a particular microscope -- I have great respect for the ability of regulated utilities, innovative ways to deal with their revenues and expenses and so my instructions to him were, Let's make sure that this one is done properly, not like the one that was done back in the mid-'80s with TransCanada. 921 MR. CASS: But the position being advanced by IGUA is that there should be a $30 million adjustment in favour of ratepayers due to the year-end change; correct? 922 MR. FOURNIER: I don't know what the number is. It's been suggested it's in that range, but the position that I instructed Mr. Thompson, and this has been run by my Enbridge committee chairman, is that the company is awarded -- is allowed to earn a rate of return on equity which this Board sets and how it earns that over the period of 12 months of the year is really irrelevant as long as on average, the recovery it has over a 12-month period is the allowed return on equity. 923 When Mr. Thompson came to me and said to me that it seems that under the 15-month plan, they have scope to overearn on average on the 15-month basis, I asked him to tell me more. We had a good long discussion on it and it was my view that the appropriate return for the 15-month period should be a return that is the average of the -- excuse me, for the 15-month return, Enbridge should earn the rate of return on equity that this Board has set, and if that means, therefore, that with a 15-month period there is a revenue adjustment in order to bring the company's return to that average for the 15-month period, then that is the appropriate course of action. 924 MR. CASS: But this isn't in the evidence of May 5th. 925 MR. FOURNIER: That is correct. 926 MR. CASS: Now you referred to a discussion at the intervenor conference, that would have been May 17th? 927 MR. FOURNIER: Something like that. 928 MR. CASS: Right. 929 MR. THOMPSON: I don't know if my friend wanted some undertaking about when this issue was first raised on the record. If you did, I was going to answer it for you. 930 MR. CASS: Okay. 931 MR. THOMPSON: If you look at IGUA Interrogatories 70 to 73 and 74 to the company, particularly 73, they're actually at tab 4 of a brief you filed the other day, Exhibit K.3.1, you'll see we asked questions about what we were then calling protection against overearnings in both the 12-month and the three-month period in 2005. 932 MR. CASS: Right. 933 Did those questions, Mr. Fournier, concern a suggestion of overearnings in relation to ROE? 934 MR. FOURNIER: I guess it's in that context, yes. 935 MR. CASS: Sorry, can you help me where the ROE was in the context of those questions? 936 MR. FOURNIER: I don't have the questions in front of me and I have to confess to you, I think at the time they were being prepared, we also had to be submitting information requests to TransCanada in its 2004 toll hearing, so my recollection is Mr. Thompson did the ones for Enbridge and I did the ones for TransCanada and we looked at each other's drafts and made some changes, I believe, and off they went. I confess to you, I don't have those IR's in front of me, I'd have to read what was asked in order to respond to your question. 937 My understanding was that the -- and I would say if I was asked, I think, the company in that three-month period should obviously be recovering its O&M, its depreciation, its municipal taxes and every other cost account category that it justifies. The scope for the excess earnings, as I understand it, is with regard to the return on equity. 938 MR. CASS: And you would agree that gas distribution is a seasonal business? 939 MR. FOURNIER: Yes. 940 MR. CASS: And I take it you're not aware of any energy regulator that's ever set ROE for a 15-month or a three-month period; right? 941 MR. FOURNIER: I don't have personal knowledge of it. I would suspect there have been. 942 MR. CASS: But you're not aware. 943 MR. FOURNIER: Not that I can cite you X, Y, Z case. 944 MR. CASS: You do have considerable experience in the regulatory area in Canada. 945 MR. FOURNIER: I would claim that, yes. 946 MR. CASS: Thank you. Can we move on, then, Mr. Fournier, to some questions about transactional services. I had indicated to your counsel that for this purpose I was going to ask you to work with me on a copy of Undertaking J.4.1. I'll just give you a minute or two to look at this, Mr. Fournier, get acquainted with it. 947 MR. FOURNIER: I have one that says "revised." That's Exhibit K.4.2. This one is headed, "VECC Template for Transactional Services." 948 MR. CASS: That's right. 949 MS. DeMARCO: Mr. Chair, can I just interject for a moment, with apologies, just to seek clarification as to what document we're speaking of, is it the revised Exhibit K.4.2 or the Exhibit K.4.2? 950 MR. FOURNIER: I don't have an exhibit number on this copy that Mr. Thompson had given me earlier but it says revised in the upper right-hand corner. 951 MR. CASS: Yes. The revised document had a column added to it. For my purposes, Mr. Fournier, I'd appreciate it if you could have all of the columns from 1998 across including those on the revised document. 952 MR. FOURNIER: I see. Okay. I have that. 953 MR. CASS: I'll just give you some time to take a glance at that. 954 MR. FOURNIER: The only difference, I take it, between the revised K.4.2 and the one that is attached to J.4.1 is the addition of the column 2005 forecast with commodity, three asterisks; is that correct? 955 MR. CASS: Correct. Yes. 956 MR. FOURNIER: Okay. 957 MR. CASS: Could we start, Mr. Fournier, by looking at the 2003 column. 958 MR. FOURNIER: Yes. 959 MR. CASS: And just see if you can confirm your understanding of how the sharing formula for transactional services works. So if you look at line -- 960 MR. BETTS: Mr. Cass, would you mind if I interrupt you. I just want to make sure whether -- I want to make sure we're all on the same document and that it's labelled correctly, because I think there is some confusion. 961 MR. CASS: Yes, I'm looking at revised -- the page that says "Revised" in the upper right-hand corner, it says Exhibit K.4.2 and it has a series of columns, the first one is headed 2003 with an asterisk beside it. 962 MR. BETTS: Thank you. We're okay, I think. 963 MR. CASS: So looking at line 6 under the 2003 column, Mr. Fournier, you see the ratepayer base guarantee, so you would agree with me that within the formula for 2003, that first $8 million is guaranteed to ratepayers; right? 964 MR. FOURNIER: I'll accept that. 965 MR. CASS: All right. And the effect of that is that that guarantee of $8 million is included in rates for the test year; right? 966 MR. FOURNIER: Yes. 967 MR. CASS: That puts the shareholder at risk for the $8 million if it's not achieved in the test year; right? 968 MR. FOURNIER: All right. 969 MR. CASS: And then at line 8, after the ratepayer guarantee, there is the shareholder base share, but out of that at line 9 comes the marginal O&M; you agree? 970 MR. FOURNIER: That's what it says. 971 MR. CASS: Right. And the shareholder is also at risk for the marginal O&M of $700,000; right? 972 MR. FOURNIER: If it's coming off the shareholder base share, it would appear so, yes. 973 MR. CASS: Right. So the shareholder's at risk for the $8 million guarantee that is included in rates and the O&M of 700,000; right? 974 MR. FOURNIER: All right. 975 MR. CASS: And then turning to the ratepayer side of this equation, down at line 14 is the total ratepayer benefit for 2003, shown to be 13.55 million. Do you have any reason to dispute that number? 976 MR. FOURNIER: No. 977 MR. CASS: Similarly, for 2004 year-to-date, the company's expecting a total ratepayer benefit of $13.18 million. Do you have any reason to question that number? 978 MR. FOURNIER: No. 979 MR. CASS: And the organization you represent, IGUA, would be among the ratepayers who share in this benefit, I take it? 980 MR. FOURNIER: I would assume there would be some allocation to the industrial rates, but to the amount of it, I don't know. I was -- in one of our meetings this year with Mrs. Hare and her staff, we were shown how some cost categories have really only marginal impact on industrial rates. So if that is the case, then I don't know how these ratepayer benefits get allocated so... 981 MR. CASS: So you don't know the extent to which -- 982 MR. FOURNIER: I don't know whether it's on the basis of total revenue contribution or on volume or on some other basis, but I would not dispute. Yes, some portion of it presumably goes to the industrial ratepayer. 983 MR. CASS: Well, let's put it this way: To the extent that members of IGUA share in this ratepayer benefit, I take it they don't mind receiving it, however large or small it may be? 984 MR. FOURNIER: Anything that reduces the utility's rates is always considered as manna from heaven. 985 MR. CASS: Thank you. So then looking up to line 2, still under the 2003 column, you see the gross margin related to commodity of 10.5 million. Now, do you understand that this is gross margin tied to commodity deals that are being done by Enbridge Gas Services in its own name? 986 MR. FOURNIER: I understand that -- I mean, before the affiliate outsourcing, my understanding is that Enbridge Consumers Gas, as it was then, I believe, did its own gas procurement. I understand that was then hived off and gas operations management also was hived off to an Enbridge affiliate. I believe that one of those at least involved in that activity was Enbridge Gas Services. But as to which one is physically buying the gas for system gas needs, I'd have to see the organization chart and what each affiliate does and so on. 987 MR. CASS: All right. Well, to put it another way, these are the commodity transactions in line 2 here that you've expressed concern about being conducted in the name of the utility; right? 988 MR. FOURNIER: To the extent that these commodity transactions were for trading activities, yes, I felt all along, and I still feel, that Enbridge Gas Distribution should be managing its own gas supply, it should have its own staff and be doing it here. That isn't what is happening. 989 MR. CASS: To come back to line 2, Mr. Fournier, there's $10.5 million of gross margin related to commodity. These are commodity deals done in connection with some transactional service. Is it or is it not IGUA's position that it has some concern about those commodity deals being conducted in the name of Enbridge Gas Distribution? 990 MR. FOURNIER: If there is any exposure for Enbridge Gas Distribution in terms of assuming credit, of assuming costs, then we have concerns. If there is -- we've always been concerned. The reason I think that Enbridge Gas Distribution should be buying its own gas, I've always been concerned that, as you know, the gas prices in recent years has been very, very volatile. If Enbridge Gas Services were to buy some gas today from Acme Marketing, let's say, for $6 and the current spot price in U.S. dollars at AECO today is somewhere around five and a quarter, which is -- say it's $7 Canadian, roughly. 991 So let's say today that EGS was buying some $7 Canadian gas; that's current market price. Let's assume that in -- and they put some of that gas in storage. Let's assume in November we suddenly get a real deep swell and maybe there's a problem with one of the pipelines or something. Anyway, the price spikes and Enbridge Gas Services has a customer, let's say, in Chicago, and to serve that customer, it's got to go out and buy some $15 gas. 992 I have a concern that it may be tempted to take the gas that it bought in its name for $7 back on the 29th of June of this year, and sells that at a profit to its customer in Chicago for 15-odd bucks, and the gas it buys for 15 bucks in November, it says to Enbridge Gas Distribution, That's part of your supply portfolio, guys, and we see it in the next QRAM. 993 Now, whether they do that or not, I have no idea. I don't track it. But it's a concern of the kind of game that can go on if Enbridge Gas Distribution is not purchasing its own gas supplies and managing its own gas. That's not the case today. This Board has accepted that there would be outsourcing. I'm not trying to cry over spilled milk or whatever else you want to call it. 994 But my view is that Enbridge Gas Distribution should be managing its own gas requirements. Any other transactional services that go on, let it be done by the non-regulated utility. If they can make $100 million, Godspeed to them, I own some Enbridge stock, but if they lose their shirt, they're not turning around and trying to recover what they can from the ratepayers. 995 MR. CASS: Sorry, Mr. Fournier, I think we are talking at cross purposes. 996 MR. FOURNIER: You're asking me -- if that's for transactional services, fine. Do I think it's a great thing? I've given what I think the proper thing for Enbridge Gas Distribution is, to be managing its own gas supply and not be involved in the transactional services game. If they are involved in transactional services game, if there's some revenues to be generated from it that can be shared, so be it. 997 MR. CASS: Can I try one more time? Do you or do you not think that the commodity transactions tied to transactional services referred to on line 2 of the column under 2003 should be done in the utility's name? 998 MR. FOURNIER: I think the current transactional services sharing arrangement provides, then, for what you just took me through, there's a ratepayer benefit and a shareholder benefit, so that is part of the transaction -- chain of transactions. And so it's there. What do you want me to agree to or not agree to? 999 MR. CASS: Do you have an issue with those transactions being referred to in line 2 being done in the utility's name? 1000 MR. THOMPSON: I think in fairness -- 1001 MR. FOURNIER: Let me try if -- one more time. 1002 MR. THOMPSON: Can I just interrupt for one second? I think it would help, Mr. Cass, if you made it clear that what is being discussed in line 2 is what's been discussed in this process as a bundled commodity transaction, the commodity currently being done by EGS and the transactional services provided by the utility. I know you've said that, but I don't think that's registering with the witness. 1003 MR. CASS: Did you understand Mr. Thompson's clarification, Mr. Fournier? 1004 MR. FOURNIER: Yes, and I must say, I had a -- when we raised this concern in our evidence, Mr. Frank Brennan was kind enough to call me and offer to explain what he could about the process and I -- and yes, I understand it's a bundled -- it's there now in part of the process. 1005 If the transactions that EGS were doing were strictly for developing or accessing the gas for the utility's own system requirements, then fine. The fact that they are doing transactions with third parties with exposure that they can have, having purchased gas too cheaply or too expensively, and the potential to pass costs of the expensive side through to the utility, I have concerns. It's there, I accept it's there now, and as long as the transactional services process remains in this way, then it's part of the overall sharing of revenues that is there. 1006 Do I think it should be encouraged and fostered and growing, I go back to, what I think that the company should be doing is buying and managing its own gas. 1007 MR. CASS: Do you understand, Mr. Fournier, that these transactions currently, in which the commodity is bundled with a transactional service, Enbridge Gas Services is doing the commodity part in its own name and the proposal in this case is whether the commodity part should be in the utility name? 1008 MR. FOURNIER: Yes. 1009 MR. CASS: Now, if wearing your hat as a ratepayer representative, you have difficulty with the ratepayer taking any risk for these commodity transactions when the total ratepayer benefit is in the order of $13 million, I would suggest to you that when you put on your hat as a shareholder of Enbridge Inc., you would have even more difficulty with the shareholder taking commodity risk with Enbridge Gas Services or Enbridge Inc. taking commodity risk for a return that's more like $3 million to $4 million, would you not agree with me? 1010 MR. FOURNIER: When I look at what has happened in the natural gas market over the last ten years, one of the reasons TransCanada PipeLines got out of the marketing game, they had Western Gas Marketing which became TransCanada Gas Services, they engaged in some currency and gas futures trading out of the Houston office and lost a small fortune. 1011 If we look at some of the various results of some of the companies like Enron, El Paso, others, don't need to go through them all, all engaged in the trading of natural gas, all of them got into deep water. 1012 I don't like the exposure that Enbridge Gas Distribution and I, both as a customer myself, a residential customer and as representing some large industrials, the exposure that is there if there is trading going on by Enbridge Gas Services, that if they err that the cost of that error, the potential of that to get passed through to the ratepayer concerns me. 1013 MR. CASS: But my point is, Mr. Fournier, if you don't like the what you've called the exposure to the ratepayer on a return in the order of $13 million as a shareholder of Enbridge Inc., you would definitely not like that exposure to be taken by Enbridge Inc. on a return in the order of $3 million to $4 million; right? 1014 MR. FOURNIER: Well, these are numbers that are here -- 2003 is a year behind us so we know what happened that year, but 2005, and I see some forecast numbers here, they could equally have the scope or potential for them to be negatives or zeros or whatever, so you're asking me, Isn't it a great thing that ratepayers get this share? Well, it's great with hindsight, but I come back to, I don't think that the regulated utility should be engaged in the risk-taking game of transactional services. 1015 MR. CASS: You're talking transactional services in general then, not just the commodity element bundled with transactional services? 1016 MR. FOURNIER: Well, commodity is the risky area, I appreciate the bundling can be storage, there can be transportation part of it, that's not really the area, the cost element that has a lot of volatility, but the price of the commodity does, and your questions are focussing on the gross margin related to commodity and it was in that context that I was expressing my concern. 1017 The fact that they're bundling it with storage and transportation doesn't take away from the fact there's a lot of risk, in my eyes, of the scope for misjudgment in purchasing gas for trading purposes. 1018 MR. CASS: All right. But if you consider there to be that risk that's not justified by a certain return, then you would surely agree with me that that risk is not justified to be taken on by a party that achieves an even lower return; right? 1019 MR. FOURNIER: You're getting into a question of return. The regulated utility has an approved return which reflects its current risk profile and if you increase that risk, then the next thing we'll see is utilities saying, We have higher risk, now we have to have a higher return. 1020 The non-regulated entity such as Enbridge Gas Services is unregulated. If they take on a lot more risk, good for them. If they can make an awful lot of money, good for them. If they can lose their shirt, good for them. That's unregulated activity. That's a whole thing that to me is -- trading of gas is about -- the regulated natural gas utility whose job is to secure system gas supplies and deliver it to their customers at a reasonable cost is what their job is. It is not speculating in gas with the potential of, Hey, we'll make $5 million and we'll share some of it with you. That's not their job. Their job is to use prudent gas purchase practices and demonstrate to this Board that the gas they've purchased was purchased prudently, and then whatever this Board says, fine, then pass those gas costs through to the ratepayer. 1021 This company should not be either making money or losing money trading in its gas purchase activity. That's my view. 1022 MR. CASS: Can I just put this simple proposition to you, Mr. Fournier, and see if you agree or disagree. If a party considers that the risk associated with a certain return is too high, then it would follow, would it not, that that risk is too high when associated with an even lower return; is that not right? 1023 MR. FOURNIER: If the party's risk is higher, then that party would normally want to have a higher return, yes. So if he has a higher risk but he's getting a lower return, he should be examining if he's in the right business or not, I suppose. 1024 MR. CASS: Right. Thank you. Would I take it that you would agree that if the risk of these commodity deals could be addressed in the utility with insurance or some other protection, then you would not have this concern? 1025 MR. FOURNIER: That's a hypothetical. I still hold to my principle that I don't think that the regulated utility should be in the gas trading game. The fact that there may be some revenues credited against the cost of service because they're doing this activity doesn't all of a sudden make it, in my eyes, an acceptable activity. 1026 MR. CASS: Can we move on to some questions about the Union storage contract? 1027 MR. FOURNIER: Thank you. 1028 MR. CASS: IGUA is taking a position in this case, Mr. Fournier, with regard to the non-cost-based rates under the new Union storage contract; am I right? 1029 MR. FOURNIER: Yeah, I think -- let me just remind myself what we had said. We didn't address that in the evidence. That was the other issue that got dropped. 1030 My understanding is, and correct me, is that you -- Enbridge has renegotiated a contract, it really has another two years to go, and the terms of that contract with Union would move its -- the storage component of that contract from a cost-based rate to a market-based rate. Do I understand that correctly? 1031 MR. CASS: I believe you've summarized IGUA's position. And you would agree with me that the Board has, in previous cases, addressed the issue of when these M12 contracts come up for renewal, whether they should move from cost-based rates; right? 1032 MR. FOURNIER: I know they've been discussed in a number of cases in the past. I don't think the Board has ruled definitively on how -- well, again, I'll give you my understanding, and correct me if I am wrong. 1033 My understanding is certainly in the case of Union Gas, that Union's storage costs for its own system requirements are to be cost-based; but that Union is allowed to charge customers that are ex-franchise market-based rates. 1034 What I am not -- so in the case of Gaz Metro, for example, of several years ago, the rates Union was were charging Gaz Metro for storage were moved to market-based rates. 1035 I've always had the understanding, but I haven't gone back and checked in depth past decisions, but it was my understanding that ex-franchise really meant ex-Ontario; that the rates that Union was to charge, in other words, Enbridge for storage should be also market-based rates. But I don't have any reference for that. That's just what I had in my own mind. 1036 What I am now aware of, however, is that last October, this Board advised stakeholders that it intended to undertake a review of a number of issues in the regulation of the Ontario gas market, and among those issues were some related to how the Board might continue to regulate storage. 1037 MR. CASS: Okay. We can come to that. Let's just come back, then, to your understanding of these decisions. Did you look at any of these decisions before formulating IGUA's position with respect to the new Union storage contract for Enbridge? 1038 MR. FOURNIER: I think the position that we will be taking we'll be taking in argument. I'm not sure that we have come to the -- I can't sit here and say today, until I've had a good chance to go through with Mr. Thompson what he's learned through cross-examination, I can't say to you this is our defined, explicit position today. 1039 MR. CASS: I see. So IGUA hasn't actually landed on its final position. 1040 MR. FOURNIER: I haven't had a chance to sit down with Mr. Thompson. 1041 MR. CASS: Well, perhaps just to cut right to the end of a series of questions, then, Mr. Fournier, and give you an opportunity to respond, you referred to the Natural Gas Forum, but what I would like to suggest to you is that it's reasonable, is it not, to suggest that the Natural Gas Forum is more likely to address issues around storage not already dealt with by the Board, such as further deregulation of storage, than it is to reconsider issues that have already been addressed in previous decisions; would you agree with that? 1042 MR. FOURNIER: Put it another way, I would -- certainly the question of the regulation now or pricing of storage sold to third parties, both Enbridge and Union hold storage, so if they are selling storage to Acme Marketing, my understanding is that that's unregulated in the marketplace. So if the OEB is to have a discussion or a review of storage and the regulation of storage, I take that to then be the regulation -- the use of and regulation of storage that is for the system requirements of the gas utilities in Ontario, and I would assume probably that includes Kitchener and the City of Kingston, to the extent that they may hold any storage. I don't know if they do or not. 1043 MR. CASS: Well, my question was, really, are you expecting the Natural Gas Forum to reopen issues that have been decided by the Board or to look at new issues, further issues related to deregulation of storage that the Board has not yet addressed? 1044 MR. FOURNIER: I think the Board -- I've got a copy of that. Oh, there it is. Mr. Thompson just showed me the new notice. There's a date on the front of this, June 24th, this notice for the gas forum, and it seems to say: 1045 The Board has decided to focus the Natural Gas Forum in three areas," the second one being the regulation of storage and transmission. It doesn't say any more than that and I'm not certainly not going to sit here and prejudge what the Board wants to do. 1046 MR. CASS: Okay. 1047 MR. FOURNIER: I suspect they'll tell us. 1048 MR. CASS: So, like me, you really don't know what the Board's intention is in the Natural Gas Forum in relation to past decisions on storage. 1049 MR. FOURNIER: Mr. Cass, if you, with your vast resource of Enbridge behind you, don't know, then I can assure you that I don't have any more knowledge of it than that. 1050 MR. CASS: All right. Thank you. 1051 Now, to the extent that IGUA has members in the Union Gas franchise areas, would those members benefit from amounts that Union is able to sell storage for above cost-based rates? 1052 MR. FOURNIER: It's been a while since I looked at Union's transactional services, but yes, I believe there is a similar kind of transactional services arrangement with Union and there is some -- to the extent that there is revenue made, there is some sharing. Now, whether it goes -- Union, of course, is a much higher -- about 66 percent of their market is industrial category, so presumably there's probably more. If they are sharing revenue, more goes to the industrial sector than it does in the Enbridge case. 1053 MR. CASS: Sorry, Mr. Fournier, just for clarity, I'm not back to transactional services, I'm still on so-called market-based rates for storage. And all I was asking you was to the extent that Union achieves something more than cost-based rates when it sells ex-franchise storage, that IGUA members would receive some of the benefit from the, I think sometimes it's called the premium, but the amount by which market-based rates exceed cost-based rates. 1054 MR. FOURNIER: That's revenue that is shared in a transactional services environment, is it not? 1055 MR. THOMPSON: It simply flows through a TS Union account, I think is what he's saying. 1056 MR. CASS: To the benefit of ratepayers. 1057 MR. FOURNIER: I don't disagree. 1058 MR. CASS: Okay. And can you help me with the extent to which IGUA members are represented in Union franchise areas as opposed to Enbridge franchise areas. Is it greater or less for IGUA members? 1059 MR. FOURNIER: In terms of volume, you mean? Number of industrials is much higher in the Union case. 1060 MR. CASS: Right. So would it not be the case that IGUA members might well seek to favour the market-based rates for ex-franchise customers in order to receive that benefit? 1061 MR. FOURNIER: It depends how you define ex-franchise. I have a lot of members in Quebec. I must say they were somewhat upset, and I shared with them that, when Gaz Metro lost the opportunity to continue to have cost-based rates, their cost of storage went up. One thing they did was they cut back on the storage they held. I have to look at the benefits to all of my members. 1062 MR. CASS: All right. 1063 MR. FOURNIER: I don't want to cut off my nose to spite my face, kind of thing. 1064 MR. CASS: So if you have an IGUA member for example whose only location is in a Union franchise area, is that member not going to want to see the sharing of the excess of market-based over cost-based? 1065 MR. FOURNIER: Well, I have -- the nose count is today it's about 47 members, I believe, and I have to balance the interests of all of them. 1066 MR. CASS: Yes. 1067 MR. FOURNIER: So the fact that it may benefit one, if it's harming 25 located in Quebec, many of those, mind you, have plants in both provinces, and indeed, in all three utility franchise areas, or four including Gazifere, so you have to be very careful -- so I can't give you a straight yes or no. Yes, it may help one, indeed, but IGUA's position may well be that we will take no position where to take one side or another of an issue could harm some members. 1068 MR. CASS: Right. So you indicated that there is this balancing that needs to be done as to the interests of various IGUA members and I take it then that that hasn't been done yet. You haven't landed on what is the best position for IGUA as a whole. 1069 MR. FOURNIER: In terms of the question of the regulation of storage and whether it should be market-based or not, no, I think this Natural Gas Forum is going to give us a -- if I recall, I think this has been a subject that has been tossed about for several years. It was certainly raised by Enbridge in, I think, initially the 2003 case, it may have been 2002, I forget which, there was a proposal put forward at one stage for an Enbridge storage entity. It didn't get -- if I recall, it did not come forward to hearing, it was shelved. But it certainly got us all focussing again on the storage issue. So it's something we've been looking to seeing either a generic hearing or at least a regulatory opportunity to address. 1070 MR. CASS: All right. Well, Mr. Fournier, I believe as far back at 1997 in the Union 494-03 case, the Board was addressing renewal of M12 contracts at market-based rates. Can you help me with, given that the issue has been around at least since 1997, why IGUA hasn't landed on its balancing of these interests and its position on this issue? 1071 MR. FOURNIER: Well, I think my recollection earlier is we were advocating cost-based rates for all storage used for and by the regulated utilities, and I included Gaz Metro in that, if Union or Enbridge had excess storage capacity that they were able to demonstrate to the OEB that they did not need for in-franchise requirements, that we had no problem with the regulated utility seeking and obtaining whatever they could get for it, in other words, market-based rates. I think that's been our position since '97. 1072 MR. CASS: Let's just move to a few questions on deferred taxes, Mr. Fournier. 1073 I take it that there would be many of your IGUA members who would have more than one line of business within their companies; would you agree? 1074 MR. FOURNIER: Yes. 1075 MR. CASS: And I take it you would agree with me that such a company could be profitable in one line of business but not profitable in another line? 1076 MR. FOURNIER: Correct. 1077 MR. CASS: And in respect of the profitable line of business, there could be taxes payable for that company; right? 1078 MR. FOURNIER: Yes. 1079 MR. CASS: But taking into account the results of the non-profitable line of business, the taxes payable could be reduced or could be zero; right? 1080 MR. FOURNIER: Correct. 1081 MR. CASS: So the taxes payable for the profitable line of business would be one number, but the taxes actually paid when taking into account the other line of business could be a lesser number or zero; right? 1082 MR. FOURNIER: I'm with you. 1083 MR. CASS: Right? So when looking at the profitable line of business, there is a difference between the taxes payable and the cash taxes actually paid; correct? 1084 MR. FOURNIER: Well, let's stop. I don't claim to be a tax expert. But certainly my knowledge of most corporations that have a number of different lines of businesses, or indeed they have past years' activities too they can draw upon, they arrange their affairs in such a way of course to minimize the taxes they have to pay. So if they have losses that they can draw upon, they will do so, but most entities, to my knowledge, will be paying income tax as the entity. So if, for example, and I'm talking off the top of my head here, but say Ford Motor Company, if they have the Ford division and the Mercury division and the Lincoln division and the truck division or something like that, I don't think each of those divisions pays taxes. So the truck division may be making a fat profit, but maybe the Ford Motor Car division this year is not making a big profit. 1085 So when Ford does its income taxes it takes all of its activity, uses all of its tax treatments that it can use and ends up calculating what taxes it reports to the tax collector that it's going to pay. So that's what I see with the normal large corporate entity. 1086 I know, for example, with TransCanada PipeLines, now TransCanada Corporation, it pays taxes as a corporation so whether, if it has some entities that are making more or less, it pays it as one corporation. Taxes collected by the main line from its main line shippers are notional taxes. They're calculated based upon the revenues and expenses and allowances of that main line, but they may bear no relationship to what the corporation pays as a whole. 1087 MR. CASS: Let's come back to your example of Ford Motor Company and the truck line of business. If there was a government program for truck manufacturing in Canada which was tied to taxes payable, the taxes payable for the truck line of business might well be different than the taxes paid for Ford Motor Company; right? 1088 MR. FOURNIER: That case is correct, except that the truck company is not a regulated as is Enbridge Gas Distribution and in my example of TransCanada PipeLines in the main line, the main line collects income taxes from its tollpayers as approved by the NEB based upon, if you like, notional taxes payable, because the real taxes that are paid are not paid or paid by its mother corporation. 1089 Enbridge Gas Distribution, I understand, is in a different position, and correct me if I am wrong, but I understand that it's within the Enbridge family of companies that the different entities pay their own taxes. So if -- correct me if I am wrong, but that's what my understanding is. So the income taxes that are collected by Enbridge Gas Distribution from its ratepayers are those that it reports to the OEB and are approved and, I understand, are paid. 1090 MR. CASS: But you understand that the taxes payable that are the subject of the company's request in respect of deferred taxes are taxes payable by unregulated companies; right? 1091 MR. FOURNIER: Prior to - what's the date I want - October 7th, 1999, the assets that those deferred taxes were accumulated on were to the account of Enbridge Gas Distribution, Enbridge Consumers Gas as it was then. What happens after that point in time, I think, gets into, Now you see 'em, now you don't. I mean, I'm somewhat baffled of why, when the assets were sold to the Enbridge affiliate, I think it was Enbridge Gas Services, if that's correct, they were then further sold to a numbered company. I don't think that was done to provide income to lawyers to set up and establish the numbered company and do all the paperwork that was involved in it. I assume it was done in order to generate some tax savings. 1092 MR. CASS: Right. But whether you're baffled by that or not, Mr. Fournier, you would agree with me that those are unregulated companies; right? 1093 MR. FOURNIER: They are unregulated, quite right. 1094 MR. CASS: Thank you. 1095 Now, looking at your evidence on deferred taxes -- I'm sorry, Mr. Chair, I'm coming to the end. I'm not sure what you're thinking in terms of a break, but I'm hoping not to be too much longer. 1096 MR. BETTS: I think a break at this point would only be in the interest of any parties that feel they need a break, and I would be happy to take a short break if that's -- 1097 MR. FOURNIER: I'm in good form. I'm ready to carry on if Mr. Cass... 1098 MR. BETTS: How is everybody out there? Is there anybody that would like a short break? 1099 MS. DeMARCO: Mr. Chair, if I could speak up for just two seconds, if I can just excuse myself with the consent of the Board. 1100 MR. BETTS: Do you want us to pause at this point? 1101 MS. DeMARCO: I'm fine if you can continue. 1102 MR. BETTS: Then feel free to do that. And everybody else is all right? I appreciate you bearing with us, and Mr. Fournier, I appreciate you doing the same. Please continue. 1103 MR. CASS: Now, looking at paragraph 21 of your evidence, Mr. Fournier, on the notional utility account, you make reference to an evidentiary basis for determining the amount actually paid on account of taxes. So I understand, then, from that that your position is to look at taxes actually paid; is that right? 1104 MR. FOURNIER: That is our -- the basis of our evidence, yes. 1105 MR. CASS: All right. And further, I understand -- 1106 MR. FOURNIER: And I understand also, I'd have to go and find that reference, but at one time it was Enbridge Gas Distribution's position also. 1107 MR. CASS: I see. Can you provide me with that reference? 1108 MR. FOURNIER: You may need that five-minute break. I've got it in here somewhere and I've got to see if I can find that. We can shorten it up if Mr. Thompson were to throw me the right reference. But I'm not sure that's appropriate. 1109 MR. CASS: Are you referring to matters that Mr. Thompson would have pursued on his cross-examination with the panel? 1110 MR. FOURNIER: I believe back in one of the various -- I mean, this first came up after the Board's initial decision in - if I can remind myself - I think it was either the 2000 or the 2001 case when the Board made its ruling with respect to the $50 million that the company might be allowed to recover -- when the notional utility account was established. 1111 That was then -- there's been various challenges within the OEB and the courts, and I'd have to find out which document it was. 1112 MR. CASS: Do you have Exhibit K.7.3, Mr. Fournier? 1113 MR. FOURNIER: I believe I do. Yes, I do. 1114 MR. CASS: Can I refer you to page 77 of Exhibit K.7.3? It's at tab 2(c). 1115 MR. FOURNIER: Yes. 1116 MR. CASS: Do you see paragraph 3.1.4? 1117 MR. FOURNIER: Yes. 1118 MR. CASS: And that paragraph indicates the position of the company is that the notional utility account can be -- 1119 MR. FOURNIER: Let me just read it. 1120 MR. CASS: Certainly, I'm sorry. 1121 MR. FOURNIER: Okay. 1122 MR. CASS: Now this is the Board decision. Do you have any reason to think that the Board has misstated the company's position in the first sentence of paragraph 3.1.4? 1123 MR. FOURNIER: I have no such reason, no. 1124 MR. CASS: All right. Can we come back, then, to where we were. I was asking about IGUA's position. It was my understanding that IGUA's position is that it should be cash taxes actually paid that are looked at, and then the next step, I just want to confirm with you, is that it's IGUA's position that one should look not just at the numbered company, which we've been called Rentco, but also at ESI and put the two together; is that right? 1125 MR. FOURNIER: Just give me one minute. It is both of them. 1126 MR. CASS: Right. And I believe IGUA actually asked an interrogatory on this to get the cash taxes actually paid when one puts the two companies together. 1127 MR. FOURNIER: I think that's correct, yes. 1128 MR. CASS: It's Interrogatory 89, I think it may be. I'll just get the -- it would be Exhibit I, tab 13, schedule 89. 1129 MR. FOURNIER: I have schedule 71. Is that the one -- was it 71, I13 -- 1130 MR. CASS: 89, I'm sorry, Exhibit I, tab 13, schedule 89. 1131 MR. FOURNIER: Right. I have it here. 1132 MR. CASS: And if you look at the response, it indicates the actual cash taxes paid by ESI and Rentco are as follows. Then looking just at income tax for ESI, the total opposite income tax, looking over at the right-hand side, is just over 2.3 million, and Rentco, the total, looking over at the right-hand side, is just over 10.9 million; do you see that? 1133 MR. FOURNIER: Yes. 1134 MR. CASS: So looking at it from the point of view of cash taxes actually paid for the two put together, ESI and Rentco, it's the sum of 2.3-odd million and 10.9-odd million; right? 1135 MR. FOURNIER: That is the sum of those two. 1136 MR. CASS: All right. Can I just, then, come back to your evidence. I know that you've corrected this, but coming back to your evidence, you presented a calculation in paragraph 22, and again I know you corrected it, but I just want to understand what you were trying to calculate in paragraph 22 of your evidence. Can you help me with that? 1137 MR. FOURNIER: Well, there's taxes payable and then the impact of capital cost allowance and depreciation, and it's -- when I look at Exhibit A8, tab 5, schedule 2, appendix 3.1, I see the sum of depreciation from '99 when the -- I have to get this right. Capital cost allowance on the pre-additional -- the '99 additional rental assets under pre-closing rental assets gives us 24.79 million. And then there's depreciation, so you deduct the depreciation from the capital cost allowance and you get a net tax payable of 5.7 whatever it is, it comes out with -- tax savings of 5.2 and then the taxes payable of 5.7. 1138 MR. CASS: Well, what I'm suggesting to you, Mr. Fournier, is that this calculation in paragraph 22 is not an actual cash taxes paid calculation, it's a mixing of the $10.9 million of actual cash taxes paid by Rentco with something else; right? 1139 MR. FOURNIER: Well, my understanding is, and correct me if I am wrong, is that Enbridge has put forward that the -- I'm trying to find where our paragraph 22, background to that, top of the page: 1140 "The evidence provided by Enbridge Gas Distribution indicates the total income taxes actually paid by the numbered company was about 10.9 million." 1141 And that's on that schedule 89. 1142 MR. CASS: Right. So just stopping there, that is a taxes-actually-paid number; right? 1143 MR. FOURNIER: Right. 1144 MR. CASS: But I suggest to you that paragraph 22 is not providing a taxes-actually-paid number. 1145 MR. FOURNIER: But the evidence also indicates that there were tax savings of $10.3 million; right? 1146 MR. CASS: Well, you're reading from paragraph 22. I believe that's been corrected in your evidence. 1147 MR. FOURNIER: No, paragraph 21. The fifth line down, we go on to say: 1148 "The evidence also indicates that the rental program business assets held by ESI produce tax savings of about 10.3 million." 1149 MR. CASS: Is that not the number that you corrected though, sir? 1150 MR. FOURNIER: I guess we should, the tax savings -- so that should come above the 5.2. 1151 MR. CASS: Can we just do it this way -- sorry. 1152 MR. FOURNIER: So that should be 5.2 not the 10.3. So subtracting the 5.2 from the 10.9 gives you the 5.7, which is what we say is the amount that it would be appropriate for Enbridge to recover from the Board's notional tax ... 1153 MR. CASS: Would you agree with me that if what IGUA is proposing is an actual-taxes-paid calculation for the two companies, then what one should do is sum the taxes actually paid by Rentco and the taxes actually paid by ESI? 1154 MR. FOURNIER: You're asking me to give an opinion -- I'm not a tax expert. What I would have thought -- I mean, if we went out and hired -- saying we, everybody in this room -- each hired a tax expert and said, Now go through the books of all these affiliates and go through all these transactions and come up with a recommendation on what the recoverable taxes should be, you'd get 20 different answers, I'm sure of it. What struck me was that Enbridge went out to KPMG, got this 12-page letter, went through all the, I guess the transactions in various different books of account or records of the different entities, and what KPMG ended up doing saying, arithmetically, when you added one plus one it was two and we agree it was two. 1155 But I'm struck with the fact that Enbridge did not ask KPMG to give an opinion as to what the proper taxes payable were actually paid or what Enbridge should be receiving under the Board's notional account should be. They say on page 12 of that: 1156 "The foregoing procedures are substantially less than either an audit or a review would provide. We make no representations regarding questions of legal interpretation or regarding the sufficiency for your purposes of the procedure. We make no representations regarding the adequacy of the disclosures or regarding any other material fact that has been omitted. This agreed upon procedures report is for the sole use ...," and goes on. 1157 So they did what Enbridge Gas Distribution asked them to do, check our mathematics. But Enbridge hasn't come in with an independent outside authoritative tax expert's evidence to say, We've looked at all the books of accounts of all the entities that were involved in this and it is our conclusion, based upon the tax credits available and the revenue received on, and on and on, the amount of taxes that would be appropriate on the Board's notional tax account is X, Y, Z dollars. Enbridge hasn't done that. 1158 You can't ask me, who is not -- I am not a tax lawyer I am not a tax accountant, I am not a tax expert. Every time I file my own personal taxes, Revenue Canada says I made a mistake. So my opinion, I think is fairly worthless in this other than to say that I think that the only thing Enbridge Gas Distribution should be allowed to recover in a notional account is the actual taxes that were paid, taking into account all of the tax credits that were there and to ask me otherwise is -- I'm sorry, I don't see the value of what my opinion is. 1159 MR. CASS: Mr. Fournier, I'm just trying to understand given your statement given your level of tax expertise, and I think you used the word "worthless" in relation to your own opinion, I'm just trying to understand why you put in the evidence you did? 1160 MR. FOURNIER: We have taken your evidence, and have seen that you have said actual taxes paid where the -- I've got to go back to it -- your average says actual taxes paid was about $10.9 million between September -- December 16 and May 7. But the evidence also suggests that ESI received tax or realized tax savings of about 5.2 million. So that that suggests that the actual taxes paid would be about $5.7 million. 1161 I also note by the way, and I understand this is now -- can you confirm to me that Exhibit I, tab 16, schedule 155 is now a document that is before the Board and is not a confidential document? 1162 MR. CASS: That is correct, Mr. Fournier, yes. 1163 MR. FOURNIER: So I note the statement that was in that, and this I believe is an Enbridge Gas Distribution report to the Enbridge Inc. Board of directors, that the sale of ESI produced the proceeds of a billion dollars, a gross accounting gain of approximately 296 million, was netted to 246 million after deducting the regulatory asset relating to the deferred taxes. So they already took into account, at least they realized that that 50 million bucks may not be there, so the 296 of gross accounting nets the 246. And it doesn't make any reference to the $42 million in tax savings that the Board already took into account in its '99 decision that Enbridge also realized. 1164 So taxes paid, taxes payable, these assets got passed on to a third party. All I'm trying to -- all that we can do in IGUA is look at your evidence and come to a conclusion as to what the Board intended in its 1999 decision. It's only the Board that can make that interpretation. Our reading of it, our recommendation is an award of $5.7 million. 1165 MR. CASS: Mr. Fournier, I'll give it one more try and then maybe we should wrap this up fairly soon, but I'm just trying to understand why, on the one hand, you would tell the Board and parties that your views on these tax matters are, in your own words, worthless, but then put in evidence and espouse these views to the Board. What value do they have if they're from someone that has no expertise and who himself calls them worthless? 1166 MR. FOURNIER: You referred me to schedule 89 and you summed these two numbers up and you came to the $13.2 million, whatever it is, and you asked me, Isn't that -- I refer you back to our interpretation of your evidence and suggest you're entitled to 5.7 million. Well, that's for argument, is it not? And I can only tell you what your position is. That's how I got that. 1167 MR. CASS: Do I have it right that your position is that it should be cash taxes actually paid, looking at ESI and the numbered company on a combined basis? 1168 MR. FOURNIER: On a combined basis, including recognition of the tax savings that were realized. 1169 MR. CASS: Well, of course. Recognition of tax savings realized would be included in cash taxes actually paid; right? 1170 MR. FOURNIER: Let's go to paragraph 22 and then you can -- in IGUA's view, the ultimate owner of the assets, which was EI, the actual taxes paid were the net amount of, and we've replaced that with $5.7 million. This amount grossed up for income taxes should be included in EGD's revenue sufficiency for 2005. That's our position. 1171 MR. CASS: Right. But you asked and got a response to an interrogatory for the actual cash taxes paid by the two entities, and that's Interrogatory No. 89; right? 1172 MR. FOURNIER: That would appear to be. 1173 MR. CASS: Perhaps we should leave it there, Mr. Chair. Thank you for your patience. 1174 MR. BETTS: Those are all your questions, Mr. Cass? 1175 MR. CASS: Yes. 1176 MR. BETTS: Mr. Thompson, do you have questions in redirect? 1177 MR. THOMPSON: Yes, I just have two, Mr. Chairman, if I might ask them. 1178 RE-EXAMINATION BY MR. THOMPSON: 1179 MR. THOMPSON: Mr. Fournier, you had a discussion with - this deals with transactional services - you had a discussion with Ms. DeMarco with EGD acting as a principal or as an agent in a commodity trading transaction, and you had some discussion with Mr. Cass about EGD's participation in what we've called bundled commodity transactions. I just wanted to get IGUA's position with respect to the transactional services, and this is what I'm talking about: Peak storage, off-peak storage, loans, exchanges, load-balancing and transportation assignments. What is IGUA's position with respect to the utility's obligation to maximize the revenues it receives from those activities? 1180 MR. FOURNIER: Well, I certainly understand that the utility has to own storage and perform all of those functions, peaking service and so forth; and the fact that it has to do that in order to serve its ratepayers, its customers, that there is scope for the company to add value to those assets when they don't need all that they have or are going for the customer base. And an argument then can be made, Well, why not maximize the value of that and give a portion of that back as a benefit to ratepayers and some to shareholders, I guess. 1181 But I go back to -- I think our basic principle is that Enbridge Gas Distribution is there to serve its customer base. It's a regulated utility. It incurs costs to serve its customers and those are appropriate costs that are approved. It's nice, I suppose, if they can realize some value and do some credits back, but I don't think that should be the driver. I think IGUA holds that the company should be doing everything it can to minimize its costs and keep its rates in line; but that if it does do things like transactional services of the nature like you just described, it should do so purely as a sideline. They should not be drivers in their own right for EGD activity. 1182 And if it wasn't there, so if rates were slightly higher because they didn't realize a $5 million or $10 million credit over the great mass of Enbridge's gross revenue requirement, it's not a big thing one way or the other. 1183 MR. THOMPSON: Thank you. 1184 Now, the other question I have relates to the discussion you've been having with Mr. Cass about the cash taxes issue. In your discussion with him, you did mention the refund amount of $42 million described in the Board's 1999 decision, and you also made reference to the gain on the sale and the minute in the report provided to the board of directors. 1185 MR. FOURNIER: Schedule 155, yes. 1186 MR. THOMPSON: Right. And my question is: When you were describing the cash taxes payable recovery scenario with Mr. Cass that's in the testimony, did you intend to -- does IGUA intend to exclude consideration of the refund or the gain on the sale or any other recovery options that emerge in the evidence here? 1187 MR. FOURNIER: I think overall, Enbridge Inc. is the ultimate beneficiary of all of the proceeds of the sale of the rental appliance business, and the application, then, of tax credits, such as -- Enbridge Inc. is the ultimate beneficiary. When Enbridge Inc. sold ESI to the third party, Centrica -- is that correct? It doesn't matter -- 1188 MR. THOMPSON: Yes. 1189 MR. FOURNIER: -- and received a monetary consideration for the sale, I would assume both Enbridge Inc. and the purchaser are sophisticated enough to take into account the tax situation on the deferred taxes on the rental appliances, in the same way that had there been any debt held by ESI when it was sold, that the purchaser either assumes the debt or has the debt removed in the process transaction. 1190 So whatever EI realized in the sale of ESI had to take into account any tax payable liability that the purchaser, Centrica, took, from my humble knowledge, that would be logical to me, so that whatever money EI received for the sale of ESI, presumably, then, was adjusted so that the new purchaser, the new owner of the assets or the new holder of whatever tax liability there was, that this was recognized in the amounts paid. 1191 So the fact that there may have been taxes payable, I have no -- I haven't seen the tax statements. I believe they were seen by parties to the hearing under the confidential side of this, so whether the taxes were actually paid or not, I can't say on that, but if some were paid before the sale, then that's what should be recoverable. 1192 If that was responsive ... I tend to ramble. 1193 MR. THOMPSON: My question was quite simple and I wanted to get your response to Mr. Cass's questions explained if I could, because when you were discussing the cash taxes option that's set out in the IGUA testimony, you also mentioned the refund amount and the gain amount and all I wanted to understand is whether, when discussing this option that's set out in the IGUA testimony, you intended for the Board to treat that as the only approach or are you suggesting the Board is free to take into account the refund amount, the gain amount, and whatever else the Board considers to be appropriate? 1194 MR. FOURNIER: I refer to the fact that if 20 of us went out and hired 20 different accountants or tax lawyers to look at this, you would get 20 different opinions. I certainly don't suggest that the position we have laid before you is the only position and, indeed, the starting point has to be an interpretation of what the Board meant in its '99 decision when it set up the notional deferral account in the first place. 1195 So there's a host of options open to the Board, yes, but I would -- but we've given you our views on what we would award, but at the end of the day, this is your decision. 1196 MR. THOMPSON: Thank you. Those are my questions. 1197 MR. BETTS: Thank you, Mr. Thompson. 1198 [The Board confers] 1199 MR. BETTS: Board panel has no questions of Mr. Fournier. Thank you very much for your appearance and your clarification of your evidence. 1200 I did fail to thank the previous panel, I see two of the members are still here and please extend to your fellow panel members my thanks for their appearance. I don't know whether we'll see them later or not, but they were helpful to a very difficult issue, so thank you as well. 1201 And with that, I believe we've concluded the day's activities. Are there any matters that should be brought to the Panel's -- 1202 MR. CASS: No, Mr. Chair, not that I'm aware of. 1203 MR. BETTS: It would appear then, and if I understood correctly, I was given advice that it would have been difficult to bring the fiscal year-end panel to the Board tomorrow and that is the reason that we have allowed the original schedule of Monday morning for that issue to be kept as is. And that's why tomorrow is more appropriate to be used for other purposes. 1204 So tomorrow, we will not be sitting. We will be therefore adjourning at this point to reconvene on Monday morning at 9:30. 1205 MS. DeMARCO: Mr. Chair, I have just one further question or more of a request for a direction in relation to any materials that might be filed to assist the Board when parties are undertaking oral argument, and specifically, would it be permissible for a structure or an outline to be filed in addition to the oral argument? 1206 [The Board confers] 1207 MR. BETTS: Ms. DeMarco, that would probably be very helpful similar to the packages that support motions, that would be very appropriate and would assist the Panel, so we'd welcome that. 1208 MS. DeMARCO: Thank you, Mr. Chair. 1209 MR. BETTS: Is there anything else that the Panel needs to put its attention to? 1210 Then it looks as though we can all celebrate Canada Day somewhere else and I trust we will all take advantage of that break and it looks like we have a bit of extended break to catch up on the myriads of things that are piling up on desks. So thank you all to this point in the hearing. We look forward to seeing you all on Monday morning. We'll stand adjourned. 1211 --- Whereupon the hearing was adjourned at 4:40 p.m.