Rep: OEB Doc: 1388Q Rev: 0 ONTARIO ENERGY BOARD Volume: 10 5 JULY 2004 BEFORE: R. BETTS PRESIDING MEMBER P. NOWINA MEMBER P. SOMMERVILLE MEMBER 1 RP-2003-0203 2 IN THE MATTER OF a hearing held on Monday, 5 July 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 5 JULY 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: [19] ENBRIDGE GAS DISTRIBUTION INC. PANEL 1 ON CHANGE IN YEAR-END - HARE, RYCKMAN, GIRIDHAR, ROSS, RYCKMAN, GRUENDING: [50] EXAMINATION BY MR. CASS: [59] CROSS-EXAMINATION BY MR. POCH: [216] CROSS-EXAMINATION BY MR. SHEPHERD: [241] PROCEDURAL MATTERS: [248] SUBMISSIONS BY MR. SHEPHERD: [249] SUBMISSIONS BY MR. CASS: [252] SUBMISSIONS BY MR THOMPSON: [257] SUBMISSIONS BY MR. JANIGAN: [260] SUBMISSIONS BY MR. DINGWALL: [263] SUBMISSIONS BY MS. DeMARCO: [266] REPLY SUBMISSIONS BY MR. SHEPHERD: [271] FURTHER SUBMISSIONS BY MR. CASS: [279] ENBRIDGE GAS DISTRIBUTION INC. PANEL 1 ON CHANGE IN YEAR-END - HARE, RYCKMAN, GIRIDHAR, ROSS, RYCKMAN, GRUENDING; RESUMED: [295] CONTINUED CROSS-EXAMINATION BY MR. SHEPHERD: [302] CROSS-EXAMINATION BY MR. JANIGAN: [666] PRELIMINARY MATTERS: [818] ENBRIDGE GAS DISTRIBUTION INC. PANEL 1 ON CHANGE IN YEAR-END - HARE, RYCKMAN, GIRIDHAR, ROSS, RYCKMAN, GRUENDING; RESUMED: [845] CROSS-EXAMINATION BY MR. THOMPSON: [852] 10 EXHIBITS 11 EXHIBIT NO. K.10.1: ILLUSTRATIVE EXAMPLE OF CHANGE IN YEAR-END [41] EXHIBIT NO. K.10.2: QUARTERLY ROE PATTERNS EXISTING YEAR-END [495] EXHIBIT NO. K.10.3: ILLUSTRATIVE EXAMPLE OF CHANGE IN YEAR-END WITH ADDITIONAL COLUMN, COLUMN T [1288] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.10.1: TO PROVIDE THE FULL SET OF REGULATORY SCHEDULES FOR THE STUB PERIOD WITH AND WITHOUT THE $4.5 MILLION INCREASE [378] UNDERTAKING NO. J.10.2: TO UPDATE WHAT IS PROVIDED IN UNDERTAKING J.10.1 TO REFLECT THE SETTLEMENT PROPOSAL [769] UNDERTAKING NO. J.10.3: TO PROVIDE WHETHER THE REVENUE DEFICIENCY OF $60.6 MILLION RECORDED IN THE SETTLEMENT AGREEMENT REFLECTS THE SETTLEMENT OF THE ENVISION PROJECT AND THE GAS-COST CHANGES APPROVED FOR JULY 1, 2004 [786] UNDERTAKING NO. J.10.4: TO PROVIDE UPDATED CALCULATION OF THE DELIVERY-RELATED REVENUE REQUIREMENT WITH THE GAS COSTS REMOVED AND A PROJECTED DELIVERY-RELATED DEFICIENCY/SUFFICIENCY FOR THE 2005 TEST YEAR [798] UNDERTAKING NO. J.10.5: TO PROVIDE THE IMPACT OF THE $18.4 MILLION ELIMINATION OF DEFERRED TAXES AND THE IMPACT OF A $1 MILLION INCREASE OR DECREASE IN THE TRANSACTIONAL SERVICES REVENUE EMBEDDED AMOUNT; TO PROVIDE A CALCULATION WHICH GIVES THE PERCENTAGE OF THE ROE OF 9.76 PERCENT, WHICH IS THE ECONOMIC FORECAST FOR THE JANUARY THROUGH DECEMBER 2005 12-MONTH PERIOD, AND PROVIDE THE RATIO OF THAT CONSENSUS FORECAST ROE AS WELL AS AN ADDITIONAL CALCULATION [946] UNDERTAKING NO. J.10.6: TO PRODUCE ANY EXCERPTS FROM THE UNION CASE ON WHICH THEY ARE RELYING AS A PRECEDENT TO SUPPORT THE RELIEF THAT THEY SEEK IN THIS CASE [984] UNDERTAKING NO. J.10.7: TO PROVIDE A COPY OF THE YANKEE GAS SERVICES DECISION RE CHANGING YEAR-END DATE [1021] UNDERTAKING NO. J.10.8: TO PROVIDE THE DECISION RE PETITIONS OF THE OFFICE OF ATTORNEY GENERAL AND OFFICE OF CONSUMER COUNSEL FOR AN INVESTIGATION OF OVEREARNINGS BY THE CONNECTICUT LIGHT & POWER COMPANY [1031] UNDERTAKING NO. J.10.9: TO PROVIDE THE EQUITY RISK PREMIUM COMPONENT OF THE BOARD'S ROE [1184] 14 --- Upon commencing at 9:35 a.m. 15 MR. BETTS: Good morning, everybody. Please sit down. 16 Good morning, everybody. Welcome back from our short but, I'm sure, well-enjoyed break for Canada Day. I hope everyone took the time to celebrate Canada's birthday. 17 We concluded day 9, having examined the deferred taxes issue as well as having examined evidence from an intervenor panel provided by IGUA. Today we are scheduled to deal with issues 13.1 and 13.2 relating to the company's proposed change in fiscal year-end. 18 Before we begin, are there any preliminary matters? 19 PRELIMINARY MATTERS: 20 MR. CASS: I have some preliminary matters, Mr. Chair. 21 MR. BETTS: Thank you. Before I take those, can you hear me okay in the back there? Is the volume okay? Is that a little bit of this? I'll maybe put it up a little bit. There. Thank you. 22 Mr. Cass, please go ahead. 23 MR. CASS: To begin with, Mr. Chair, there are answers to two undertakings available. These are Undertakings J.9.3 and J.9.4. Both relate to questions asked of the deferred taxes witness panel. If I recall correctly, I think they were both questions by Ms. Girvan, one for the cost allocation of the deferred taxes amount, and the other was a question about customer communication. Both of these undertaking responses are now available. 24 MR. BETTS: Thank you. We'll take those both now. Thank you, Mr. Cass. 25 MR. CASS: Next, Mr. Chair, the company's updated response to School Energy Coalition Interrogatory No. 158 was sent out to everyone, I believe, on Wednesday of last week. I do have a pile of additional copies if anyone doesn't have it here with them today. 26 MR. BETTS: The Board Panel has a copy, thank you. Does anyone else need a copy that doesn't have one? 27 MS. LEA: Which one was it? 28 MR. CASS: School Energy Coalition Interrogatory No. 158. 29 MS. LEA: Thank you. I think there are some people in the back there. 30 MR. BETTS: I saw two hands go up behind you. Thank you for bringing those copies. That was thinking ahead. 31 MR. CASS: Also, Mr. Chair, the company sent out a short piece of evidence explaining a proposal for the demand-side management plan in respect of what's been called the stub period. That was sent out, I think, on Friday and again I have additional copies here for anyone who may not have received it. It's Exhibit A7, tab 1, schedule 1, appendix 1. 32 MR. BETTS: The Board Panel has a copy, thank you. Do any intervenors need a copy of that? I think we're okay there. Thank you, Mr. Cass. Anything further? 33 MR. CASS: Yes, one last item, Mr. Chair. There is a two-page document that Mr. Ross will be referring to in his testimony today. Again, I think this was sent out on Friday, but I have additional copies here. 34 MS. LEA: Mr. Cass, is this new evidence, or is it evidence already in the record? 35 MR. CASS: No, this is not in the record. This will be referred to by Mr. Ross this morning. 36 MS. LEA: So should we give it an exhibit number now for identification? 37 MR. CASS: I think that would be appropriate, if we could do that. 38 MS. LEA: I think we're at day 10. So K.10.1, please. What's a good title for this exhibit, please? 39 MR. CASS: Illustrative example of change in year-end. 40 MS. LEA: Thank you. K.10.1. 41 EXHIBIT NO. K.10.1: ILLUSTRATIVE EXAMPLE OF CHANGE IN YEAR-END 42 MR. BETTS: Thank you, Mr. Cass. Are there any other preliminary matters for the Board's consideration? 43 MS. LEA: I have one matter I wanted to put on the record, sir. 44 MR. BETTS: Ms. Lea. 45 MS. LEA: Thank you. If there are any parties here today or who are reading the transcript who intend to make argument in this proceeding, make final argument in this proceeding, and haven't yet spoken to me about argument schedule, I wonder if you could contact me, please. You can contact me at the Board, my direct line is 440-7631. Thank you. 46 MR. BETTS: Thank you. Anything else? 47 Mr. Cass, I see that there are some new and also familiar faces at the witness bench. Would you care to introduce them and we will swear in those that haven't been. 48 MR. CASS: Yes, thank you, Mr. Chair. For the next issues, issues 13.1 and 13.2, there is a six-person witness panel, which includes Mr. Ryckman at the end of this particular table. I believe that all have been sworn except for Mr. Gruending and all have been introduced, but perhaps I'll go through them and reintroduce them to the Board. 49 Sitting closest to the Board Panel is Ms. Marika Hare. She testified on the first day of this hearing, I believe, along with Mr. Culbert, who is sitting next to her. The third witness, moving away from the Board Panel, is Malani Giridhar. Then Mr. Bill Ross. Next to Mr. Ross is Colin Gruending. He is the only witness who has not yet been sworn. He is the Director Investor Relations of Enbridge Inc. Then finally, the last witness, who also has been sworn previously, is Mr. Norman Ryckman. So out of the six witnesses, it is only Mr. Gruending that needs to be sworn. 50 ENBRIDGE GAS DISTRIBUTION INC. PANEL 1 ON CHANGE IN YEAR-END - HARE, RYCKMAN, GIRIDHAR, ROSS, RYCKMAN, GRUENDING: 51 M.HARE; Previously sworn. 52 K.CULBERT; Previously sworn. 53 M.GIRIDHAR; Previously sworn. 54 W.ROSS; Previously sworn. 55 N.RYCKMAN; Previously sworn. 56 C.GRUENDING; Sworn. 57 MR. BETTS: Thank you. The witness has been sworn in. Please proceed, Mr. Cass. 58 MR. CASS: Thank you, sir. 59 EXAMINATION BY MR. CASS: 60 MR. CASS: Ms. Hare, could you please explain the purpose of this witness panel and the issues that will be addressed by each panel member? 61 MS. HARE: Yes, Mr. Cass. This panel will address the change in year-end from September 30th to December 31st and its implications. The panel show that the change in year-end -- 62 MR. SHEPHERD: I'm sorry, Mr. Chairman, I'm sorry to interrupt Ms. Hare, but we're having some difficulty hearing Ms. Hare in the back. 63 MS. HARE: The panel will show that a change in year-end itself will have no impact on earnings and that there is neither a benefit to the shareholder or a disadvantage to ratepayer as a result of the change in year-end. Nor should there be a detriment to the shareholder since the change in year-end is solely for the purpose of improving the clarity of financial reporting. It's purely a change in the measurement date. A change in year-end by itself will produce no economic consequences and this is laid out in Exhibit A9, tab 1, schedule 1. 64 I will address the regulatory aspects associated with our application and precedents with respect to change in year-end. Mr. Culbert will discuss the impact on rates. Mr. Culbert will also answer any questions concerning the clearance of deferral and variance accounts as a result of the change in year-end. Ms. Giridhar will discuss the normal rate-setting process and what is being proposed for the change in fiscal year-end. She'll also speak to certain implementation issues including the clearance of the PGVA and the change in upstream cost allocation. Mr. Ross will discuss the impact in the change in year-end on the company's profitability. Mr. Gruending is here as a resource to help the Board understand the rationale for the change in year-end and implications with respect to financial reporting. And Mr. Ryckman will address how the company proposes to treat the DSM volumetric target, budget and SSM during the three-year period. 65 MR. CASS: Ms. Hare, how did the company structure its application with respect to the change in year-end and rate-making implications? 66 MS. HARE: The application was framed as a cost-of-service application for a 12-month period from October 1st, to September 30th, 2005. Then for the additional three months, we applied for an escalator to account for inflation for the three-month period, and this escalator was proposed at 90 percent of the consumer price index. The company's plan would then be to apply for rates for the 2006 year, January 1st, 2006 to December 31st, 2006. 67 MR. CASS: Did the Board not rule in the 2004 case that indexing to inflation was appropriate only in the special circumstances of that case? 68 MS. HARE: No. The Board cautioned the company that acceptance of that methodology did not mean that the methodology itself had been approved, but the Board did say that they would continue to review applications based on the evidence and would have to be assured that the rates are just and reasonable before they're approved. 69 So on applying the Board's decision in the 2004 case to this application, I understood that the onus was on the company to demonstrate that we had just and reasonable rates for a 12-month period, and then further to demonstrate why should there be any escalation for the three-month period. And I believe that our evidence does prove that the methodology is valid. 70 MR. CASS: Why did the company not just apply for rates based on 15 months of cost-of-service? 71 MS. HARE: There are two reasons for not doing so. The first was that if the Board didn't approve the change in year-end for rate-making purposes, we still needed to have a 12-month rate-setting process, so that was the first reason. 72 The second and perhaps more important reason is that there is no way to do a 15-month cost-of-service application, so we never considered setting rates on other than a 12-month period. To undertake a 15-month cost-of-service presentation would require information that we don't have, neither has there ever been a methodology approved for a 15-month cost-of-service. For example, how does one set rate base on a 15-month basis? Rate base is set based on the average of monthly averages, so looking at a 15-month period or adding a quarter in which rate base is higher because of, for example, gas and storage, that would distort what the rate base is. 73 Secondly, ROE, return on equity, is based on the Board's formula. We know how to calculate ROE on a 12-month period. It's simply applying the formula. But the Board has never ruled on what the appropriate formula should be on a 15-month period, and neither has the Board set ROE on a three-month period. To determine ROE on a 15-month period would require a review of the Board's guidelines, and as the Board and intervenors know, we just had a review of ROE in the fall of 2003, so now to come forward and ask for a review of ROE on a 15-month basis didn't seem practical to the company, particularly in light of the fact that it would be a one-time ROE for a 15-month period. 74 So instead we requested that rates be set on 12 months based on the cost-of-service review and then proposed a modest increase to account for inflation, any increase in customer costs due to that inflation and also the number of customers that are being added. 75 Now, to demonstrate that some type of increase was required, we further filed cost-of-service information, and that's at Exhibit A9, tab 1, schedule 3 through 3C, and that's based on a 12-month period from January 1st, 2005 to December 31st, 2005. We then compared that result to the 12-month fiscal period that we applied for and the results were very close to the indexed approach. We believe that it's a pragmatic and fair approach. 76 Now, to attempt to turn the stub period into either a stand-alone three-month test period or add it to October 1st-September 30th period and make it a 15-month period results in confiscation of earnings that will never be regained. Only if rates are set as proposed in our application will the utility be kept whole. So if rates are determined to be just and reasonable for the 12-month period and we demonstrate that there's a need for an escalator for three months, it seems to us logical that those rates would also be just and reasonable. 77 MR. CASS: Are you familiar with any regulatory precedent relevant to this proposal? 78 MS. HARE: Yes. There are three areas that I'd like to comment on. But first I'd like to make a comment as to why there's actually very little regulatory precedent in this area. 79 The first is that there's a relatively small number of utilities in the Canada, so we look to the United States where there are obviously a much larger number of utilities. In the U.S., most utilities don't file annually for rates. Instead, they stay out, unless there's a material change causing them to come forward for a change in rates. So to the extent that a utility might be changing its year-end but doesn't come back for a change in rates, it would be transparent as to how that change in year-end then is implemented. 80 But I did want to comment on three regulatory precedents. 81 The first is that Union Gas changed its year-end in December 1995. Previously, Union Gas had March 31st as its year-end, but with the amalgamation with Centra Gas, they moved to change their year-end so it would coincide with that of Centra. Based on a review of Union Gas's evidence, the Board's decision and intervenor arguments, there was no indication that a change in year-end did not result in any rate-making implications. In fact, it appeared to have been routinely approved without any examination of earnings or ROE. But as an aside, I might mention that had the Board or intervenors argued in the same manner that they are in this case, there actually would have been a significant increase in rates as a result of Union Gas's change in year-end. That's because their change resulted in a nine-month stub period consisting of two relatively low quarter months. So in the case of Union Gas's nine-month stub period, for them to achieve the ROE of 11 percent, and that was the approved ROE at the time, in a period where for those nine months they only would have earned three, there would have been a significant increase again if the same logic is applied as the intervenors have stated in our settlement proposal. 82 Union Gas, like Enbridge Gas Distribution, has seasonal variation in revenue and that's what causes this distortion. In the case of Union Gas, though, no adjustment was made. 83 The second precedent that was found was the application of Yankee Gas Services Company for approval of a change in year-end. They were also moving from September 30th to December 31st. The date of this decision was January 10th, 2001. It was before the State of Connecticut Department of Public Utility Control. As with Enbridge, Yankee has variation in earnings due to seasonality and the change in year-end was approved with no change to rates or ROE. 84 The third precedent I'd like to bring to the Board's attention deals with another ruling of the Connecticut Department of Public Utility Control. This decision is dated June 2001 and is with respect to Connecticut Light & Power Company. In this decision, which dealt with the company's transmission distribution rates and excess earnings, the issue of relevance to this proceeding is with the calculation of ROE on a quarterly basis. Although the Connecticut department ordered Connecticut Light & Power to report ROE on a quarterly basis, it was always done on a rolling 12-month basis so that each quarter reported on the previous three quarters. The ROE was not reported on a three-month basis but always on a 12-month basis, and it demonstrates that the only way to look at ROE is on an annual basis. I might say it is also consistent with the OEB's monitoring requirements where financial reporting is required on a 12-month basis, so if the OEB is requesting first quarter results, the results are three-month actuals and nine-month projected for an annual ROE. 85 MR. CASS: Did the company prepare for the regulatory aspects of the change in year-end in any other way? 86 MS. HARE: Yes. I met with staff from the Ontario Energy Board and we discussed the issue and there was no mention of applying for rates on a 12-month basis or on a three-month ROE basis. So based on all of the information that was compiled, I believe the approach taken by the company in applying for rates on a 12-month basis, based on cost-of-service and then escalating the last three months, is a valid approach. 87 MR. CASS: Lastly, Ms. Hare, could you comment, please, on the company's position if the Board finds any merit in the intervenor proposal as set out in the settlement proposal regarding earnings adjustment. 88 MS. HARE: Yes, Mr. Cass. The company is asking the Board to approve the change in year-end for rate-making purposes on the basis that the company applied for. The company doesn't want a change in year-end unconditionally. If the Board approves this on a basis with the material difference than that applied for, such as, for example, an earning adjustment in the order of 20 or $30 million, then it's not the company's decision to proceed to change its year-end for rate-making purposes. 89 MR. CASS: Thank you. 90 Turning to you, Mr. Ross, was the company's evidence on the change in year-end prepared by you or under your direction or control? 91 MR. ROSS: Yes, it was. 92 MR. CASS: Is the evidence accurate, to the best of your knowledge or belief? 93 MR. ROSS: Yes, it was. 94 MR. CASS: Can you please summarize the company's position with respect to the change in year-end. 95 MR. ROSS: Yes, I can, Mr. Cass. 96 Mr. Chair, the company's changing its year-end from September 30th to December 31st. The reason for this is to enhance the clarity of Enbridge Inc.'s reporting to the financial community. Enbridge currently consolidates EGD's results on a quarter lag, that is, EI's financial statements for the year ended December 31st include the results of EGD for the year ended September 30th, and that is illustrated in numerous notes in Enbridge Inc.'s annual report. This creates confusion in the market when EI's financial results are compared with those of its piers. 97 MR. CASS: What is the effect of the change in year-end on rates and on the company's profitability? 98 MR. ROSS: EGD's change in year-end will have no effect on ratepayers. They will not pay any more, nor any less, as a result of merely EGD changing its year-end. Likewise, the change in year-end will have no effect on EGD's profitability, that is, EGD's retained earnings will not change as a result of a change in year-end. Now, we're using retained earnings to represent the cumulative profits of the business that are available for distribution to shareholders, and therefore these are a measure of shareholders' wealth. 99 A point to note is that EGD operates a very seasonal business with high earnings in the winter months and little or no earnings in the summer months. Earnings are therefore uneven throughout the year and earnings for a single interim period cannot be extrapolated to derive the annual rate of return without due consideration of the seasonality of the business. 100 Let me illustrate this through an example. Earlier we handed out Exhibit K.10.1, so I will refer to that for the next illustration, so if you would like to pull that out. 101 There are two pages in this exhibit and we can even move on to page 1. This is an illustrative example which will compare the retained earnings on a quarterly basis on the assumption that no dividends are paid of a company that decided to change its year-end under three separate scenarios, and I'll give you an overview of the example and then we'll go into the two pages in some detail. 102 If you look on page 2, there are four cases illustrated. Case 1 shows the company's profitability and retained earnings on the basis that they did not change its year-end and continued with an illustrative return on equity of 10 percent per annum. Case 2 continues with the same assumptions as in case 1 but assumes that the company changed its year-end from September to December. Under this scenario, the company continues to earn an annual rate of return of 10 percent. We then look on to case 3, which assumes that the rate of return for the stub period, i.e., October to December under a change in year-end, be set as one quarter of the allowed annual rate of return, that is, one-quarter of 10 percent. Finally, case 4 assumes that the rate of return under a change in year-end be set for a 15-month period, and that is computed as five-fourths of the allowed rate of return of 10 percent. 103 Let's look at this example in some detail. If you would like to turn now back to page 1 -- K.10.1, page 1, outlaying the assumptions used in this example. 104 The allowed rate of return is 10 percent. Secondly, we illustrate the projected annual volumes for the company. We'll notice that this business is very seasonal, and for this purpose we're assuming that 32 percent of volumes are distributed in the first quarter, 40 percent in the second quarter, that is the quarter January to March, and 20 percent in the third quarter, that is, the quarter April to June, and finally in the fourth quarter, July to September, only 8 percent of the total volumes are distributed. 105 In addition to that, we are showing that -- we are assuming that this company has an equity rate base of 1.2 billion, 1,200 million. Our assumption is that annual net income for the company is $120 million. Also, the annual cost of the business are 2,380,000,000, 2,380, and finally, the opening retained earnings are 1.2 billion, 1,200. 106 So with those assumptions in mind, let me move on to page 2. I'll take you through this example in some detail. 107 As I mentioned, page 2 illustrates the effect of changing year-end under four scenarios. First of all, let's look at columns B through F and start with line 6. You'll notice at line 6, we're expecting the revenue of the business, and in line with the previous example, being a seasonal business, 800 is earned in the first quarter, 1,000 in the second quarter; column C, 500 in column D, the third quarter; 200 in revenue in column E; that gives the total for the year at column F, line 6, of 2,500. 108 Similarly, under line 7, costs also fall in line with that volume seasonality, and if you look at lines B through E, we see the quarterly costs for the business, giving a total of 2,380 in column F, line 7. 109 The net income for the business is also seasonal and is in line with the business, so in the first quarter it is 50, grows to 100 in the second quarter under column C, drops down, line 8, column D, to 10, and then moves on to minus 20 on column E. The total for the year is 120 at F8, line 8, column F. 110 Let's move down to line 10. I assume that the opening retained earnings were 1.2 billion, 1,200, so at the end of December 2002, in column B, line 10, column B, the retained earnings grow to 1,250. They move on to 1,350, with the addition of the earnings of the second quarter in column C; 1,340 in column D; 1,320 in column E; and from the fiscal year, they are 1,320. That is line 10, column F. 111 You'll notice that this business moves on to the following fiscal years, and we're also assuming that this business does not change rates, nor its revenue. Everything else remains the same as in the first year. And therefore the profitability of the business will continue at $120 million per year as illustrated in line 8, column L. 112 So at the end of the second fiscal year, that is, line 10, column L, retained earnings are 1,440. In other words, line 10, column F, 1,320, plus the $120 million earned in that year at line 8, column L, to give 1,440. 113 Similarly, we can move to the same example for the third year, the year ended September 30th, '05, and again, we would be at $120 million net income, that is, line 8, column S, and once again retained earnings would grow by 120 million to 1,560. 114 So that depicts the retained earnings of the business as if there had been no changes in year-end. 115 Now let's move on to case 2, which starts at line 14. This illustrates the company's approach that the year be changed from September over to December. So you will note, starting with line 17, across columns B through E, revenues are exactly the same as in lines 6, columns B through E. Line 19 shows net income, quarterly net income for the quarters ended December, March, June, and September in columns B, C, D, and E. For the year ended September 30th, 2003, net income is still $120 million. 116 Now we'll move on to the interim stub period, which is the period ended December 31st, '03, and this is starting on column H and looking at line 19. So you'll notice on line 19, column H, net income for the business is 50, which is the same as net income under column B, line 19, for the exact same quarter the previous year. Remember, we are assuming no growth in income. Retained earnings grow by 50 under line 21 to 1,370, and also the rate of return is the same as it was the previous year, under column B, line 23, of 4.2 percent. So column H at this stage compares exactly to column B, except the retained earnings have obviously grown by the profitability of four quarters for the previous fiscal year plus the interim quarter. 117 You'll also note that on the line above, when there had been no change in year-end, we looked at line 10, the retained earnings at the end of December 31st, 2003, under column H. You'll see that retained earnings then were 1,370, which is exactly the same as line 21, column H. And again, the change in year-end has not changed in any way the retained earnings of the business. 118 Now, if we move on along column -- sorry, line 21, from columns I through M, you'll notice retained earnings continue to grow by the net income of the business, and once again the quarterly net income of the business at line 19 is almost the same as the net income at line 8. However, this time, when we get to the end of the fiscal year at column M, we are at December 31st, 2004, and once again the retained earnings of the business are 1,490, which is exactly the same as the retained earnings in the previous example at the end of December '04 as depicted in column O. So you go to retained earnings, line 10, column O, 1,490. At that point in time, retained earnings are 1,490 and exactly the same as at column M, line 21. 119 Mr. Chair, I'd like to move on now to case 3, and in case 3 we assume that we still have a change in year-end. However, in this case, in the interim or stub period, that is, the period ended 31st December '03, as shown in column H, that the rate of return be based as one fourth of the allowed rate of return of 10 percent, that is, 2.5 percent, and that is shown on line 34, column H. And this compares with the 4.2 percent on column H, line 23. 120 Now, the immediate consequence of that is you'll notice that revenue on line 28, column H, has now dropped and has dropped to 780, line 28, from 17 -- sorry, from 800, line 17, column H. The consequences of this is that as shown on line 30, net income is now 30, retained earnings on line 32, again on column H, are 1,350, and if we look at line 35, we notice that there's a drop of 20, column H, compared with the previous retained earnings under example -- in case 2 on line 21. So if we compare retained earnings, column H, line 21, of 1,370 with the retained earnings on line 32, they have dropped by 20. 121 Now, if you scan along line 36, you'll notice that that 20 exists in eternity. In other words, that 20 is never recovered by the company again as depicted also in retained earnings on line 32. So in other words, as a result of changing the rate of return for that interim quarter, the company has sustained an economic loss. 122 Now, finally I'd like to go to case 4, and in this case we assume that the rate of return be set for a 15-month period and that be computed as five-fourths of the allowed rate of return of 10 percent. So once again, columns B through F in case 4 remain exactly the same. What does change are columns H through L. 123 You'll note now that the rate of return which is changed and is set as five-fourths of 10 percent, and also the fact that we are assuming a 15-month fiscal year, has moved up to 12.5 percent as shown on the return on equity line, line 46, column M. In the very first quarter of that 15-month period, we note at line 42, again column H, net income is now 45 and then moves to 94 in column I, minus 13, minus 21, 45, to become 150 for the 15-month period. 124 Again, let's look at retained earnings, and these growing by adding opening retained earnings to the net income for that period. Line 44, we have 1,365, and you'll notice if you move down to line 47, column H, that there's a deficiency of 5 compared to cases 1 and 2. That deficiency continues and naturally grows to 20 if we move along line 47 and column L. And you'll notice then, moving along line 47, that the 20 deficiency continues into the next fiscal period, and again, indeed, this will continue into infinity. 125 Mr. Chair, this is an illustrative example and it seeks to show that the company will sustain a loss if it were to change its year-end and also alter its rate of return for an interim period. In summary, the analysis demonstrates EGD and ratepayers should be equally unaffected by a change in year-end, which is merely a change in the reporting period used to accumulate results. It does not reduce profits available for distribution to shareholders, nor does it increase them, and the value of the business or service to customer is completely unaltered. The analysis also demonstrates that, in a seasonal business, it would be quite inappropriate to apportion an annual rate of return, which has been calculated on the basis of 12 consecutive months, in proportion to the time period in question, in other words, to prorate that for three or even 15 months. 126 The company believes that the rate of return for a test year shorter or longer than 12 months would require due consideration of economic drivers in that period. In the absence of this, the company's approach is to leave rates intact with an appropriate allowance for cost inflation for the stub period, and this provides a fair result to both ratepayers and to shareholders. 127 MR. CASS: Mr. Ross, Exhibit K.10.1, as filed, does not seem to have the yellow boxes at the end of cases 2 to 4. Do you have a copy of Exhibit K.10.1 as filed? 128 MR. ROSS: I do. I don't have them in colour, though. Yes. 129 MR. CASS: Is there a missing column at the end of K.10.1? 130 MR. ROSS: After column S? No, I believe not. 131 MR. CASS: Okay. Thank you. 132 MR. SHEPHERD: Excuse me, Mr. Chairman, can I interrupt? 133 MR. BETTS: Yes. 134 MR. SHEPHERD: We were provided with copies of this document on the weekend, and my copy has a column T, so if there's a discrepancy, I think maybe we could clear that up. 135 MR. ROSS: Yes, I'm sorry, Mr. Cass, the copy you just handed me comes to S, and quite correctly, the correct copy should have a column T as well. 136 MR. CASS: All right. At the break, could you perhaps run a new version of K.10.1 with the column T? 137 MR. ROSS: I will. Mr. Chair, just for clarification, column T would show the total for the fiscal years for the year ended December 31st, '05 under the three scenarios. In other words, it's omitting the accumulation of four quarters. 138 MR. BETTS: Thank you. Perhaps after break we can just review that so the Panel can understand clearly what column T does to this chart. Thank you. 139 MR. CASS: Thank you, sir. 140 Next, turning to you, Mr. Culbert, can you please explain the company's updated response to School Energy Coalition Interrogatory No. 158. 141 MR. CULBERT: The company requested to have rates set for the 12 months October 2004 to December 2005 and next to have those rates inflated -- 142 MR. BETTS: You'll have to speak more directly into that microphone. 143 MR. CULBERT: Pardon me. The company requested to have rates set for 12 months of October 2004 through September 2005 and next to have those rates inflated to recover typical cost increases for the next three months. The company's view is that its evidence, filed at A9, tab 1, schedule 3, explains how comparing consecutive 12-month periods is the appropriate method for determining a rate change for the three months of October through December 2005 which the intervenors disagree with. The information in the updated interrogatory provides the Board with both the intervenors' and the company's view of the relevant factors of the change in year-end issue. 144 MR. CASS: Having provided the quarterly information requested by at least one intervenor, does the company agree with the position of intervenors set out under issue 13.1 in the settlement proposal? 145 MR. CULBERT: No, we did not agree with the intervenors' position. The quarterly information provided, pardon me, in this updated interrogatory shows that each of the quarters within the company's operating cycle contribute different percentages of an annual allowed ROE, that is, due to the seasonal nature of the business, each three-month period did not contribute simply 25 percent of an annual allowed ROE. 146 The intervenors' view of the ROE per quarter or the three-month period does not consider this relevant issue. The company believes that any required change in rates should consider all relevant issues of the company's operating cycle. 147 MR. CASS: Can the Board assume that the company should earn one-quarter of an annual ROE in each quarter? 148 MR. CULBERT: Again, in the updated response to School's 158, the table at page 3, if everybody wants to turn to that, if everybody has the interrogatory, is everybody there? 149 MR. BETTS: Thank you. 150 MR. CULBERT: The table at page 3 shows the projected quarterly returns on lines 1 and 4, whether the company does or does not change its year-end, and it shows that the projected quarterly returns along each of those lines is the same regardless of whether the company changes its year-end. In fact, a 12-month rolling addition of any four consecutive quarters along either of those lines would produce an ROE of 9.69 percent or 9.77 percent. The company's forecast or consensus forecast of a calendar year ROE is 9.76 percent for that period. If the Board determines that it needs to consider what an approved portion of an allowed annual ROE should be per quarter rather than use the company's evidence at A9, tab 1, schedule 3 as the basis for determining any required change in rates, the company submits that lines 1 and 4 on this table show the appropriate quarterly contribution which should be allowed out of an annual allowed ROE. 151 MR. CASS: What is the effect on the company's earnings of a 15-month or three-month reporting period? 152 MR. CULBERT: The company does not have any different earnings or return on equity from changing its year-end. The only difference is in which fiscal year the three months of October through December is reported. The company would achieve typical earnings for this period when it arrives. Now, instead of reporting those earnings within a fiscal 2006 financial report, they will be reported within a delayed fiscal 2005 financial report. That's the only difference. 153 MR. CASS: Is the intervenors' $30 million amount affected by the outcome of other issues in this case? 154 MR. CULBERT: The $30 million amount assumed as an overearnings by the intervenors was calculated using budgeted information for the three-month period of October 2005 through December of 2005. Within that calculation, the company assumed a three-month average rate base, three-month average capital structure, three-month utility income and income tax calculations. Guidelines for such three-month calculations are not in existence as far as the company's aware, but we provided that calculation at the request of the intervenors. The results of that calculation were then compared with the intervenors' assumption that the allowed ROE for that three-month period should simply be one-fourth of an allowed annual ROE. That amount was calculated at a point in time where the company was assuming an $85.4 million increase in rates which has changed from that point in time. The final determination of appropriate rates by the Board would, in fact, change or alter that assumed amount. 155 MR. CASS: Would a reduction in rates with respect of the so-called stub period in accordance with the intervenors' position have any impact on future earnings of the company? 156 MR. CULBERT: Yes. Such a reduction would almost certainly result in rates which would produce a significant deficiency in the company's future earnings when applied on a 12 month fiscal year, and likely would require a significant increase in rates as of January 2006. 157 MR. CASS: Turning to you, Ms. Giridhar, can you summarize, please, how the company's rate-setting process works. 158 MS. GIRIDHAR: Certainly. Enbridge Gas Distribution has a 12-month operating cycle and the rate-setting process also uses, excuse me, a 12-month period that coincides with the company's fiscal year. There are two distinct phases to the rate-setting process. 159 The first phase asks the question, excuse me, do rates need to be changed, and then in the second phase, we ask the question, assuming rates need to be changed, how should they be changed for each of the rate classes that customers take service under. 160 MR. CASS: How does the company carry out the first phase? 161 MS. GIRIDHAR: The key feature of that first phase is a test that equates forecast costs and forecast revenues over a 12-month period. Now, the forecast cost is calculated by using O&M depreciation and an appropriate return on capital, and the forecast revenues is calculated by using forecast volumes times existing rates. So if that equation is satisfied, i.e., forecast revenues equal forecast costs, the conclusion is that rates don't need changing; if revenues exceed costs, that means that rates need to go down and vice versa. 162 MR. CASS: What does the company do in the second phase of the process? 163 MS. GIRIDHAR: The second phase is to determine what the impact is at the rate class level, so to do that we first have to establish costs at the rate class level and we have a prescribed three-step methodology to do so, which is called functionalization, classification and allocation of costs. And the allocation of costs at the rate class level is done on the basis of allocation factors which are also developed on a 12-month operating-cycle basis. Now, not all of these allocation factors are volumetric in nature, recognizing the fact that there are several different cost drivers, so you have cost allocation factors that reflect storage requirements, peak-day requirements, customer numbers, and annual volume. So at the end of the stub -- step, we've then established costs at the rate class level and then we would design rates to recover those costs at the rate class level using Board-approved revenue-to-cost ratios. 164 MR. CASS: Does the company have a mechanism in place to adjust for costs on a 12-month basis outside of the process you've just described? 165 MS. GIRIDHAR: Now, basically if I could just go back, the theoretical construct of the cost-of-service approach is that rates, once set, should be good for the future unless there's a change in the underlying economic conditions that underpin those rates, which means that if your costs change over a forecast 12-month period and/or your revenues change because your volumes are different over a 12-month period, then those rates need adjusting. But theoretically, if history repeated itself, you really shouldn't have to touch those rates again. 166 Now, in terms of cost adjustments, we recognize that even within a 12-month period, costs might not, in fact, remain static at the level that was forecast, and specifically with respect to gas costs, we've had guidelines in place that tell us how to adjust for costs that end up changing. These guidelines are actually in the settlement agreement to RP-2000-0040. What's interesting about these guidelines is they don't ask us to equate revenues and costs for a particular quarter. What they ask us to do is to forecast the change in costs for a 12-month period going forward, which is essentially a rolling 12-month period, and then determine if rates need changing. So once we do that, we're essentially sticking with the principle that costs and revenues and rates can only really be determined on a 12-month basis, and we do that with the full knowledge that rates would probably likely change the very next quarter because gas costs are likely to change, but we still use a 12-month process for that determination. 167 For the second phase, which is the allocation of the costs at the rate class level, we continue to use allocation factors that are derived on a 12-month basis. So that's the process we have. 168 MR. CASS: Why is the first phase of a quarterly rate change not the same as the first phase of an annual cost-of-service process? 169 MS. GIRIDHAR: Quite apart from the fact that an annual grassroots rate-setting process is tedious, cumbersome and takes a lot of time, there are also good conceptual reasons why we look at it on a 12-month basis and not on a three-month basis. In fact, we could look at it on that three-month basis if each quarter were a fully scalable version of the annual year, but that's not the case for a weather-sensitive utility. In fact, our volumes vary over each quarter and we do not have a single quarter which represents the average quarter for the year. 170 Now, in this situation as well, we have a large proportion of our costs recovered through volumetric charges, which means that if your volumes change from quarter to quarter and your costs don't change in that same proportion, keeping in mind that the rate-setting is for a 12-month period, you have a situation where your contribution to that return on equity varies from quarter to quarter. Now, if you were to apply that test of equating revenues and costs on a quarterly basis, what that would mean is that your rates would have to go down in high-volume quarters and go up in low-volume quarters. Now, essentially, at the end of the day this would give you the same result as an annual rate-setting process, but it does have additional baggage in terms of rate volatility, which also means you will then have to communicate this to customers. 171 So that's the reason, when you have an operating cycle of 12 months and you have significant variations within that operating cycle, it makes more sense to look at rates on a 12-month basis, particularly given that the theoretical construct is that the company should make a fair and reasonable rate of return over its operating cycle. 172 MR. CASS: Now, what is the implication of quarterly cost-of-service for phase 2, the second phase of the process that you've summarized for the Board? 173 MS. GIRIDHAR: Now, if we were to do a quarterly cost-of-service process every quarter, then that follows that we also need to be allocating those costs at the rate class level based on some criteria that you have determined at that quarterly level. 174 MR. CASS: And what effect would this have on the rate classes? 175 MS. GIRIDHAR: What this would mean is that you'd have significant cost shifts from quarter to quarter because I've just stated that we don't have an average quarter, every quarter is different from the annual. For instance, if you look at the shoulder period from October to December, you've got significantly higher large-volume usage than you do during the winter period from January to March. Now, the bulk of our maintenance costs and capacity costs are really allocated on capacity drivers that determine what is the usage on peak-day. If you were looking only at that shoulder period, then you should be determining what is the usage of the different rate classes of the pipeline, and that would mean that you would have a cost shift to large-volume customers in the October to December quarter that would be reversed in the following quarter. So this would result in cost shifts within rate classes that would eventually even out but they would add to the volatility that I just talked about that comes from overall volumes being different. 176 In conclusion, I think what I'm trying to say here is that a three-month cost-of-service approach regulatory rate-making is not really used and it's not used for good reason. It doesn't answer the fundamental question which is, What are the changes over your operating cycle that warrant a change in rates? Plus it results in unnecessarily complex rates, a lot of rate volatility that could be avoided and eventually all this needs to be communicated to customers as to why rates should vary significantly from quarter to quarter. 177 MR. CASS: So in the context that you've just described, Ms. Giridhar, can you please describe the company's rate-setting proposal for the year-end change. 178 MS. GIRIDHAR: The company's proposal for the year-end change essentially marries these two different Board-approved methodologies we have in place, the first one being the annual rate-setting process and the second one being the methodology we have for cost adjustments within that rate-setting process. 179 So what the company is proposing is that for the 12-month period from October 1st to September 30th, we would use the annual cost-of-service approach to set just and reasonable rates, and then for the three-month interim stub period, we would adjust for costs that are likely to change. Now, we know of at least two costs that would change during that stub period, the first one would be gas costs, and in fact, we do have an established process for gas costs, and we would make that determination in the month of September 2005 to see if gas costs need adjusting. 180 In addition, what the company is proposing is that our operating costs are also likely to change because we are now looking at the period past the 12-month period, and a good proxy for determining what that cost change for operating costs is likely to be would be something linked to CPI, short of actually doing a grass-roots exercise for that period. 181 Now, the process that the company is advocating for that three-month period is identical to the QRAM methodology in that you would look at what that CPI increase would yield over a 12-month period and then you would set rates for a 12-month period knowing fully well that in fact, those rates would only remain in effect from the three-month period from October to December and that we would come forward with the rate application for fiscal 2006, which means that you would likely have new rates as of January 2006. So again, this mimics the QRAM process where you in fact set rates for the three-month period, but you take into account a rolling 12-month period beginning with the start of when you want the rates to change. 182 MR. CASS: So does the company's approach yield a reasonable result? 183 MS. GIRIDHAR: We believe it does. In response to interrogatories as a reasonability test, the company did, in fact, provide the impact of this approach for the rolling 12-month period from January 1, 2005 to December 31st, 2005, and this can be found at Exhibit A9, tab 1, schedule 3C. And the results in that exhibit indicate that the CPI increase for the three months is a reasonable proxy for the impact of including cost-of-service information for October to December 2005 into a rolling 12-month period that starts as of January 2005. 184 MR. CASS: Thank you, Ms. Giridhar. 185 I'm now going to skip around, members of the panel, just to make clear the implications of the year-end change on different aspects of the case. 186 Starting with you, Mr. Ryckman, in the event that the proposal to change the year-end were approved by the Board, could you address, please, how DSM would be treated in what's been called the stub period. 187 MR. RYCKMAN: Yes. I'll be referring to Exhibit A7, tab 1, schedule 1, appendix 1, which is the evidence that's just been filed. And the way we're proposing treatment of demand-side management should the change in year-end go forward would be a proposed volumetric target of 19.2 million and a total O&M budget of $3.7 million. And let me just highlight how we've come to some of those numbers. 188 Essentially we have -- well, we filed evidence on our DSM plan from October 1st through -- October 1st, 2004 through September 30th, 2005, and that's at Exhibit A7, tab 1, schedule 1. I'm pleased to say that the intervenors and the company were able to reach agreement on a volume target budget, SSM, LRAM, and DSMVA for the 2005 test-year period. The target during that period is 76.9 million cubic metres, with a total budget of $14.8 million. The proposed target and budget are effectively 25 percent of those amounts. 189 When we look at the target of 76.9 million versus the prefiled evidence, our prefiled target was approximately 59 million cubic metres, so our ADR agreed amount is 30 percent higher than our prefiled. I'd also like to point out that when we look at an historic analysis of the last four years, so we looked at the period October through December based on the last four years, on average we achieved 15 percent of our annual target during that period. 190 So once again, we've got a target that's based on 25 percent here, so it's relatively aggressive. That 15 percent that we typically achieved during that quarter on average had a budget of approximately 19 percent of the annual operating budget, so they're not directly comparable. If you kind of scale it up to the 25 percent budget that we're proposing here, the 3.7 million, you come in with a target of about 14 million in three. 191 so just to back up, if I take the 76.9 million m3 and take the historic 15 percent, with a stub period target of roughly 11 million cubic metres, if you gross that budget up to the 25 percent that we're proposing, you would come in at about 14 million cubic metres. So we certainly do have a very aggressive target for that period, but it's something that the company feels and hopes would be acceptable to the majority of parties in this case. 192 The other thing that I wanted to touch on was savings allocation, and when -- what I'm talking about when I refer to savings allocation is the credit that the company gets for the activities and its programs. So what I mean by this, where we partner with other organizations to bring forward programs, we're claiming 100 percent of the credit for that, and it's important to keep that in consideration because we wouldn't want to see after-the-fact changes to the way actuals were evaluated. If we were to alter that savings allocation, then the initial target should be altered accordingly; that is, we would have a target that would be something less than what we're proposing. 193 The company is proposing using use of the SSM LRAM in DSMVA, the accounts and methodologies, as it's set out for the previous 12-month period and once again in the settlement agreement that all participating parties signed off on. We're also proposing that the evaluation report and audit relating to the company's DSM activities in fiscal 2005 will be expanded to include three-month stub period, and it will be presented in the report separately, so we'll look at them as two discrete periods. 194 It's our belief that doing this will also facilitate easy year-over-year comparisons, so when we're looking at DSM from year to year, keeping this 12-month period wholistic will allow for ease of comparisons. 195 We've also included a proposal to address any concerns that may arise through gaming. Now, Enbridge would not engage in gaming, and this is not to suggest in any way, shape or form that it would. In fact, the evaluation reports and audits that we conduct test for projects to make sure that they are being claimed within the year that they occur. But to address any concerns that may exist, we have got three scenarios that we've laid out, and basically in the first bullet point under paragraph 9 on page 3, what we're saying here is that if we overachieve during the 12-month period and overachieve during the three-month period, we will address that as an aggregate. The SSM will be calculated based on the aggregate as those two periods. Mathematically, it's the same as the 15-month period. 196 In the second bullet point, this really addresses the company's return that the stub period target may be overly aggressive, and what we're saying here is that we have an agreement for the 12-month period, and should we not achieve that aggressive target in the stub period, that the SSM will be evaluated as per the settlement agreement, that is, the 12-month period and the target of 76.9 million cubic metres. 197 The third bullet point addresses any potential concerns that parties may have where we might miss the 12-month target and the concern could be that savings would flow that the three-month period and thereby generating an SSM for that three-month period. In that case, we would evaluate the SSM on the aggregate of those two periods as well. 198 So in summary, the SSM would be calculated based on the settlement agreement unless the stub period was being used in conjunction with the claim, at which time it would be calculated based on the aggregate, the 12 plus 3. And that's essentially it. 199 From an implementation perspective, just to touch on that for a moment, the company will administer the deferral accounts in the two periods as two separate sets of accounts, so that is, the opening balance for the stub period would be zero. And as the result of lag, it's likely that these periods would be cleared within the same proceeding because, once again, these aren't typically cleared until after the evaluation and audit reports are done, so there is somewhat of a lag in the clearance of those accounts. 200 MR. CASS: Okay. Now back to you, Mr. Culbert. In the event that the proposal to change the year-end is approved by the Board, what does the company propose in respect of clearance of deferral accounts? 201 MR. CULBERT: The company proposes to clear deferral and variance accounts which the Board deems appropriate for clearance as of October 1, 2005, and they would be based on balances projected as of July 31st. Any variances from those projected balances and any amounts that would be accumulated in the October 2005 through December 2005 period would be available for the Board's review within the company's filing of actual and projected deferral account balances as part of its subsequent quarterly QRAM filings. These balances would be disposed of in a manner the Board sees fit in a future filing which would be a QRAM filing or another filing. 202 MR. CASS: Thank you. 203 Ms. Giridhar, what about clearance of the PGVA in the same scenario where the change in year-end is approved. 204 MS. GIRIDHAR: Again, the company would propose to mirror the rate-setting approach such that we would clear the PGVA for the 12-month period from October to September, and then for the three-month stub period, we would clear or we would evaluate the variance in the PGVA relative to what was forecast for that three-month stub period, and if it's material, we could undertake to clear that stub period variance at the end of those three months. 205 MR. CASS: And still with you, Ms. Giridhar, the settlement proposal, under issue 15.4, contains a phase-in of the rate impacts of certain upstream cost allocation changes. How would that phase-in, or how would the company propose that the phase-in would work in the event that the change in year-end is approved by the Board? 206 MS. GIRIDHAR: The company's proposal is to keep that October to September time frame for the phase implementation of its cost allocation changes. What that means is that the phasing in would occur as of October 1 in each of the subsequent years, but to the extent that the company's year-end change is approved, the test period would actually shift from January to December and what we might have is that in that January quarter, we might have some minor adjustments to reflect any cost drivers that have changed. But for -- the bulk of the phasing in, it would actually happen in the October time frame. 207 MR. CASS: And then finally, Ms. Hare, what about transactional services for the three-month stub period in the event that the change in year-end is approved. 208 MS. HARE: We would propose to simply prorate the Board's decision coming out of this case for the TS formula. So, for example, if the company's proposal is accepted to take credit costs off the top, therefore, for the fiscal year there's $8 million guaranteed to ratepayers, that would then be $2 million for a three-month period. The company's proposal for the fiscal year is then to have the next 2.7 million to the ratepayer, so that would become 675,000 -- sorry, to the shareholder, with the rest being split 75/25. 209 MR. BETTS: Thank you. Mr. Chair, that completes the evidence in-chief of the witness panel. 210 MR. BETTS: Thank you very much, Mr. Cass. 211 Can I have an indication of parties that would like to cross-examine this panel? Mr. Shepherd, one, two, three, four, five, six, seven, looks like virtually anybody that's here. Has there been any discussion about order? 212 MR. POCH: Mr. Chairman, I can just say that my cross-examination is limited to the DSM stub item and really just a few brief questions of clarification. 213 MR. BETTS: I think it would be in our interest, if you want to proceed then, Mr. Poch, and deal with those, then that might bring us around to an appropriate time for a break anyway. 214 Mr. Poch, please begin your cross-examination. 215 MR. POCH: Thank you, Mr. Chairman. 216 CROSS-EXAMINATION BY MR. POCH: 217 MR. POCH: Mr. Ryckman, I guess all these questions will be for you. 218 Can we agree that simply interrupting the SSM period, not having an SSM for the three-month stub period would be problematic in the sense that it would raise those concerns you spoke of a few minutes ago of potential for gaming? I'm not suggesting you would game, but that that would certainly lead to some concern and potentially debate because of the concern about the company's recognition of savings at the beginning and the end of the period? 219 MR. RYCKMAN: I think fragmenting the SSM is problematic for some of those reasons, but also I think it sends the wrong message. In today's environment where conservation is a key objective of the government and a number of parties, I think removing or fragmenting any incentive mechanism is very problematic and sends the wrong message. 220 MR. POCH: Okay. So turning to your proposal, you have proposed this basically pro rata application of the values for budget and target that were agreed to in the ADR and accepted by the Board, and I think the only difference, then, on the SSM, if I've understood you correctly, is you just don't want to be put in the position of having to gamble whatever SSM you might earn in the 12-month period based on your performance in the subsequent three-month period. You don't want to merge them in the situation where you don't do well, as you fear is a possibility, in the three-month period, you don't want to lose the SSM that was agreed to in the ADR for the 12-month period; is that fair? 221 MR. RYCKMAN: Yes, that's fair. What we would effectively be doing in that case is spreading that risk of that very ambitious target, because keep in mind, once again, that is a prorata on a target that is already 30 percent over and above what was in our prefiled agreement. So by merging the two periods, you would be effectively spreading that risk over the complete time frame and that wouldn't be appropriate, in my opinion. 222 MR. POCH: Okay. So then turning to the three bullets where you break out these scenarios in A7, tab 1, schedule 1, appendix 1, page 3 of 4, I think you've already said, in the first case where you exceed your target for the 12 months and you exceed this prorata target for the 12 months, you would merge them, but that's mathematically the same as if you treated it as a 12-month SSM and three-month SSM. 223 MR. RYCKMAN: We would look at the target -- 224 MR. POCH: So you're respecting the SSM ADR agreement fully in that scenario. 225 MR. RYCKMAN: Yes. 226 MR. POCH: And the second is the one we just spoke of where you say you don't want to lose the potential for SSM in the 12-month if you happen to do particularly badly in the subsequent three-month period. 227 MR. RYCKMAN: That's right. In that period we would calculate it based on the ADR agreement that's in place, and that's for the 12-month period. 228 MR. POCH: And finally, the third one, do I understand that the concern that this is responding to is that you would -- if you knew you weren't doing too well in your first 12 months, you might -- some allege you might defer some recognition of some savings because you could -- if you recognized them in the subsequent three-month period, you would have the advantage of still potentially getting the SSM in that period. That's the gaming concern that this responds to? 229 MR. RYCKMAN: Yes, that's the gaming concern. But once again, Enbridge would not engage in gaming in the evaluation report and audit test for that as they have been conducted in the past. But that address that potential concern. 230 MR. POCH: Okay. Thank you. I think that confirms my understanding. 231 Thank you, Mr. Chairman. I guess implicit in this, we have no concerns with respect to the prorata aspect. I just wanted to make sure that the SSM was as I think I understood it is. That was my questions. 232 MR. BETTS: Thank you, Mr. Poch. That was particularly efficient. The order that I spotted the hands appearing was Messrs. Shepherd, Janigan, Dingwall, Ms. DeMarco and Ms. Girvan. 233 MR. ROWAN: Mr. Betts, could I be added to that list, please. Malcolm Rowan, CME. 234 MR. BETTS: Sure you can. Is it okay if we just follow that order? Does anyone have any problem? 235 Then, Mr. Shepherd, I'll invite you to begin your cross-examination, and if you can find an appropriate break in the next 20 to 25 minutes, that would be good for us. 236 MR. POCH: Mr. Chairman, just before Mr. Shepherd begins, I'm going to take my leave, with the Board's permission, and I'll try to do so quietly now. Thank you, Mr. Chairman. It's probably the last occasion I'll see you in this hearing as I'm going to take advantage of the opportunity you provided me earlier to give you a brief written argument. 237 MR. BETTS: Very well. 238 MR. POCH: Thank you, Mr. Chairman. 239 MR. BETTS: Mr. Shepherd. 240 MR. SHEPHERD: Yes, Mr. Chairman, thank you. 241 CROSS-EXAMINATION BY MR. SHEPHERD: 242 MR. SHEPHERD: Let me start by asking a question of Ms. Hare. 243 Ms. Hare, for the first time today you advised that the company -- the company's position is that if the Board doesn't approve the year-end change exactly as you've requested it, then you're withdrawing it; is that right? 244 MS. HARE: No, Mr. Shepherd, I didn't say exactly. I think I used the words that if there is a material difference from what we've applied for, then we wouldn't proceed. 245 MR. SHEPHERD: So I don't understand that. What's your application before the Board today? Because this is new this morning; right? 246 MS. HARE: Yes, it is. 247 MR. SHEPHERD: Mr. Chairman, before I go on with the cross-examination, maybe this is an appropriate time to talk about the procedural question. 248 PROCEDURAL MATTERS: 249 SUBMISSIONS BY MR. SHEPHERD: 250 MR. SHEPHERD: The company is purporting this morning to change its application to, in effect, say to the Board, Give us exactly -- not exactly, give us almost what we've asked for or we're not going to let you make the decision. That seems to me to be wrong and not within the company's power to do so. I'm a little bit -- I haven't prepared for this so I'm a little bit at a loss for it, what to do about it. I guess before I go on with my cross-examination, I think we need to make clear whether the Board accepts that the company is allowed to do that. It seems to me that they're not. Those are my submissions. 251 MR. BETTS: Mr. Cass, any response? 252 SUBMISSIONS BY MR. CASS: 253 MR. CASS: Yes, thank you, Mr. Chair. Mr. Shepherd made the comment, I believe, that the company is changing its application. That is absolutely not the case. The company has made an application for a cost-of-service rate-setting in respect of the 12-month period. It has made an application for a different sort of rate-setting in respect of what has been called the stub period. It has not applied for cost-of-service in respect of the stub period, it has applied for an indexing mechanism. The company stands by that application. I believe what Ms. Hare told the Board was that if the Board were to see fit to make some changes to what the company applied for to materially change it by way of conditions or the like, that the company would not want what it applied for. That's not an amendment to the application. That's saying if someone else argues for a different application than what the company requested, the company may not want it if it's a material difference. 254 I would suggest, in fact, Mr. Chair, that that would be an appropriate question that the Board itself might have in any particular case where somebody is arguing for a condition on what the company has applied for. If the somebody is arguing to change what the company has applied for by way of attaching some unrequested condition to it, I think it would be perfectly appropriate for the Board to ask the company, Well, does the company want what it applied for with that condition that was not part of what it applied for. 255 MR. BETTS: Before I return to Mr. Shepherd for reply, I would just like to ask if there are any other submissions on this matter. 256 MR. BETTS: Mr. Thompson? 257 SUBMISSIONS BY MR THOMPSON: 258 MR. THOMPSON: Yes, I would support Mr. Shepherd's view of this which is the company cannot constrain the possible outcomes of issues that are on the list. It sounds to me like Ms. Hare's proposal is yet another attempt to constrain the ambit of issues 13.1 and 13.2 which it sought to do initially by removing them from the list. So I take the view it's a matter of argument at the end of the case as to whether they can get away with in or not get away with this. But I would submit what they're trying to do indirectly is what they've been refused permission to do directly which is modify the ambit of issues 13.1 and 13.2 in this case. 259 MR. BETTS: Any other submissions? Mr. Janigan. 260 SUBMISSIONS BY MR. JANIGAN: 261 MR. JANIGAN: I'm also concerned with the materiality of the change that is supposed to trigger the withdrawal of the application to change the year-end. I think that that should be, I guess it will be explored a little further in this examination. It's a little premature for me to indicate what impact that will have upon the company's application as a whole. I would like to hear some further evidence on that. But I think that intervenors are being put in the position at the current time of having to continually hit a moving target and it's very difficult to keep up with the company's positions as they change throughout this hearing. 262 MR. BETTS: Mr. Dingwall. 263 SUBMISSIONS BY MR. DINGWALL: 264 MR. DINGWALL: The moving target analogy is one that might be found appropriate. I prefer, of course, the stapling Jell-o to the wall analogy. In looking at what the company has said in morning, I wonder whether or not we are prejudging what the outcome might be and what the company's response to that might be, which might be, in my view, more of a question for argument. I don't believe it's possible for the company at this time to give any kind of response to a decision that has not been made. So the question then becomes whether the matter that they're putting forward in terms of what their reaction to a decision on the issues list and on the evidence filed before this Board might be. It is curious. So I certainly support the other intervenors in their questioning whether there are procedural implications of this, and the view that some clarity would be nice, but I'm not sure whether clarity is a matter of prejudgment or post-judgment. 265 MR. BETTS: Any further submissions? 266 SUBMISSIONS BY MS. DeMARCO: 267 MS. DeMARCO: Mr. Chair, Lisa DeMarco at the back of the room. Two points. First, I concur with Mr. Thompson's submission regarding the potential attempt to constrain the Board's jurisdiction in this matter and that it is a matter for argument, and would note only that this has occurred in another instance on another issue, specifically Issue 5.5 before the Board, and it is an attempt for intervenors to try and hit a moving target. 268 Secondly, if I could raise the point of administrative efficiency of having each and every party here prepared, making submissions in relation to an issue which might then disappear depending on the outcome certainly appears to me to be a squandering of considerable resources before the Board and should be thought about in that context. Thanks very much. 269 MR. BETTS: Anything further? 270 Mr. Shepherd. 271 REPLY SUBMISSIONS BY MR. SHEPHERD: 272 MR. SHEPHERD: My friend Mr. Cass, I think, has forgotten something that is sort of basic to this process and that is that this Board doesn't make binary decisions, this Board doesn't make yes/no decisions. It's rare that the Board says, Yes, company, we're giving you exactly what you want, or Yes, intervenors, we're giving you exactly what you want. Almost all of the time the Board says, We're going to strike a balance, it's going to be more on this side or more on this side, but we're going to strike a balance, or we're going to impose conditions, additional conditions, that were either argued before us or sometimes weren't even argued before us. 273 And those are the things that the Board is not only allowed to do but is required to do. It's required to look at the right answer, not whether the Board accepts the company's proposal. And for the company to say, which they appear to be saying, We want to look at your decision and then have a choice as to whether we accept it or not, that's not how it works. 274 What's happening here is not a decision about a fiscal year-end, it's a rate case, and the Board is going to set rates. And once the Board's decision comes down, that's it, it's done. And the company isn't in a position, and shouldn't be allowed to be in a position on this issue or on any issue in which it can say, Well, we don't like that part, we're not going to take it. Ontario Hydro used to do that, that was really good. And we saw how well they were regulated. 275 The company can't be put in that position where their compliance with the Board's final decision in this matter is voluntary. Those are our submissions. 276 MR. BETTS: Thank you. I think this is probably an appropriate time for a break. And the Panel will consider the submissions on this particular question and then we will return for cross-examination to continue. 277 MR. CASS: Might I have an opportunity to briefly reply to some of these comments, Mr. Chair, I'll be very quick, or perhaps you don't need to hear from me, I'm not sure. 278 MR. BETTS: I took it that Mr. Shepherd was raising the point and you were submitting comments to us. I think this in case I would be happy to take a reply, and I don't see any objection to that. 279 FURTHER SUBMISSIONS BY MR. CASS: 280 MR. CASS: Mr. Chair, I'll be very quick. 281 First of all, I fundamentally agree with Mr. Thompson that to the extent there's a point here, it's a matter for final argument, and I think it can be disposed of on that basis. But I did just want to address a couple of things that were said by others other than Mr. Shepherd that I didn't get a chance to respond to. 282 Mr. Thompson talked about this being an effort by the company to constrain the issues on the issues list. Mr. Chair, I would say, in fact, quite the reverse. The company brought a motion requesting that the issues be removed from the issues list which was unsuccessful. That means they remain on the issues list. In my submission, that does not mean that the company is required to take a position on an issue remaining on the issues list regardless of what intervenors might be arguing for. In other words, this submission that you're now hearing from intervenors is trying to constrain the issues list by basically saying the company is required to take a position on issue 13.1 that the change in year-end should go ahead regardless of what the Board should decide on this so-called overearnings adjustment. So it's in fact the intervenors that are seeking to constrain the issues list. The company, in my submission, is free to take positions on matters on the issues list, particularly when the intervenors propose something quite drastically different from what's in the application. 283 The other point that I just wanted to quickly respond to made by Mr. Thompson and I think one other was the reference to this as a moving target. In my submission, Mr. Chair, there's no moving target at all. This is very much in line with what the company said on the motion that was heard by this Board. I think if the Board were to look back at Ms. Hare's affidavit, it was stated quite plainly there that it was the company's desire to withdraw this part of the application. So the fact that the company advises the Board that if the intervenors' approach to this issue were to be accepted it doesn't want to change the year-end I don't think is a moving target at all. It's very consistent with the position that the company has taken from the time this issue first surfaced in the settlement proposal. 284 Thank you. 285 MR. BETTS: Thank you. 286 [The Board confers] 287 MR. BETTS: Thank you. We will recess at this point, and based on the fact that we have some thinking to do, we'll reconvene at 11:30. 288 -- Recess taken at 11:05 a.m. 289 --- On resuming at 11:33 a.m. 290 MR. BETTS: Thank you, everybody. Please be seated. 291 Before we resume, are there any preliminary matters for the Panel's consideration? 292 MR. BETTS: With respect to the question raised by Mr. Shepherd, the Board Panel feels it's premature at this point in the process to prejudge, first of all, our decision with respect to these issues and secondly, what action may occur as a result of that decision. We do not feel constrained in any way by statements made. We would like all parties to proceed with these issues. The Board will consider them on their merits and make an appropriate decision. 293 With that, Mr. Shepherd, will you continue your cross-examination. 294 MR. SHEPHERD: Thank you, Mr. Chairman. 295 ENBRIDGE GAS DISTRIBUTION INC. PANEL 1 ON CHANGE IN YEAR-END - HARE, RYCKMAN, GIRIDHAR, ROSS, RYCKMAN, GRUENDING; RESUMED: 296 M.HARE; Previously sworn. 297 K.CULBERT; Previously sworn. 298 M.GIRIDHAR; Previously sworn. 299 W.ROSS; Previously sworn. 300 N.RYCKMAN; Previously sworn. 301 C.GRUENDING; Previously sworn. 302 CONTINUED CROSS-EXAMINATION BY MR. SHEPHERD: 303 MR. SHEPHERD: Ms. Hare, you've told us that material changes to what you've asked for are not acceptable to the company. What constitutes a material change? 304 MS. HARE: Well, certainly the overearnings adjustment that the intervenors have quoted in the range of $30 million is a material change. 305 MR. SHEPHERD: What about the indexing? 306 MS. HARE: No, I would expect that there certainly could be argument as to whether or not the indexing is 90 percent of CPI or if it's 50 percent of CPI. That I wouldn't consider to be a material change. 307 MR. SHEPHERD: If the Board decides that the indexing is zero, is it your -- is it the company's position that you would then not wish to change your year-end? 308 MS. HARE: If the Board decision is that the indexing is zero, the company would find a way to mitigate those cost pressures for the three months and I would expect that the company would still want to change its year-end. I think that's a very different situation than the precedent that's being discussed in terms of what an appropriate ROE is for three months. In that case, we wouldn't go forward. But if the Board determines that, in fact, there is not a need to increase rates for three months, I believe the company would still proceed. 309 MR. SHEPHERD: And, sorry, you referred to precedent. Is the problem the company is facing here the precedent or the dollars? 310 MS. HARE: Maybe the wrong word was precedent. Maybe I was thinking the principle in terms of what the company earns in a three-month period. It is not a quarter of the ROE, it's whatever's earned in that quarter, and that's the principle, that there's no impact on earnings. And so the company shouldn't suffer a loss when there actually is no difference in earnings. 311 MR. SHEPHERD: Well, same question, though. Is the concern you have here the concern of principle or of dollars? 312 MS. HARE: Both. 313 MR. SHEPHERD: Now, this is a principle that, of course, you've said yourself isn't likely to be applied again; right? It's a one-off thing. That was your direct evidence; right? 314 MS. HARE: Well, it might not be for other utilities in Canada or the United States. But certainly, I wouldn't see that the company would change its year-end back. 315 MR. SHEPHERD: Mr. Culbert, can you turn to your new version of School Energy 158, please. 316 Mr. Chairman, this is Exhibit I, tab 16, schedule 158. 317 MR. CULBERT: Yes. 318 MR. SHEPHERD: Mr. Culbert, this is mainly your work; right? 319 MR. CULBERT: Pardon me? 320 MR. SHEPHERD: This is mainly your work? 321 MR. CULBERT: Mine and my staff's, yes. 322 MR. SHEPHERD: Now, you're asking for a $4.5 million rate increase for the stub period; right? 323 MR. CULBERT: From an inflationary perspective, correct. 324 MR. SHEPHERD: And I'm looking at page 3 now. So for the stub period, you're seeking a quarterly ROE of 4.143 percent, which is higher than the 4.057 percent for the first quarter of the test year. I take it that's because of this recalculated annual ROE? 325 MR. CULBERT: The 4.143, as I mentioned in my evidence in-chief, used the three months' budgeted information for the October through December 2005 period calculated three-month average of averages rate base, et cetera, as per the intervenors' request, and then included an inflationary increase of $4.5 million into the results. 326 In other words, if the company didn't have that $4.5 million increase in rates for that three-month period based on the calculations we performed, if you look at note D at the bottom of the table, the ROE in fact for that three-month period would be 3.914 percent. 327 MR. SHEPHERD: Now, you haven't filed cost-of-service information for that stub period, have you? 328 MR. CULBERT: We filed cost-of-service information for the three-month period within the context of the A9, tab 1, schedule 3 information whereby we included the three months of additional information for that period with the nine months of information for the January through September 2005 period. 329 MR. SHEPHERD: That's not my question. Have you filed cost-of-service information for that three-month period? 330 MR. CULBERT: Within the context of those 12 months, yes, it has been filed. 331 MR. SHEPHERD: So you haven't filed those three months' worth of information, have you? 332 MR. CULBERT: By themselves? 333 MR. SHEPHERD: Yes. 334 MR. CULBERT: No, they have not been filed. 335 MR. SHEPHERD: There's nowhere we can look and see that stub period anywhere, cost of service information, is there? We can see the calendar year but we can't see the stub period, can we? 336 MS. HARE: Well, Mr. Shepherd, I think I tried to explain in the examination that we didn't do that and we won't do it because there is no way to do a cost-of-service presentation on a three-month period. The reference that I made to the two cases from Connecticut we felt were proof that no regulator looks at ROE on a three-month and if you can't look at an ROE on a three-month basis, you can't do cost-of-service on a three-month basis. In fact, what I showed from the Connecticut examples - and I could make those available if they're helpful to the Board - but those Connecticut examples reinforce the notion that you look at a quarter's returns in the context of a 12-month period. 337 MR. SHEPHERD: Yes, we all understand that. That wasn't my question. 338 Mr. Culbert, you have a number here of 4.143 percent. You calculate that by taking revenues and deducting certain things from it and getting a dollar figure; right? And then you apply it to rate base; isn't that true? 339 MR. CULBERT: That's correct. 340 MR. SHEPHERD: So what are the numbers? 341 MR. CULBERT: I'm not sure I understand the question. 342 MR. SHEPHERD: Well, you have -- in order to get 4.143 percent, that's a percentage, a profit figure as a percentage of a rate base figure, or an equity figure actually; right? 343 MR. CULBERT: Yes, it's -- 344 MR. SHEPHERD: So what's the profit figure and what's the rate-base figure? 345 MR. CASS: Mr. Chair, could Mr. Culbert be allowed to finish his answer to the previous question? 346 MR. SHEPHERD: I'm sorry, I wasn't trying to talk over him. My apologies. 347 MR. CULBERT: I'm sorry, I'm not quite sure of the question. Could you repeat it, Mr. Shepherd? 348 MR. SHEPHERD: 4.143 percent is a profit figure divided by an equity base figure; right? 349 MR. CULBERT: Correct. 350 MR. SHEPHERD: What's those two numbers? What's the profit figure and what's the equity figure? 351 MR. CULBERT: I don't have those numbers with me. The calculations were performed in response to an intervenors' request. I could certainly look for those numbers, but I don't have the numbers with me to show the rate base and equity, et cetera, for those three months. 352 MR. SHEPHERD: Aren't these the numbers that Ms. Hare just said you can't do? 353 MS. HARE: Can't do in a meaningful way, I should have added. 354 MR. SHEPHERD: So you do have the numbers. These are the numbers we've been asking for since February. You do them, right, you just won't give them to us? 355 MS. HARE: I'm sorry, Mr. Shepherd, you're now asking about -- I don't want to quibble. You asked for 15-month numbers in February, not three-month numbers. 356 MR. SHEPHERD: Okay. And so if you add 12 plus 3, this is a discussion we've had before, right, 12 plus 3 still equals 15, just like it did two weeks ago. 357 MS. HARE: Yes, it does. 358 MR. SHEPHERD: Mr. Culbert, so you have a profit figure and you have an equity figure in order to get that 4.143 percent; right? 359 MR. CULBERT: Yes, I do. I might add, as I explained in my evidence in-chief, those calculations have been based on three-month average calculations for rate base, equity, et cetera, which there really is no method of calculating those results. I did so at the request of intervenors and I've never done quarterly returns of this nature prior to that request. So the Board would have to look at them and determine whether or not those calculations are correct in the first place before viewing whether the information is correct. 360 MR. SHEPHERD: But then you haven't tabled them so the Board can't check anything, can it? 361 MR. CULBERT: No, they haven't been tabled at this point in time. This is the first we've been asked for this. 362 MR. SHEPHERD: Just before I ask for them, the equity number is actually 35 percent of a rate-base number; right? 363 MR. CULBERT: Yes, it is. 364 MR. SHEPHERD: And the profit number is a net of revenues, projected revenues, minus O&M and, sorry, depreciation and debt costs, right, financing costs? 365 MR. CULBERT: It's a mini revenue requirement calculation for a three-month period which, you're correct, it includes three months of revenues, three months of costs, and a three-month rate base within an assumed 35 percent average equity of that three-month period. 366 MR. SHEPHERD: So this is -- you're familiar with the regulatory schedules, the standard set of regulatory schedules at the end of every filing; right? 367 MR. CULBERT: Yes, I am. 368 MR. SHEPHERD: Okay. And so you had to do those for the three months in order to get that 4.143 percent. 369 MR. CULBERT: Yes, I did. 370 MR. SHEPHERD: Okay. And then you have another number at the bottom of that chart, I'm still on page 3 of 158, which is 3.914 percent. Now, you again had to do that same set of regulatory schedules to get that number, didn't you. 371 MR. CULBERT: It's actually the same set of results with a removal of $4.5 million of revenues from the calculations. 372 MR. SHEPHERD: Okay. So then I'm asking you to undertake to file that data, please. 373 MR. BETTS: Can you reference that last number for me. 374 MR. SHEPHERD: Sorry. In note, I think it's D on page 3 of 158, it's very small type. 375 MR. BETTS: Thank you. 376 MR. SCHUCH: Mr. Chair, that would be Undertaking J.10.1, and perhaps I could ask Mr. Shepherd to give us a summary of that undertaking. 377 MR. SHEPHERD: Yes. I'm asking for the full set of regulatory schedules for the stub period with and without the 4.5 percent increase -- sorry, the $4.5 million increase. 378 UNDERTAKING NO. J.10.1: TO PROVIDE THE FULL SET OF REGULATORY SCHEDULES FOR THE STUB PERIOD WITH AND WITHOUT THE $4.5 MILLION INCREASE 379 MR. BETTS: Do the witnesses understand what is being asked of them? 380 MR. CULBERT: Yes, I do, Mr. Chair. 381 MR. BETTS: Thank you. Please continue, Mr. Shepherd. 382 MR. SHEPHERD: Thank you. Now, one of the components of that calculation is an O&M figure; right? 383 MR. CULBERT: That's correct. 384 MR. SHEPHERD: And for O&M, did you just use 25 percent of the agreed O&M in the settlement agreement? 385 MR. CULBERT: No. I believe the budget department went through a typical budgeting process to determine what the requirement would be for those three months. 386 MR. SHEPHERD: So then you're asking this Board for an increase in your O&M for this stub period, aren't you? 387 MS. HARE: Yes. 388 MR. SHEPHERD: How much? 389 MS. HARE: This is laid out in the evidence. 390 MR. CULBERT: We can look to Exhibit A9, tab 1, schedule 3. If you look to schedule 3A, page 2, the O&M that the company is asking for within the context of the 12-month period ending December 31st is an O&M number on line 9, column 3, of $327 million. 391 MR. SHEPHERD: So you're asking for a $5.2 million increase in O&M. 392 MS. HARE: Yes. 393 MR. CULBERT: The results are showing that we're looking at $5.2 million increase in O&M for the three-month period of October through December 2005 compared to the October through December period of 2004. That's correct. 394 MR. SHEPHERD: Is that $322.5 million figure, is that the figure in the settlement agreement? 395 MR. CULBERT: No. That's the figure prior to the settlement agreement. 396 MR. SHEPHERD: So then what's the new number? 397 MR. CULBERT: The company hasn't filed an update of this information. As it explained to the Board, it would require probably three to four weeks of time to redo this information after the settlement proposal was completed. 398 MR. SHEPHERD: So you want an increase -- so you want an increase in your O&M, but you're not going to tell us how much, then, is the truth, isn't it? 399 MR. CULBERT: No, that's not the truth. 400 MR. SHEPHERD: It's not the 5.2, is it? 401 MR. CULBERT: The 5.2 was a change in the October through December periods at a point in time. That number might be different at this point in time. I could certainly look to provide that to the Board if it would be helpful. 402 MS. HARE: Mr. Shepherd, there's a VECC Interrogatory 136 which laid out, again this is prior to the settlement proposal, in response B, some of the drivers for the change in O&M. And we could check whether or not those have changed, but I suspect they wouldn't have changed. Those were the identified increases in O&M for the three-month period. 403 MR. SHEPHERD: Mr. Culbert, will you agree that a $5.2 million increase in O&M for a single quarter is equivalent to a 7 percent annual increase in O&M? 404 MR. CULBERT: I'd have to check your calculations, but if you've done the calculations, I would assume your number is correct. 405 MR. SHEPHERD: It's in that range, isn't it? 406 MR. CULBERT: Presumably. 407 MS. HARE: No, it's not. 408 MR. SHEPHERD: It's not? 409 MS. HARE: No. 410 MR. SHEPHERD: well, 5.2 million for one quarter is 20.8 million for four quarters, isn't it? 411 MR. ROSS: Mr. Chairman, here we're asking for rate inquiries for one quarter versus the previous quarter. This is not an actual rate, so all we're looking at here is the change between two consecutive 12-month periods, and that naturally would be about 3 percent. 412 MR. SHEPHERD: Well, they're actually not consecutive periods, are they? They're overlapping periods in which there is only one quarter difference; isn't that right? 413 MR. ROSS: If your referring to A9, tab 1, schedule 3A, we're relating to 12 months, December versus the previous December. 414 MR. SHEPHERD: Sorry, column 1 says test year with September 30th year-end, and column 3 says test year with December 31st year-end. That doesn't look like consecutive 12-month periods to me, but maybe I'm misunderstanding your evidence. 415 MR. ROSS: I believe the $5.2 million is the difference between the year ended September and the quarter ended December. 416 MR. SHEPHERD: Which means that it's a one quarter difference, isn't it? 417 MR. ROSS: But it takes into account inflation over a 12-month period, not three months. 418 MR. SHEPHERD: That's true. But, of course, if you applied that, as Ms. Giridhar said, you set rates based on 12 months. You set rates for the stub period based on 12 months. So if you apply it over 12 months, it's $20.8 million, isn't it? 419 MR. ROSS: I don't believe you can do the math that way. 420 MR. SHEPHERD: Well, tell me how you should do the math. 421 MR. ROSS: The increase is over a 12-month period, not over three months. We're not extrapolating three months over 12 months. 422 MR. SHEPHERD: Okay. Let's come back to page 3 of 158, the revised 158. 423 Mr. Culbert, correct me if I'm wrong, but you're proposing that the ROE, projected ROE for the period ended September 30th, '06 is 9.776 percent; right? 424 MR. CULBERT: That's correct. That's using the company's latest or January consensus of a calendar year ROE, correct. 425 MR. SHEPHERD: But that's not how the formula works, is it? The formula can't be done now for 2006, can it? 426 MR. CULBERT: For 2006? 427 MR. SHEPHERD: Yeah. 428 MR. CULBERT: No. What that's showing is if you add up columns 5, 6, 7 and 8, the consecutive quarterly returns on rows 4 or 1, that the accumulation of those four quarterly ROEs amount to 9.776 percent. 429 MR. SHEPHERD: And is that what you're telling us the ROE for that 12-month period should be? 430 MR. CULBERT: You're quite correct. I'm not sure what the formula ROE would be for 2006 at this point in time. I'm showing that that's what the company would earn if it assumed that it would earn 8.114 percent in the January through March period, the same as we earn in January-March, April through June period and the July through September period. 431 MR. SHEPHERD: Let me come back to this 3.914 percent number which is at the bottom in the note. That's the number that would be in column 5 if you didn't get the $4.5 million increase; correct? 432 MR. CULBERT: That's correct. 433 MR. SHEPHERD: That's in line 2 -- sorry, line 1 in column 5. 434 MR. CULBERT: Line 1 or line 4, correct. 435 MR. SHEPHERD: Right. And the reason why that's less than 4.057 which you see on line 1 in column 1 is because you're assuming that your costs are higher. You have, in effect, approved costs that are higher; right? 436 MR. CULBERT: That's partially correct, yes. 437 MR. SHEPHERD: So you're asking the Board to approve an increase in costs. 438 MR. CULBERT: Pretty much, yes. 439 MR. SHEPHERD: Okay. But you haven't actually filed those costs for the three months, have you? 440 MR. CULBERT: We'll be filing it according to the undertaking I've taken from you, yes. 441 MR. SHEPHERD: You're just going to file a total for the undertaking; right? 442 MR. CULBERT: Yes. I'll file the information that I can to show the Board the revenue requirement that was calculated for the intervenors for that three-month period. 443 MR. SHEPHERD: And the information you file is going to be based on the presettlement agreement numbers, isn't it? 444 MR. CULBERT: At this point it is. I could take an estimate as to how long we would require to calculate the numbers post-ADR, but at this point I would certainly be filing the numbers that were prior to the ADR agreement. 445 MR. SHEPHERD: Okay. So the numbers will be wrong when you file them, but they'll be close. 446 MR. CULBERT: They'll be representative -- fairly representative of what the company would earn in that period. 447 MR. SHEPHERD: In your direct evidence you talked about the $30 million figure, the famous $30 million that you calculated, and you said that that $30 million, the - I say this in a non-pejorative away - the overearnings amount in the stub period assumes an $85.4 million revenue deficiency that's made up for in a rate increase; right? 448 MR. CULBERT: Yes. The results assumed that the company would have an increase in rates of approximately $85.4 million at that point in time. 449 MR. SHEPHERD: And you said in your direct evidence that that number would change if the rate increase changed; right? 450 MR. CULBERT: That's correct. 451 MR. SHEPHERD: Tell us how that happens. 452 MR. CULBERT: The rates that are assumed to be applied to that three-month period which Ms. Giridhar's group would give to us would have assumed an increase of $85.4 million. Therefore, the unit rates that she currently has in existence would increase, times the volumes for that three-month period, net of cost, et cetera, would produce a certain revenue requirement and deficiency/efficiency. If those rates declined by something other than Ms. Giridhar's group assumes as an increase in those rates of $85.4 million such that the Board adjusts the eventual deficiency the company would be allowed to increase its rates by, the unit rates would decline and times the volumes of that three- month period would produce a lower assumed overearnings number for that three-month period. 453 MR. SHEPHERD: That's interesting, because the Board or, in this case, the settlement agreement, right, doesn't change the deficiency, does it? It changes the costs that it allows you to recover; isn't that true? 454 MR. CULBERT: It changes the revenues and the costs in the October through September 12-month period. What it doesn't do is look at the volumes or the costs in the three-month period of October through December of 2005 and what the rates that the company would have available to collect revenues in that three-month period would otherwise be. 455 MR. SHEPHERD: The only way that the $30 million would change based on this Board's decision, tell me if this is correct, is if you assume that the costs and the revenues in the stub period are different from the costs and revenues in the 12 months; true? 456 MR. CULBERT: The company is not sure we understand your question. We've given the answer that if the rates, in fact, decline from what the company had used in its original calculation of that assumed overearnings number, if the rates declined from what it used in calculating that number as they have as a result of ADR and whatever the Board's determination of final rates will be, and those rates times the volumes and whatever the cost projections are in that three-month period will produce a lower assumed overearnings number for that three-month period. 457 MR. SHEPHERD: That's what I don't understand, because the ADR settlement doesn't reduce your ROE, does it? All it says is that your O&M is lower and your capital costs are lower; right? 458 MS. GIRIDHAR: If I might just jump in here. Basically what that $30 million number represents is a test for that three-month period that says, compare revenues and costs for that three-month period. So as a result of the ADR settlement, you will be having lower rates that will apply to the revenues for that three-month period. If you look at the two sides of the equation, if your costs remain identical for that three-month period, the revenues then are lower, the difference in the revenue costs then has to be lower than before. 459 MR. SHEPHERD: Well, surely that's exactly the point, is that the ADR settlement agreement does not say that your costs remain the same. The reason why the rates are lower is because your costs are lower; right? 460 MS. GIRIDHAR: That's the cost for the 12-month period from October 1, 2004 to September 30, 2005. 461 MR. SHEPHERD: So the only way that the $30 million wouldn't be right is if you don't continue the terms of the settlement agreement for the three months, but rather, you bump up your O&M or you bump up your capital expenditures. You have to make one of those underlying changes, don't you, in order to change the $30 million. 462 MS. GIRIDHAR: Well, I don't know that we're making an underlying change because the settlement proposal was for the 12-month period October 1 to September 30th. We are now talking about a three-month period that extends beyond what was agreed to in the settlement proposal. 463 MR. SHEPHERD: So then the company's position is you can use whatever numbers you want for the stub period? 464 MS. GIRIDHAR: No. 465 MR. CULBERT: No. The company, as you asked, has a projected set of numbers or costs for that three-month period, and to the extent that those costs increase, which is why the company asked for an inflationary increase in the first place, that costs typically do increase in that three-month period, depreciation goes up, for example, as a result of the company spending capital dollars. O&M increases would occur as a result of inflationary pressures, et cetera, as would potentially municipal tax calculations increase or a variety of different costs. So those costs are not the same as what the company would incur in the 2004-2005 period of October through September 2005. There are increases in that three-month period. 466 MR. SHEPHERD: So the bottom line is, then, that you're not proposing, the company is not proposing to continue the agreements in the settlement agreement for the following three months. 467 MS. GIRIDHAR: If I might just -- I think what the company is proposing for that three-month period is a reevaluation of rates using a proxy, which is 90 percent of CPI, which would be calculated for a 12-month period. So essentially, then, what I understand is that we are trying to substitute what the company has proposed as a proxy for estimation of costs for that three-month period with some presumption that the costs in the three-month period must follow from the settlement agreement for the 12-month period that precedes it. 468 MR. SHEPHERD: Let me move on. 469 Mr. Culbert, still looking at this chart, page 3 of the Interrogatory Response 158, there's a line there called cumulative annual ROE. You see it on line 2 and line 5. 470 MR. CULBERT: Yes. 471 MR. SHEPHERD: So can you explain what that line means. 472 MR. CULBERT: The cumulative annual ROE? 473 MR. SHEPHERD: Yeah. 474 MR. CULBERT: What that is is the accumulation of what the company earns in each of the three-month periods leading up to September 5 in columns 1, 2, 3, and 4, and then what the company earns in October through December of 2005, which is pretty much representative of what the company earns in the October through December 2004 period. And then it goes on to accumulate earnings for each of the January through March 2006 period, and in columns 7, 8 and 9, the subsequent three-month periods after that. 475 MR. SHEPHERD: The point here is that it doesn't matter what quarter you start with, you have to have four quarters to get a fair calculation of ROE; right? 476 MR. CULBERT: That's the company's position. The only way you can determine what the company's annual return on equity is is by looking at four consecutive quarters of earnings. 477 MR. SHEPHERD: And so in your current fiscal year, for example, what happens is that in the first quarter you earn more than 9.69 percent and in the second quarter, even more still, but then those extra earnings simply -- they get sort of clawed back in the third and fourth quarters because you have earnings shortfalls in those quarters; right? 478 MR. CULBERT: The quarterly ROEs are different from 25 percent of an annual ROE; that's correct. 479 MR. SHEPHERD: And is the pattern I'm talking about, is that correct, you earn more Q1 and Q2, and then you claw it back in 3 and 4 to get to the right number at the end of four quarters? 480 MR. CULBERT: Well, what the schedule shows is that the company earns whatever it earns in each of those quarters and it would continue to earn those returns in those quarters regardless of whether it reports earnings at a September period or December period. 481 MR. SHEPHERD: I guess what I'm trying to understand is, this is sort of like a bank account; right? You have some extra money in Q1 -- in the test year we're talking about right now, the 12 months, you have some extra money in Q1, you put it in the bank account, leave it there. In Q2, you have some more extra money. You put that in. But then in Q3, you have to take some of it out because you have a shortfall, and in Q4 you have to take the rest of it out so you're back to zero, you're back to 9.69 percent; is that right? 482 MR. CULBERT: Pretty much. 483 MR. SHEPHERD: Okay. So let's -- so if you have a quarterly percentage of 4.057 percent, on an annual basis, that's 16.228 percent; right? You just multiply it by four. 484 MR. ROSS: That's correct, yes. 485 MR. SHEPHERD: And similarly, if you have a quarterly percentage of 8.114 percent, that works out to be 32.456 percent; isn't that right? 486 MR. ROSS: If you multiplied that number by four, yes. 487 MR. SHEPHERD: And similarly, if you have a loss in your -- the quarters beginning April of 1.6 percent, that's really a loss of -- sorry, of 0.4 percent, that's really a loss of 1.6 percent, isn't it, on an annual basis. 488 MR. CULBERT: If one is to assume that you can simply take one-quarter of the company's operating cycle and extrapolate what the company would earn on an annual basis, I would disagree with your calculations. If you're simply saying four times whatever the return is in that quarter would earn you a 32 percent return or 16 percent return, I can't disagree with your math, but it wouldn't be indicative of what the company would earn on an annual basis. If one was to suggest that the company would typically earn 16 percent by multiplying the first quarter by four, it would be wrong because purely the -- surely the company doesn't earn that type of return on a 12-month basis. 489 MR. SHEPHERD: No, Mr. Culbert, there's no trap here. If you had four quarters that were exactly like Q1, you would end up with 16.228; right? 490 MR. CULBERT: If you did, that's correct. 491 MR. SHEPHERD: and similarly, if you had four quarters like Q3, you'd lose 1.6 percent. 492 MR. CULBERT: That would be correct. 493 MR. SHEPHERD: Okay. So Mr. Chairman, my friends are joking that I went to the University of Crayola, and to prove that, I've filed another visual aid. This I think you've had copies of and I've distributed them around the room. Perhaps we should get an exhibit number for that. 494 MR. SCHUCH: Mr. Chair, that would be Exhibit K.10.2, quarterly ROE patterns existing year-end. 495 EXHIBIT NO. K.10.2: QUARTERLY ROE PATTERNS EXISTING YEAR-END 496 MR. SHEPHERD: Mr. Culbert, can you confirm that this was provided to you on the weekend? 497 MR. CULBERT: Sorry, Mr. Shepherd, I just have to locate my copy of it. 498 MR. SHEPHERD: Use the coloured copies. It's nicer. 499 MR. CULBERT: It looks much prettier, that's for sure. I received this actually this morning, yes. 500 MR. SHEPHERD: Mr. Hare, can you confirm that it was provided to the company on Saturday? 501 MS. HARE: Yes, it was. 502 MR. SHEPHERD: So I just want to take you through this and see if conceptually we're ad idem here. If you take it look at the first page of this visual aid, you'll see that you have four red columns, if you like, and that represents the four quarters of the year ended September 30th, '05. Do you see that? 503 MR. ROSS: There's three red and four orange. 504 MR. SHEPHERD: The orange is -- my printer decided it would have a little frolic on its own. 505 MR. BETTS: I don't want to point this out to anybody that may be sensitive, but if there is anybody that has colour blindness, this may be a little hard to discern, so we may want to number the columns so we don't have to deal with that. 506 MR. SHEPHERD: I'll be referring to the dates at the bottom anyway, Mr. Chairman. 507 MR. BETTS: Thank you. Please do. 508 MR. SHEPHERD: Mr. Culbert, this shows the pattern that you were talking about and that Mr. Ross has talked about in his evidence too, this pattern where your earnings are higher than your annual rate in the October quarter than in the January quarter, but then in the April and July quarters you lose money, so then at the end of the year you're back to 9.69 percent; right? 509 MR. CULBERT: That's correct. 510 MR. SHEPHERD: And it's true, isn't it, that that happens every year. You have a similar pattern every year. 511 MR. CULBERT: Yes. The company earns different returns out of its annual ROE each quarter on a seasonal basis; that's correct. 512 MR. SHEPHERD: And it tends to be similar each year, right, the pattern. 513 MR. CULBERT: Yes, it does tend to be very similar. 514 MR. SHEPHERD: And in fact, so you see the set of four orange or truly orange colours starting October '05 to July '06 quarters, that's a set of four quarters, and if we just visually look at that, it looks like it ends up working out to be 9.69 percent, which it would, right, normally. 515 MR. CULBERT: Normally it would, yes. 516 MR. SHEPHERD: Okay. Now, just let me understand something. We're talking about this as if these were percentages, but they're not actually percentages; right? They're real money, aren't they? 517 MR. CULBERT: That's correct. 518 MR. SHEPHERD: So, in fact, in that quarter October '04, you currently expect to earn $30 million more than a 9.69 percent for that quarter; right? 519 MR. CULBERT: If you're to extrapolate that one quarter into an annual return, that would be correct. 520 MR. SHEPHERD: Again, no trap. I'm just getting the number. $30 million; right? 521 MR. CULBERT: That's correct. 522 MR. SHEPHERD: And in the second quarter, will you accept subject to check that the number is $104 million? 523 MR. CULBERT: Do I actually have to perform the calculation? 524 MR. SHEPHERD: I'm asking if you will accept subject to check. 525 MR. CULBERT: I would say more or less, without doing a calculation for it. 526 MR. SHEPHERD: Okay. So then by the end of March, you're ahead $134 million in a normal 12-month year, in your current year; right? You're ahead $134 million. You can't spend it yet because you're going to need it, but you're ahead; right? 527 MR. CULBERT: We're ahead of what an average return is for the fiscal year? 528 MR. SHEPHERD: Yes. 529 MR. CULBERT: I would say we're ahead of an average for the fiscal year. We're certainly not ahead of what the company typically earns in those two quarters in any prior year or will earn in any subsequent year. 530 MR. SHEPHERD: Of course. Of course. And so you've got, in effect, $134 million in this bank account, but then in the April quarter, will you accept subject to check that you're actually going to be $52 million below a 9.69 percent return? 531 MR. CULBERT: Subject to check, sure, I would agree. 532 MR. SHEPHERD: Okay. And that would leave you with $82 million in your bank account. 533 MR. CULBERT: If your math is correct, I would agree. 534 MR. SHEPHERD: And so then will you -- can you estimate, given the fact that there's $82 million in the bank account, can you estimate what your shortfall is in the fourth quarter? 535 MR. CULBERT: It would be $82 million. 536 MR. SHEPHERD: Exactly, because it's a zero sum game; right? These work in sets. 537 MR. CULBERT: If you're to look in four quarters of returns, it should always achieve what the Board-formula ROE is for a four-quarter consecutive term. 538 MR. SHEPHERD: Okay. And that pattern is just a temporary timing difference during the year; right? It's not -- you don't get any -- it doesn't give you anything -- any special break, does it? 539 MR. CULBERT: I'm not sure I understand the question. 540 MR. SHEPHERD: The company doesn't get any benefit out of that pattern. At the end of the year, it nets out to zero; right? 541 MR. ROSS: No, I believe the company does not get any benefit through seasonal earnings. 542 MR. SHEPHERD: And, in fact, even though you have this extra money in the winter, that goes into your working capital calculation and so it nets out. Even the time value of the money doesn't benefit you, does it? 543 MR. ROSS: No. 544 MR. SHEPHERD: Okay. So then -- so we have the four quarters in the test year and we see the same pattern year after year after year, and that's the same thing. You earn extra, you draw it back, you get to zero at the end of the year; right? It's like a closed system; true? 545 MR. CULBERT: For a typical 12-month year, I would agree. 546 MR. SHEPHERD: So then I'd like you to look at the next page of Exhibit K.10.2, and you told us earlier, and you've said in your evidence, that it doesn't matter what quarter you start with, as long as you use four quarters, your calculation should end up right; correct? 547 MR. CULBERT: Yeah. We stated that if you add up any four consecutive quarters, the company's return would typically be its allowed ROE for a 12-month period. 548 MR. SHEPHERD: So on this second page of the visual aid here, you see the same test year, you see $30 million in the first quarter, another 104 in the second quarter, and then you draw it back, 52 in the negative in the third quarter and another 82 negative in the fourth quarter, you're back to zero. 549 Now I'm going to ask you to just skip over the stub period for a second and go to your new fiscal year, your new 2006 fiscal year. Do you see the four orange, real orange blocks starting January '06? 550 MR. CULBERT: Yes. 551 MR. SHEPHERD: Okay. And so what's going to happen starting January '06 is that in the first quarter, you're going to be 104 to the good; correct? 552 MR. CULBERT: Correct. 553 MR. SHEPHERD: Then in the second quarter, you're going to lose 52 million and so you're going to be back to 52 in your bank account; correct? 554 MR. CULBERT: Correct. 555 MR. SHEPHERD: And then in the third quarter you're going to lose 82 million, so you're actually going to have an overdraft of $30 million in your bank account, much like mine except it's a larger figure. You're going to have 30 million overdraft; right? 556 MR. CULBERT: I'm not sure about your bank account, but I would agree. 557 MR. SHEPHERD: But then in the further quarter, magically, you have that extra 30 million so you're back to zero; right? 558 MR. CULBERT: Actually, not magically, the company has earned, once again as your chart shows, that for every October through September period, the company earns what it typically does in that three-month period. 559 MR. SHEPHERD: Absolutely. That's great. And so you see in 2006, you see that happen in 2007. So the pattern is different but the result is the same, isn't it? 560 MR. CULBERT: That's correct. 561 MR. SHEPHERD: And after every year you end up at zero. 562 MR. CULBERT: After every 12-month year you end up with zero. 563 MR. SHEPHERD: Okay. And the reason for that is you have to -- as you've said, you have to look at these quarters in sets of four; right? 564 MR. CULBERT: That's correct. 565 MR. SHEPHERD: So now we have this one quarter that I left to the end which is the October quarter, the orphaned quarter, and it doesn't have a set, does it? 566 MR. CULBERT: You're talking about the October quarter at 2012, at the end of your chart? 567 MR. SHEPHERD: No, October 2005. 568 MR. ROSS: Well, it does have a set. It's the set of the previous three quarters. 569 MR. SHEPHERD: Well, yeah, except that those previous three quarters are already balancing out another quarter. How can you count it twice? 570 MR. ROSS: No. Those are balancing out your bank account for the previous three quarters. 571 MR. SHEPHERD: Well, except that the bank account already had money in it and it came out to zero. We've already agreed that at September 30th, '05, it's at zero. We already agreed to that; right? 572 MR. ROSS: If you started with zero, yes, at zero. 573 MR. SHEPHERD: Okay. And we've already agreed that if you start out January '06 at zero, at December '06 you're still at zero; isn't that right? 574 MR. ROSS: That is correct. 575 MR. SHEPHERD: Okay. So then I don't see where the orphaned quarter has three buddies that will balance it out. 576 MR. CULBERT: Of course it doesn't. It's being reported as parliament of a 15-month year, so that quarter's results have been transferred from your quarterly ROE patterns existing year-end chart from being the first year quarter of a fiscal 2006 annual report and they're now become reported as a final quarter of a 15-month year. All that those five quarters you're showing in your year-end change result are indicative of is what the company would earn for those particular five quarters if you were to add up those particular five quarters anywhere along your chart. 577 What your chart is failing to show in your existing year-end chart is at the end of your chart, which ends at July of 2012, it's failing to show that, in fact, if you were to add an interim financial reports return results for the -- I guess it would be the July, August and September period, that in fact you'd have another bar chart adding up or being very similar to the October through December periods that you show all the way through your chart. And by the end of that point in time, at October of 2012, the company's retained earnings and cumulative ROEs would be identical. In fact, you could pick a point in time anywhere along this chart as to the company's retained earnings or balance sheet within the retained earnings and the returns would be identical in either scenario. 578 MR. SHEPHERD: Mr. Culbert, just looking at page 2 of this visual aid here, it's true, isn't it, that as of December 31st of each year on this chart except '04, every other year as of December 31st, you're $30 million to the good every year? At the end of every fiscal period on this chart, except the September one, every other one, you're $30 million to the good, aren't you? 579 MR. CULBERT: That's correct. 580 MR. SHEPHERD: Cumulatively. 581 MR. ROSS: Well, if you start from zero at your first point in time, it would be 30, yes. 582 MR. SHEPHERD: And ratepayers never get that $30 million back, do they? 583 MR. ROSS: Well, they do. 584 MR. SHEPHERD: They get it back temporarily during the year but then you take it again; right? 585 MS. GIRIDHAR: If I might just make a point here. If you're comparing two scenarios, you should have the exact same amount of time being represented in both of those two scenarios. The first one you've got October '04 to the period ended September 30th in the year 2012. In the next one, you've got the same starting point, October '04, but you've actually included one quarter at the end which takes you to the end of December 2012. So I would suggest that any comparisons you make should, in fact, have the same number of intervals that you're considering in both scenarios. You've got one interval less in the first than you do in the second. And if you were to make that like comparison, you would see that a year-end change does absolutely nothing over any four consecutive quarters and it does exactly the same thing over any five consecutive quarters. 586 MR. SHEPHERD: Well, Ms. Giridhar, I'm just doing the same thing that Mr. Ross did in K.10.1, am I not? 587 Isn't that what you did, Mr. Ross? 588 MR. ROSS: It isn't. I compared retained earnings at the end of each quarter with the cumulative retained earnings of the company, and it was quite inconsequential of whether we had a quarter on its own or three quarters or -- and one of the things that was demonstrated, at any point in time, be it September 30th or December 31st, we would always be in the same position as far as retained earnings; that is, the earnings available for distribution by the company, the cash available in the bank, in other words, the value of the company. 589 MR. SHEPHERD: Now, you actually made -- for financial purposes, you made the change is this year; right? You're making the change this year. 590 MR. ROSS: We have not done it yet. We're contemplating it for 2004. 591 MR. SHEPHERD: Okay. So then in 2004, when you consolidate into Enbridge Inc., you're going to have an extra quarter to consolidate, aren't you? 592 MR. ROSS: That's correct. 593 MR. SHEPHERD: Isn't that going to increase the earnings by $50- or $60- or $70 million? 594 MR. GRUENDING: Mr. Shepherd, maybe I can respond to that. On a reported basis, indeed, it will. We will report 15 quarters, that is correct. However, the capital market community, investment community will quickly erase one quarter obviously as they value our company on a 12-month expected basis. 595 MR. SHEPHERD: That's interesting. They'll get rid of one quarter, but you're actually adding two quarters this year, aren't you? Because you use a quarter lag right now and it's not going to be a quarter lag anymore, is it? 596 MR. GRUENDING: That is correct. 597 MR. SHEPHERD: So they're going to take out one quarter but you'll still have an extra quarter, won't you? 598 MR. GRUENDING: We will consolidate in 2004 the four calendar quarters of 2004, and the fourth quarter, i.e., the December-ended quarter of 2003. 599 MR. SHEPHERD: Well, I think you're also going to consolidate Q3 of 2003, aren't you? Because you use a quarter lag right now. 600 MR. ROSS: No. It would be -- the current fiscal year ended September 30th, 2004, so that's 12 months, and it would be the quarter ended December 31st, 2004. 601 MR. SHEPHERD: Okay. So what do the capital markets do with that extra income? Do they just treat it as a windfall? 602 MR. GRUENDING: Yes, they remove that entirely. 603 MR. SHEPHERD: Well, they don't ignore it. 604 MR. BETTS: Mr. Gruending, can I get you to speak directly into the microphone. 605 MR. GRUENDING: Yes. Like any other unusual non-recurring items, they would remove it. 606 MR. SHEPHERD: But you still have the extra money; right? 607 MR. GRUENDING: We would have the same balance sheet, if you'd like, otherwise. The retained earnings would be the same under either scenario. 608 MR. SHEPHERD: When you had an after-tax gain on the sale of ESI of $240 million, the capital markets adjusted for that; right? 609 MR. GRUENDING: That's correct. 610 MR. SHEPHERD: But they still recognized that you had the $240 million, didn't they? They didn't ignore the fact that you had it. 611 MR. GRUENDING: I don't think the balance sheet is in question here, is it? I mean, we would have it either way. It would be in the bank, if you like, as you've said, in either scenario, so they would not remove it. 612 MR. SHEPHERD: Okay. I just have a couple of quick questions for you, Ms. Giridhar, on the upstream cost allocation question. 613 As I understand this, that phase-in that we see in -- I'm looking for the exhibit you just filed. This is Exhibit N1, tab 1, appendix B; is that right? "Estimated Rate Impacts of Four-year Phase-in." 614 MS. GIRIDHAR: Sorry, I was thrown off when you said "just filed." 615 MR. SHEPHERD: Sorry. 616 MS. GIRIDHAR: Give me a second. Yes. 617 MR. BETTS: Sorry, Mr. Shepherd, which document are we referring to now? 618 MR. SHEPHERD: The N is the settlement agreement. 619 MR. BETTS: And was this recently filed? 620 MR. SHEPHERD: This is June 10th. 621 MR. BETTS: Pardon me? 622 MR. SHEPHERD: It's the settlement agreement, so it's June 10th, and it's appendix B. 623 MR. BETTS: Thank you. 624 MR. SHEPHERD: It says table 2, "Estimated Rate Impacts of Four-year Phase-in." 625 Now, as I understand this, what you have is about $50 million that the general service classes are, in effect, overpaying right now that you're trying to correct, and you're doing it over four years. 626 MS. GIRIDHAR: That's correct. 627 MR. SHEPHERD: Okay. And the agreement says that as of October 1st each year, starting in 2004, and for three more October 1sts, you'll phase-in a certain percentage. 628 MS. GIRIDHAR: That's correct. 629 MR. SHEPHERD: And there's a formula for doing that. 630 MS. GIRIDHAR: That's right. 631 MR. SHEPHERD: Okay. Now, the agreement doesn't contemplate a change of year-end, does it? 632 MS. GIRIDHAR: That's correct. 633 MR. SHEPHERD: And so you've said I think to this Board, you said you can do it either way. You can continue to do it October 1st or you can change it to the new fiscal year of January 1st; right? 634 MS. GIRIDHAR: That's right. 635 MR. SHEPHERD: Either way works. 636 MS. GIRIDHAR: Yes. 637 MR. SHEPHERD: Okay. And aside from -- and administratively, it's a little bit more difficult to do it October 1st? 638 MS. GIRIDHAR: That's correct. Do you want me to explain why? 639 MR. SHEPHERD: Well, I'm asking, is it a significant difference or is it something that you can do relatively easily? 640 MS. GIRIDHAR: What's difficult is not so much doing it as of October as in the fact that we would have a new fiscal year the following January and cost allocations by definition are a zero sum game. So if the following January I now have a new set of allocation factors, then I would have to tweak that result somehow such that I come back to that zero sum game under the new cost allocation drivers that underpin it, because for the subsequent three quarters, I would want to reflect those new cost allocation factors because I would be doing that in the QRAM and anything else as far as rate-making process. So it's an administrative burden in the sense that I'm going to have to simulate the results of what happened the previous October except change it a little bit to reflect updated allocation factors the following January. 641 MR. SHEPHERD: Well, the extra work isn't as of January 1st, right, because you have to do the rates January 1st anyway. The extra work is for the October QRAM. 642 MS. GIRIDHAR: Well, I would agree with that in the sense that -- maybe I should explain this a little further. We've actually got two things that happen at any point in time, and this exhibit here assumes that there's only one thing that happens. It assumes that our world, our regulatory world actually repeats itself in future years in exactly the same manner as it is today, and if that were the case, i.e., everything else remaining the same, what this then says is how you would phase-in cost allocation changes such that the general-service customers pay a little bit less, and the large-volume customers pay more. 643 So underpinning this exhibit is an assumption that nothing else changes, but in fact everything else does change when you come into a new regulatory fiscal year. So at any point in time. I'm going to have two changes I need to reflect, one being the normal costs and volume changes that will happen when you update for a fiscal year, and the other one would be the impact of this phasing in. And at any point in time, I need to be able to separate those two impacts because the settlement agreement says the impact of the phasing in will not exceed 9 percent for any rate class. 644 So in that sense, if the phasing in, incorporating all these other changes, happened at the same time frame, it would be a little bit easier than, in fact, doing it the way I'm proposing now which is to phase-in the cost allocation change at a time that doesn't synchronize with all the other changes. 645 MR. SHEPHERD: The reason why you're proposing October 1st rather than January 1st is because that's what the agreement is; is that right? 646 MS. GIRIDHAR: I don't believe it's said anywhere in the agreement, but I offered it as an option that might be acceptable to all the parties -- sorry, maybe I should be corrected. I'm sorry? I'm sorry. 647 MS. HARE: I'm sorry, Mr. Chairman, I was just reminding Ms. Giridhar that we shouldn't talk about discussions we had during ADR. But if I could just answer Mr. Shepherd in concept, it was really the impact on the residential customers that we're trying to correct in the first place -- sorry, rate 6, rate 1 customers, that we're trying to correct in the first place in terms of our belief that the allocation wasn't fair between rate classes. And so it seemed to us, looking at years 1 and 2, that the impact would basically, if we did it October 1st for the first two years, then those classes would get the benefit of the reallocation. And then after that, Ms. Giridhar is concerned about the additional work, but what we're really thinking is that we might deal with that when we get to years 3 or 4 as to whether we approach the intervenors and the Board and file for a different phase-in. But what we are saying is that for the first two years, it would be October 1st. 648 MR. SHEPHERD: And, in fact, if you used January 1st, 2006 rather than October 1st, 2005, correct me if I'm wrong, but the effect would be that a $2 million additional subsidy would take place, roughly $2 million additional subsidy would arise because of that quarter lag; right? 649 MS. GIRIDHAR: You're referring to the $8 million for the second year that's postponed by a quarter, yes. 650 MR. SHEPHERD: Yes. And that $2 million, the rate 1 and rate 6 customers, they never get that back; right? That's a subsidy. They've lost it forever. It's not a timing difference. 651 MS. GIRIDHAR: No, it's a delay. 652 MR. SHEPHERD: Well, is it a delay? The rates are not going to be fixed for that three months and as a result there's going to be $2 million of extra subsidy in those three months; right? 653 MS. GIRIDHAR: Yeah, you do extend the subsidy by a three-month period, if that's what you're asking, yes. 654 MR. SHEPHERD: Okay. And those ratepayers never get that subsidy back. It's fixed eventually, but that $2 million they never get back; right? 655 MS. GIRIDHAR: Well, the act of fixing it would eliminate -- 656 MR. SHEPHERD: From the point it's fixed onward. 657 MS. GIRIDHAR: That's right. 658 MR. SHEPHERD: For that three months, they're out of pocket $2 million; right? 659 MS. GIRIDHAR: That's right. 660 MR. SHEPHERD: They don't get that back. 661 MS. HARE: And that's why that's not our proposal. 662 MR. SHEPHERD: Thank you. Those are my questions, Mr. Chair. 663 MR. BETTS: Thank you, Mr. Shepherd. 664 I had Mr. Janigan next. 665 MR. JANIGAN: Thank you, Mr. Chair. 666 CROSS-EXAMINATION BY MR. JANIGAN: 667 MR. JANIGAN: I wonder if I could start with an example, at least what I think is a simple example, a hypothetical situation, and ask you to comment on it. Let's assume that in the summer of 2005, a regulatory revolution takes place and the regulatory accountants en masse persuade the Board that we should go to cost-of-service reviews every three months commencing October the 1st, 2005. So let's assume for that three-month period, if we're doing the standard cost-of-service review, that we would, first of all, estimate the costs, estimate the revenues, the annual rate of return will continue at the same level, and we would fix rates based upon the revenue requirement for that three-month period. Do you get me so far? 668 MS. GIRIDHAR: Yes. 669 MR. JANIGAN: Now, looking at the rate of return for that period, I assume that -- for sake of simplicity, let's say that the rate of return is 10 percent, that the rate of return that we would use for that three-month period would be 2.5 percent. Would I be correct of that? 670 MS. GIRIDHAR: These are all your assumptions? 671 MR. JANIGAN: Yes. 672 MS. HARE: We don't have to agree with your assumptions, you are just laying out your assumptions? 673 MR. JANIGAN: Yes. Would you agree that that would be the rate of return that would be applied for that three-month period if we wanted it to remain the same? 674 MS. GIRIDHAR: I think that's a scenario that I mentioned in my direct examination. If every quarter were exactly -- a scalable version of a fiscal year, then yes, you could scale everything down to that quarter, including the ROE in that sense. 675 MR. JANIGAN: And that would be 2.5 percent. Well, let's say in December of that year there's a counterrevolution. Ms. Giridhar's department has swollen to three times its size, she's the vice-president of the company. They decide, no, no, no, this is not going to happen. We're going to go back to 12-month cost-of-service reviews starting on January the 1st. So we would have a cost-of-service review for the next year, we would set all the costs, we would set all the revenues, and the return on equity we would use for that 12-month period presumably would be the 10 percent. Isn't that correct? 676 MS. GIRIDHAR: This is your new set of assumptions? 677 MR. JANIGAN: Yes. 678 MS. GIRIDHAR: Okay. 679 MR. JANIGAN: So in the context, let's apply my hypothetical example to the context of the current situation. Let's assume that if we had revenues and costs set correctly for the stub period, the return on equity in the example where the return on equity is set at 10 percent for that stub period in the current case should be 2.5 percent, if we have revenues and costs set correctly. 680 MS. GIRIDHAR: I would question what you mean by setting revenues and costs correctly. 681 MR. JANIGAN: Well, if we had the revenues and costs for that three-month period estimated correctly, okay, and accurately, then the return on equity for the company, in my example, should be 2.5 percent. 682 MS. HARE: I think that's correct, Mr. Janigan. If your company earns exactly the same amount in each quarter, that makes sense. But where there's a seasonal business, it doesn't make sense. 683 MR. JANIGAN: But if we have the revenues and costs for that stub period correctly estimated, we can then apply the ordinary return on equity and get the appropriate rates. 684 MS. HARE: Well, I think -- 685 MS. GIRIDHAR: I don't think -- sorry. 686 MS. HARE: The appropriate return on equity could be set on a three-month period, but then it would look at what that business typically earns, and if it's a regulated utility, in comparison to other investments, other businesses. It would still use the fair rate of return principle. And if there's no seasonality, it would be 2.5 percent. But if there's seasonality, I would argue that it's not 2.5 percent for each quarter. Each quarter would be viewed in a different way. 687 MR. JANIGAN: Yes, but once again, it's a matter of ensuring that we have the correct information in that quarter that accurately estimates the revenues and the costs; correct? 688 MS. HARE: No, I don't think it's just revenues and costs. 689 MS. GIRIDHAR: I don't think it's just a question of estimating revenues and costs, it's the question of determining what is the appropriate return for the company over its operating cycle. 690 MR. JANIGAN: Well, let's go back to my example. We've got a three-month period. The appropriate return for that three-month period as a quarter of the year is 2.5 percent. 691 MS. HARE: If it earns the same amount in each quarter. 692 MR. JANIGAN: That's why you need the appropriate amounts for revenues and costs. If you have the revenues and costs and you apply the return on equity, then you get the appropriate rates; right? 693 MS. HARE: Yes. But the question is what is the appropriate return on equity, that's exactly the question. It's not a matter of getting the right costs and revenues. That's important too, but that doesn't tell you what the ROE should be. 694 MR. JANIGAN: Well, let's go back to my initial example. We had a three-month cost-of-service review and we kept the same return on equity as is currently in place for Enbridge of 10 percent, I've rounded it off to 10 percent. In that three-month period, we would do a complete cost-of-service review, we would estimate accurately all of the revenues and the costs, we then would apply a 2.5 percent return on equity, and we would get rates, would we not, in that three-month cost-of-service review? 695 MS. GIRIDHAR: Well, I think you've made the assumption there that the appropriate rate of return in that three-month period is one-quarter of the annual ROE. That's an assumption. 696 MR. JANIGAN: Yes. 697 MS. GIRIDHAR: Obviously the outcome of any process is a function of the assumptions you make. 698 MS. HARE: But you would get rates. You could do it that way and I think what would happen is that in the winter months your rates would be very low and in the summer months they would be very, very high. 699 MR. JANIGAN: Okay. 700 MS. GIRIDHAR: So you're talking about a fully scalable utility that can be scaled into its component quarters, and that doesn't represent Enbridge Gas Distribution, but ... 701 MR. JANIGAN: But as a check to see whether or not you have estimated this period correctly, what you would need is the appropriate levels of revenues and costs for that three-month period so we can see, applying that 2.5 percent, whether or not it's reasonable. Isn't that the case? 702 MS. GIRIDHAR: I think the reasonability test in itself is in question here, because what the company is suggesting here is that -- there's really two things that the Board approves for us, among everything else. It approves an annual ROE or an ROE determined on the basis of a 12-month period. It also approves a rate structure for the company. And the rate structure that's been approved for this company through time has been one where the bulk of our revenues are recovered through volumetric charges which, in fact, means that in high-volume quarters you would get a higher contribution to that annual return. So historically, the company has been tested on a 12-month period for rate-setting purposes and therefore any test of reasonability for a subset of that 12 months has to take into account the fundamental premise that you had, which is that it can only be estimated over a 12-month period. So I have ... 703 MR. JANIGAN: Well, I agree. I mean, I agree with you about the seasonality of revenues. I understand that. All I'm saying is that if you take a quarter of the year and decide that, if you're going to make 10 percent per year, you're going to make 2.5 percent of that in the quarter, let's see what your revenues and let's see what your costs are and let's see what the effect on rates are. All we're asking for is let's see what the revenues and costs are for that quarter to see whether or not your assumptions are valid or not. 704 Can we not get that information? 705 MS. GIRIDHAR: I guess the question I have is that what are the assumptions you're checking here? If the assumption is that an appropriate return is 2.5 percent and then you compare it with what we're doing, obviously it's going to look as if ... 706 MR. JANIGAN: Let's go back to my initial example. Let's assume that we had -- let's assume that the hypothesis that I said was going to take place, took place. You had a three-month cost-of-service period followed by a 12-month cost-of-service period. You wouldn't be getting an extra return in the 12-month cost-of-service period because you had 2.5 percent in the three-month cost-of-service period, would you? 707 MS. GIRIDHAR: I think what I'm saying is that in terms of utility rate-making, the test period has always been a 12-month period because the test is, does this company make an appropriate return over its operating cycle. 708 MR. JANIGAN: Yes. 709 MS. GIRIDHAR: If I go to the Bonbright, which many people consider to be some kind of Bible on public utility rate-making, the question is always what is appropriate over a 12-month period. And the reason you choose a 12-month period is because that's your operating cycle. 710 MR. JANIGAN: Let's say that we make the startling assumption that because three months is one quarter of 12 months, that maybe you should earn one-quarter of your return through a three-month period. Let's assume that we make that assumption. 711 MS. GIRIDHAR: Okay. 712 MR. JANIGAN: Okay? But in order to make that -- in order to ensure that rates are set appropriately, we have to look at the revenues and costs in that period and set them appropriately, all right? 713 MS. GIRIDHAR: All right. 714 MR. JANIGAN: So in the circumstance I've given you initially where we had a three-month period, we set it at 2.5 percent, and we set rates accordingly, then we went to a 12-month period, we wouldn't have a bump up of rate of return in that 12-month period to make up for the 2.5 percent that you earned during that three-month period. 715 MS. GIRIDHAR: I would suggest that -- sorry? If I might just -- I would suggest that in the theory of public utility rate-making, you always look for a rate structure that can endure through time. So if you have begun with the presumption that rates need to equal costs over a three-month period, then your rate-making would have made that presumption and therefore your rate structure would have used that result. In that instance, if you went from setting rates in three months to setting rates in 12 months, I would be very surprised if the Board were then to turn around and ask us to change that rate structure. So if that equation obtained in that three-month period it would obtain for any multiple of three months, whether it's a six-month year or a 12-month year, it would be exactly the same. So my assumption is that if you're trying to demonstrate that in that situation, in a three-month period if your rates were set to equate revenues and costs and therefore you make a quarter of -- 10 percent ROE in that quarter, over the next four quarters, you would actually be making that quarter of 10 percent in each one of those quarters as well. 716 MR. JANIGAN: In the circumstance of Enbridge, instead of doing the complete forecast of all components of cost-of-service, you're suggesting an indexing approach; correct? 717 MS. GIRIDHAR: Yes. 718 MS. HARE: Yes. 719 MR. JANIGAN: Now, why is that superior to the complete forecast of the stub period? 720 MS. HARE: I'm not sure we're necessarily saying it's superior. It was a practical way to reflect the costs that we're looking at in the three-month period. As we stated before, our difficulty in doing a full cost-of-service for the three months is we don't have the ROE to be able to plug in, for example. 721 MR. JANIGAN: Now, my friend has -- Mr. Shepherd has asked for the projection of all operating and financial components of the cost-of-service during the period of October 2005 to December 2005. Will that be done on a consistent basis with the settlement agreement? 722 MS. HARE: You know, when Mr. Shepherd was asking the question, I hesitated to jump in with my rate experts here, but it seemed to me that maybe something was missing. The settlement agreement, of course, then is reflected in the rates, and so when we're talking about an index applied to the rates, then of course the settlement proposal is reflected in those rates. So we're certainly abiding by the settlement proposal in terms of what O&M is baked into those rates, what capital costs are baked into those rates. 723 MR. JANIGAN: I think you're answering another question. What I was dealing with was the undertaking to provide a projection of all operating and financial components about the cost-of-service and income between October 2005 and December 2005. 724 MS. HARE: Oh, what -- 725 MR. JANIGAN: And my question was, to make sure that it was consistent with the settlement agreement, otherwise it's going to be an apples and orange -- 726 MS. HARE: What Mr. Culbert was answering is he would have to do that calculation because it hasn't been done. The one that is available is based on the previous numbers. That would have to be redone. I'm just not sure of the time frame. Mr. Culbert should comment. 727 MR. CULBERT: I certainly don't have the information for that three-month period which has been adjusted according to the ADR settlement proposal. The three-month cost-of-service information, et cetera, was the company's forecasted cost at a certain point time, and volumes, et cetera. 728 MR. JANIGAN: But we're going to get that information, though, presumably. 729 MR. CULBERT: I would have to undertake to see where we are with that type of information to provide a response to the Board as to when I could provide such results. 730 MR. JANIGAN: Well, I would prefer to get an undertaking to provide it and then leave it to your best efforts to provide it when you can rather than find out when you can provide it. 731 MS. HARE: Excuse me, Mr. Chairman. 732 Mr. Chairman, we'd be happy to give that undertaking. I'm just concerned about the timing. It appears that it would not be available until middle of next week, possibly the beginning of next week. I don't know how that fits with intervenor argument. I mean, our argument would be done before we'd have the results available. It's just a matter of the time it takes to do this. 733 MR. JANIGAN: Well, I think we would prefer to have the argument and the results rather than the argument and no results because of timeliness, and there may be provision, of course, for any additional comment based upon those results. But I think that the numbers are going to be pretty critical in terms of the -- both the decision and the intervenors. 734 MS. HARE: We can do our best to provide them. If I understand, there are two undertakings. One is to provide the backup to the information that's already been provided; and secondly, to update to it reflect the ADR settlement. 735 MR. JANIGAN: That's correct. 736 MR. BETTS: Mr. Janigan, if this information isn't available until the schedule for arguments begin, can you tell me what your position is on that? 737 MR. JANIGAN: Well, I think it would be our position that the Board may do one of two things. It may decide that it wishes some further comment from parties based upon the information provided or it may treat it as simply an update of the existing information and go on to make its decision based upon the argument that's in place. I mean, it's going to be little surprise that many intervenors will base their argument on the fact that the information will disclose, in fact, the circumstance that differs markedly from that urged by the company. But I think it's important that the information be before the Board in making the decision. I think we'd prefer to have an opportunity to comment in some fashion before the decision is made. But our preference would be to make sure that at least that the Board, in any event, has this material. 738 MR. BETTS: The Panel will confer for a moment. Before we do, are there any other submissions from parties with respect to that, and particularly with how it might relate to their ability or inability to make argument. 739 Mr. Shepherd. 740 MR. SHEPHERD: Two comments, Mr. Chairman. First, I don't know why this would take ten days. It would appear to me that getting an O&M number for the quarter is dividing by four, and I can do that faster than ten days if Mr. Culbert needs some help. And with respect to things like capital expenditures and that sort of thing, it doesn't seem to me to be a very complicated exercise. I would have thought that it's something that could be done in an hour or two. That's my first comment. 741 The second comment is I don't think it's in the interests of anybody to delay the argument, but I agree with Mr. Janigan that if there's a big surprise in these numbers when they eventually come in, we should have the opportunity to comment, presumably in writing, on those numbers. Those are our submissions. 742 MR. BETTS: Any other submissions for the Panel's consideration? 743 Mr. Thompson. 744 MR. THOMPSON: Yes. I'm not entirely sure whether what I'm about to say falls within the ambit of what Mr. Janigan is looking for or is not looking for, but I would be asking some questions of the panel of how they got the $30 million number, first of all, and then secondly, the estimated impacts on that number on the assumption that the revenue requirement is as stated in the ADR agreement, and then the estimated impacts on that number of any other issues that are in dispute before the Board in this proceeding that the company says will have an impact on that number. I believe those estimates can be provided if not in response to the cross-examination questions, by way of undertaking responses provided promptly. If that's where Mr. Janigan's going, I want to go there too; if it's not where he's going, I don't care. Hopefully that's helpful. 745 MR. BETTS: Thank you. The Panel will confer for a moment. 746 [The Board confers] 747 MR. BETTS: We're ready to resume. We find that the proposal being suggested is appropriate. We will not allow this to interfere with the argument schedule. But certainly when it is filed, if comments -- if parties feel it important to make a comment on it, we would receive those comments in writing. 748 So let us officially acknowledge those undertakings. 749 MR. SCHUCH: Mr. Chair, I would assign Undertaking J.10.2 to the two-part undertaking, and I wondered if somebody wanted to take a crack at summarizing that undertaking. I believe Ms. Hare started. 750 MS. HARE: Yes, Mr. Chairman. However, Mr. Culbert here suggested that we should seek clarification to make sure that we understand what's being asked for. The other thing that we were whispering is we will make our best efforts to try and have something, it might be an estimate, but a good estimate, by the end of the week. If we could have a clarification to make sure we're on the same wavelength, that would be helpful. 751 MR. JANIGAN: It's been a bit of a two-headed effort here between myself and Mr. Shepherd. As I understand it, we want the regulatory schedules that would make a projection of all operating and financial components of the cost of service and revenue for the period October 2005 to December 2005. 752 MR. CULBERT: Can I ask a question? Sorry to interrupt, Mr. Janigan. That would be similar to what Mr. Shepherd asked for in J.10.1, which would be a set of regulatory schedules that derives a three-month return per se? 753 MR. JANIGAN: Yes. 754 MR. CULBERT: So if I provided to the Board and intervenors a condensed utility income statement, rate base and capital structure, for example, that would be sufficient? 755 MR. JANIGAN: Yes. And then one that is updated to reflect the settlement agreement. 756 MR. CULBERT: Okay. I'll -- 757 MR. BETTS: Do I understand this correctly, then, that Undertaking J.10.1 will satisfy one of those requests? 758 MR. JANIGAN: I'm sorry? 759 MR. BETTS: Do I understand it correctly that Undertaking J.10.1 will satisfy one of the two requests? 760 MR. CASS: Mr. Chair, my understanding, if I might interject, is that Undertaking J.10.1 stands. The new undertaking that's being requested, and that would be 10.2, is to update what's being provided in 10.1 to reflect the settlement proposal. 761 MR. JANIGAN: Yes. 762 MR. BETTS: And everybody agrees on that? 763 MS. HARE: And then, Mr. Chairman, Mr. Thompson was asking for some further assumptions with respect to issues still to be dealt with by the Board. I would assume that would be the notional deference taxes and something on transactional services? 764 MR. BETTS: At the risk of complicating this even further, I'm going to ask, Mr. Thompson, if there's anything you would like us to add to these undertakings to resolve some of your potential questions. 765 MR. THOMPSON: I think I have to ask the questions of the panel first and then indicate whether I think something needs to be added. 766 MR. BETTS: Very well. We'll come back to that. 767 MR. THOMPSON: Because I'm not sure myself what is missing. 768 MR. BETTS: We'll not anticipate where that's headed, then. Is everybody clear on the undertakings? Thank you. 769 UNDERTAKING NO. J.10.2: TO UPDATE WHAT IS PROVIDED IN UNDERTAKING J.10.1 TO REFLECT THE SETTLEMENT PROPOSAL 770 MR. BETTS: Mr. Sommerville has just pointed out for clarification that the Board understands that the update based on the ADR will be an estimate based on best efforts and that's the standard you'll be aiming for. Thank you. 771 Mr. Janigan. 772 MR. JANIGAN: Thank you, Mr. Chair. Just one further line of questioning, and it's a bit of a step back. 773 I want to make sure that I understand what the current projected revenue requirement and revenue deficiency is for the test year October 1st, 2004 to September the 30th, 2005. The settlement agreement -- in the settlement agreement, the revenue requirement for the period October 1st, 2004 to September 30th, 2005 is shown at line 21, at N1, tab 2, schedule 6, and also N1, tab 2, schedule 2, line 9. 774 MR. CULBERT: I'm sorry, just repeat the line numbers, Mr. Janigan. I just turned to the schedule. 775 MR. JANIGAN: Line 21 at N1, tab 2, schedule 6. 776 MR. CULBERT: Correct. 777 MR. JANIGAN: And also at N1, tab 2, schedule 2, line 9. That impact statement indicates there's a revenue deficiency of 60.6 million at existing rates; is that correct? 778 MR. CULBERT: That's correct. 779 MR. JANIGAN: Okay. And has the company updated these numbers to reflect the settlement, be it the EnVision project and the gas-cost changes approved for July the 1st, 2004? If not, could you also do that by way of an undertaking? 780 MS. GIRIDHAR: Sorry, are you asking us to update the revenues, the line items for the July 1 QRAM? 781 MR. JANIGAN: No, there's a revenue deficiency of 60.6 million that you've recorded in the settlement agreement. Now, does that number reflect the settlement of the EnVision project and the gas-cost changes approved for July the 1st, 2004? 782 MR. CULBERT: It doesn't have the adjustment for the July 1 change of PGVA reference price. I'm not sure of the change associated with the EnVision agreement. I could certainly look into whether that could be incorporated. 783 MR. JANIGAN: Okay. If I could get an undertaking to that effect, that would be fine. 784 MR. BETTS: Mr. Schuch. 785 MR. SCHUCH: Mr. Chair, that would be Undertaking J.10.3. 786 UNDERTAKING NO. J.10.3: TO PROVIDE WHETHER THE REVENUE DEFICIENCY OF $60.6 MILLION RECORDED IN THE SETTLEMENT AGREEMENT REFLECTS THE SETTLEMENT OF THE ENVISION PROJECT AND THE GAS-COST CHANGES APPROVED FOR JULY 1, 2004 787 MR. SHEPHERD: And does the company have an updated calculation of the delivery-related revenue requirement with the gas costs removed and projected delivery-related deficiency or sufficiency for the 2005 test year? 788 MS. GIRIDHAR: I haven't worked through completely the effect of the ADR settlement -- 789 MR. BETTS: Ms. Giridhar, would you mind -- 790 MS. GIRIDHAR: Sorry. I haven't worked through completely the effect of the ADR settlement on rate components, which is what I would need to tell you what the delivery component alone is. These are all tedious exercises that take time. I'm not sure whether an approximate number would suffice or ... 791 MR. JANIGAN: Well, I wonder if we could get a best-efforts undertaking to provide that number, or as close to that number as you think you can provide within a reasonable time frame. 792 MS. GIRIDHAR: So the delivery -- basically you want to know the delivery revenue? 793 MR. JANIGAN: Yes, the delivery-related revenue requirement with the gas costs removed, and the projected delivery-related deficiency/sufficiency. 794 MS. HARE: I'm sorry, Mr. Chairman, through you, Undertaking 10.3, we were asked to update for the EnVision project, which is very doable, and I think there was some suggestion for gas costs the July 1st QRAM. I'm not sure what we agreed to. But to do it for the July 1st QRAM is a lot of work. 795 MR. JANIGAN: We don't need the July 1st QRAM. 796 MS. HARE: Thank you. I just wanted to clarify that, Mr. Chairman. 797 MR. SCHUCH: Mr. Chair, the new undertaking is J.10.4. 798 UNDERTAKING NO. J.10.4: TO PROVIDE UPDATED CALCULATION OF THE DELIVERY-RELATED REVENUE REQUIREMENT WITH THE GAS COSTS REMOVED AND A PROJECTED DELIVERY-RELATED DEFICIENCY/SUFFICIENCY FOR THE 2005 TEST YEAR 799 MR. BETTS: Thank you. I have at least in my mind a description. Does it need to be restated? Does everybody understand what 10.4 is? 800 Mr. Janigan, perhaps for the record, please restate what your expectations are. 801 MR. JANIGAN: Sure. It's an updated calculation of the delivery-related revenue requirement with the gas costs removed and a projected delivery-related deficiency/sufficiency for the 2005 test year. 802 MS. GIRIDHAR: If I might just add, I would provide it in the format that I always provide this information, which you usually see in our H1, tab 1 schedules which show commodity, load balancing, and delivery, and all I would show is the delivery component. 803 MR. JANIGAN: That's fine. 804 MS. GIRIDHAR: I just mention that because the way we look at delivery rates is a little different from excluding all gas-cost evidence because, for instance, we do have lost and unaccounted for charges that are recovered for delivery charges. I would follow the format we always do. 805 MR. JANIGAN: That's fine. Thank you, Mr. Chairman. Those are all my questions. 806 MR. BETTS: Thank you, Mr. Janigan. 807 I think would be an appropriate time to take a lunch break. We will be returning with the cross-examination, and I do have on my list Mr. Dingwall, Ms. DeMarco, Ms. Girvan and Mr. Rowan. 808 Is that everybody? 809 MR. THOMPSON: I think I'm next, Mr. Chair. 810 MR. BETTS: Sorry, Mr. Thompson. You're absolutely right. You do follow Mr. Janigan. 811 Let us take an hour and ten minutes for lunch, so we will return at 2:15. 812 --- Luncheon recess taken at 1:05 p.m. 813 --- On resuming at 2:17 p.m. 814 MR. BETTS: Thank you, everybody. Please be seated. 815 Before we resume cross-examination with Mr. Thompson, are there any preliminary matters for the Panel's consideration? 816 MS. LEA: I have some scheduling matters to discuss when the time is right, sir. 817 MR. BETTS: I think the time is probably right now, so please proceed. 818 PRELIMINARY MATTERS: 819 MS. LEA: Thank you. I've had an opportunity to speak with my friends about a couple of matters about the conclusion of the evidentiary portion of the hearing and also possibly argument scheduled. 820 I understand from Mr. Cass that this is the one and only panel on the year-end issue so we do not have a second panel to go to, so when this panel finishes, then, as I understand it, the applicant's case in chief is complete. I'm not aware of any other intervenor panels or intervenors who are seeking to give evidence. At the present time, the company has no reply evidence planned. 821 Presuming, then, that this panel finished on the 6th, that would be tomorrow, then I've canvassed my friends a little bit with respect to argument. Mr. Cass would prefer to make his argument on July the 9th, which is the Friday. Mr. Shepherd has a conflict, a conflict that I envy him about - he is travelling to very exotic places on the 9th - so he needs to argue on the 8th. So we would have Mr. Shepherd precede Mr. Cass, in all likelihood, and Mr. Shepherd has indicated that if there's anything of surprise that comes up in Mr. Cass's argument, he will deal with it at the time that he reads that argument. But he's willing to go first. Mr. Cass on the 9th. 822 We have a series of intervenors who are available to argue on the 12th. In no particular order, Mr. Janigan, Mr. Klippenstein, Ms. Street -- 823 MR. JANIGAN: The 13th. 824 MS. LEA: Oh, you wanted the 13th. I do beg your pardon. Just correct me if I get any of this wrong. I'm sorry, that was Ms. DeMarco on the 12th, Mr. Klippenstein, Ms. Street, and Mr. Thompson in the afternoon. 825 Then on the 13th, I have Mr. Janigan, Mr. Dingwall, and Ms. Aitken has indicated in an e-mail to me that she can argue on the 9th or the 13th. And Mr. Warren and Mr. Poch are filing written argument. Have I left anybody out? Have I made a mistake? Okay. So I'll write it up, I'll write it down, and counsel can perhaps determine an order among themselves on those days. I'll let Ms. Aitken know that she may be able to argue on the 9th depending on the length of Mr. Cass's argument and she may opt to go on the 13th instead. 826 So if anybody has any comments on that proposal, I'll leave it in your hands, sir. 827 MR. BETTS: The Panel will confer for a moment. 828 [The Board confers] 829 MR. BETTS: Thank you. That schedule at this point sounds fine. 830 MS. LEA: What I have not yet debated, and Mr. Schuch has been kind enough to remind me, is whether the Panel was seeking written or oral reply and frankly I don't remember what you had indicated to me. 831 MR. BETTS: The Panel was seeking oral reply. 832 MS. LEA: Okay. So that's something I can discuss with Mr. Cass at leisure then. Thank you. 833 MR. BETTS: And again, for timing purposes, I think the original outline that we provided orally in one of the transcripts on one of the days indicated that August 3rd would be the ideal day for the Board for final reply. And that is to accommodate our scheduling problems here. 834 MS. LEA: Thank you very much. 835 MR. BETTS: Thank you. Okay. Are there any other preliminary matters? 836 Mr. Thompson, please proceed with your cross-examination. 837 MS. LEA: Oh, I'm so sorry, sir. You had indicated this to me earlier. On the 12th, I understand the Panel cannot sit until 11:00. Am I correct about that? 838 MR. BETTS: That's correct. 839 MS. LEA: All right, then. Thank you very much. I just wanted to put that in my e-mail, so thank you. 840 MR. BETTS: Thank you. In fact, if we can just make note of that, I'll try and do it again at the end of today's hearing, that on the 12th we will not convene until 12:00 a.m. and I'll make that reminder -- what time did I just say? We should say we'll convene at 11:00 a.m. 841 MS. LEA: On the 12th. Got it. Thank you. 842 MR. BETTS: On the 12th. Thank you. 843 Mr. Thompson. 844 MR. THOMPSON: Thank you, Mr. Chairman. 845 ENBRIDGE GAS DISTRIBUTION INC. PANEL 1 ON CHANGE IN YEAR-END - HARE, RYCKMAN, GIRIDHAR, ROSS, RYCKMAN, GRUENDING; RESUMED: 846 M.HARE; Previously sworn. 847 K.CULBERT; Previously sworn. 848 M.GIRIDHAR; Previously sworn. 849 W.ROSS; Previously sworn. 850 N.RYCKMAN; Previously sworn. 851 C.GRUENDING; Previously sworn. 852 CROSS-EXAMINATION BY MR. THOMPSON: 853 MR. THOMPSON: Panel, I'd like to start, if I could, with a series of what I call informational follow-ups and the first deals with the $30 million calculation of the alleged overearnings adjustment or overrecovery adjustment. And Mr. Culbert, if you would be good enough to turn up Exhibit I, tab 16, schedule 158, page 3 of 5, which you were discussing with Mr. Shepherd this morning. And there you show the quarterly ROE for the October '05-December '05 period at 4.143 percent -- 854 MR. CULBERT: Correct. 855 MR. THOMPSON: -- is that correct? And you've indicated to Mr. Shepherd that that number is based on your forecast of earnings for that quarter divided by your estimate of equity-related rate base for that quarter. 856 MR. CULBERT: That's right. 857 MR. THOMPSON: And these numbers are coming, as I understand it, in response to one of the undertakings. 858 MR. CULBERT: That's correct. 859 MR. THOMPSON: Okay. But in terms of where the 30 million there odd comes from, am I correct that the starting point is that ROE number, 4.143 percent, from which we subtract the quarterly ROE of 2.423 percent, which we see at line 10 in column 5, which produces the differential ROE or -- of about 1.72 percent, and we then multiply that by some equity component of rate base. Is that where the 30 million estimate comes from? 860 MR. CULBERT: That's correct. 861 MR. THOMPSON: Okay. And is the multiple, is the multiple that you were using for an estimate something close to the common equity component of capital structure for the 2005 test year that we find at line 5 of Exhibit N1, tab 2, schedule 5, page 1, which is shown there in an amount of $1.198 billion? 862 MR. CULBERT: Pardon me while I turn that exhibit up, Mr. Thompson. 863 MR. THOMPSON: Yes. This is the settlement agreement, N1, tab 2, schedule 5, page 1. The common equity component capital structure is $1,198 million. 864 MR. CULBERT: So your question is, is the -- 865 MR. THOMPSON: Is that the approximate amount of equity capital that was used in deriving the estimate of $30 million? 866 MR. CULBERT: Well, no, it isn't. What the estimate of the equity capital is for that three-month period is, in fact, higher because, as Ms. Hare pointed to, the average rate base for that three-month period is much higher than it would be over a 12-month period mostly due to things like the gas-to-storage value being much higher in that quarter of the year. Therefore, the deemed common equity, which is 35 percent of the capital structure, results in a projected higher equity at that point in time for those three months of the year. Even though the equity will be, by the end of a 12-month period, much lower, the rate base at the start of the year for that three months is much higher, therefore the deemed equity is much higher. 867 MR. THOMPSON: Well, I did the math, the differential in return of 4.143 percent minus 2.423 percent and I got, and maybe I didn't do the math properly, I thought I got 1.72 percent; is that right? 868 MR. CULBERT: Yes. The difference between the two is 1.72 percent shown on line 15, I suppose it is, yes. 869 MR. THOMPSON: And if I multiply that percentage times the common equity capital structure shown in Exhibit N1, tab 2, schedule 5, I get a figure of about $20.6 million before taxes; would you take that subject to check? 870 MR. CULBERT: I would agree with that calculation. We've performed the calculation. 871 MR. THOMPSON: And if we gross that up for taxes, we use a rate of about 40 percent; is that what the company is using? 872 MR. CULBERT: The tax rate is about 35 percent, I believe, in the year 2005 fiscal year. 873 MR. THOMPSON: And that produces a multiple of -- I had it at about 1.5, but what is the multiple that arises from using a tax rate of 35 percent? 874 MR. CULBERT: 1.54. 875 MR. THOMPSON: So if I multiply 20.6 million times 1.54, it comes up to a number slightly in excess of the $30 million. That's how I thought we got the $30 million. 876 MR. CULBERT: Well, as I said, the $30 million was actually calculated on a different deemed equity than you're seeing here because once again, that three-month calculation was developed through the averaging of the three month's budget information for that period, which I spoke to earlier, which was part of the problem. There is no approved methodology for calculating a three-month rate base. We did the calculation at the request of the intervenors and that's where the information was coming from. 877 MR. THOMPSON: Well, you've been talking about this $30 million calculation and you left me with the impression you did a calculation that came up with that number. Is it anything different than what I've done and if so, would you explain it to me, please, how you got the $30 million? 878 MR. CULBERT: Well, I'll actually be filing that information as part of the undertaking to Mr. Shepherd to show, in fact, how that calculation comes about. 879 MR. THOMPSON: All right. Well is the multiple 1.72 percent? 880 MR. CULBERT: I believe it is, subject to check. I believe it is. I don't have the information with me. I'll certainly look into it. 881 MR. THOMPSON: All right. Well, let's move on then. We understand conceptually how it's derived. 882 Now, the 4.143 percent, I understood you to say, has built into it a number of assumptions, one of which is that the revenue deficiency for 2005 was as filed by the company in the amount of $85.4 million rather than the amount of $60.6 million reflected in the financial impact and settlement proposal; is that correct? 883 MR. CULBERT: That's correct. 884 MR. THOMPSON: All right. And I think what you're telling us in your responses to earlier questions is that if I assume that the revenue requirement for 2005 is $24.8 million less than what was filed, then my 4.143 percent is going to go down. 885 MR. CULBERT: That's correct. 886 MR. THOMPSON: Then we can take whatever -- and is that number going to show up in the undertaking responses that you've agreed to provide? 887 MR. CULBERT: Yes, I believe in the undertaking response to Mr. Janigan, J.10.2, I think it was. 888 MR. THOMPSON: So whatever it goes down to, we'll see the level to which it reduces based on a revenue requirement for 2005 that's $24.8 million less than what was claimed? 889 MR. CULBERT: Yeah, that's correct. 890 MR. THOMPSON: All right. And the other number that is indicative -- sorry, that is included in your 4.143 percent number, you've also assumed that you would get the $4.5 million inflationary increase in rates. 891 MR. CULBERT: That's correct. It assumed a $4.5 million increase in the October through December period. 892 MR. THOMPSON: And the document, Exhibit I, tab 16, schedule 158, shows that if we take that assumption out, assume no inflationary increase, the ROE reduces from 4.143 to 3.914 percent; is that correct? 893 MR. CULBERT: That's correct. 894 MR. THOMPSON: And I can go through the math of taking the 3.914 percent, deducting the 2.423 percent, that produces, if you would take it subject to check, a differential of 1.491 percent; would you accept that subject to check? 895 MR. CULBERT: We can do the calculation right now. 1.491 percent. 896 MR. THOMPSON: Yes. And if we multiply that times the equity component of capital structure shown in N1, tab 2, schedule 5, I get an amount before gross-up of about $17.9 million; would you take that subject to check? 897 MR. CULBERT: Yes, we agree with that calculation. 898 MR. THOMPSON: If you gross it up for taxes, I get it to be something close to $27 million. 899 MR. CULBERT: That's correct. 900 MR. THOMPSON: All right. And so what is telling me is that as the revenue requirement for 2005 goes down, the 30 million goes down. 901 MR. CULBERT: That's correct. 902 MR. THOMPSON: And as it goes down by $4.5 million, the 30 million reduces to about 27 million. 903 MR. CULBERT: Having not -- 904 MR. THOMPSON: Based on these numbers. 905 MR. CULBERT: Yes. Having not included an inflationary rate for that three-month period, I agree, that's correct. 906 MR. THOMPSON: So those, I think the hard data that deals with those numbers is going to fall out of these undertaking responses that are forthcoming; am I correct? 907 MR. CULBERT: That's correct, although it wouldn't be exactly as you've determined, once again, because the three-month calculation that I've performed is based on an average of rate base for that three-month period solely, therefore, rate base is higher and deemed equity is a little higher, et cetera, but the information will be seen in those exhibits, yes. 908 MR. THOMPSON: To the extent the rate base is higher, the 30 million goes up and the 27 million goes up, we start from a higher adjustment and ... 909 MR. CULBERT: In the first set of examples, first set of calculations that Mr. Shepherd has asked for in the 4.143 percent, the data is going to be used from a point in time; that is, all that data is static. The second set of calculations, in fact, there will be different cost assumptions, different rate base assumptions coming out the ADR proposal that are affecting those three-month numbers. So to the extent that those numbers are being presented, I can't say at this point in time whether they would change proportionately to your numbers. 910 MR. THOMPSON: All right. And then just carrying on then, this comes back to something that needs to be added to these undertaking responses, the other factors in issue in this case dealing with the 2005 revenue requirement, I believe there are two of them of significance. One is the deferred taxes recovery built into the $60.6 million revenue deficiency now shown in Exhibit N1, tab 2, schedule 5, at line 15 is the claim for $18.4 million in deferred taxes; am I right? 911 MR. CULBERT: That's correct. 912 MR. THOMPSON: Okay. So if that were to be disallowed, then that would increase the reduction, if you will, to 2005 revenue deficiency from $24.8 million to -- it would increase it by another $18.4 million. 913 MR. CULBERT: I'm sorry, could you go over those numbers again, Mr. Thompson? 914 MR. THOMPSON: Yeah. My understanding is that the grossed-up amount that you're seeking, that's built into the revenue requirement claim for 2005 for deferred taxes is $18.4 million. 915 MR. CULBERT: Yes, it is, and the deficiency of $60.6 million would decline by that $18.4 million. 916 MR. THOMPSON: All right. So if that happened and you ran the calculations again for the percent quarterly ROE, it would drive the ROE down. 917 MR. CULBERT: That's correct. 918 MR. THOMPSON: And the 27 million that we were discussing would go down further. 919 MR. CULBERT: That's correct. 920 MR. THOMPSON: All right. And the extent to which it would go down further is not yet a part of the undertaking responses; am I right there? 921 MR. CULBERT: That's correct. That was part of our explanation to begin with, which was until the Board determines final rates for the October through September period, it's difficult to determine what in fact that overearnings -- assumed overearnings number would be for the three-month period we're talking about, that's correct. 922 MR. THOMPSON: But we know that the most that can get knocked out of a claim on account of deferred taxes is $18.4 million. Is there some rule of thumb that you can give us that if the 2005 revenue requirement reduces by $10 million, the so-called overearnings adjustment reduces by X? Or do I need to add to the undertaking response a calculation of what the ROE would be and the 30 million would become if that 18.4 is disallowed. 923 MS. GIRIDHAR: If you make the assumption that any introduction in that deficiency is recovered volumetrically through rates and you've got approximately 30 percent of annual volumes being recovered in the period October to December, I guess you could use 30 percent of the overall reduction as being representative of the reduction in revenues for that quarter. 924 So, in other words, if the deficiency went down by $18.4 million, a rule of thumb might be to take 30 percent of that 18.4. 925 MR. THOMPSON: So the 27 million would reduce by about 6 million; is that what you're saying? If not -- 926 MR. CULBERT: $5.5 million. 927 MS. GIRIDHAR: That's a rule of thumb. 928 MR. THOMPSON: All right. Well, is it a reliable rule of thumb? 929 MS. GIRIDHAR: We wouldn't know until we went back and... 930 MR. THOMPSON: Well, then, I think what I'll ask you to do, then, is to add by way of separate undertaking a calculation of what the 30 million becomes in the scenario where the deferred taxes amount of $18.4 million is disallowed in its entirety. So it's moving down from the -- your starting assumption is everything in, and then you take out the 4.5 million, then you take out the second thing we discussed, which I've just forgotten, we take out deferred taxes -- are you following me? 931 MR. CULBERT: Yes. 932 MR. THOMPSON: Okay. And just before we leave it, then, the last thing I think that may affect this calculation is the amount that is embedded in rates for transactional services, and right now, my understanding is that the assumption reflected in the deficiency claim of $60.6 million is that there will be $8 million of transactional services revenue embedded in rates; have I got that straight? 933 MR. CULBERT: That's correct. 934 MR. THOMPSON: And so if the Board increased that embedded amount, it would have an impact, and if it decreased the embedded amount, it would have an impact on the so-called $30 million calculation; am I right? 935 MR. CULBERT: Yes. 936 MR. THOMPSON: Could we add to the undertaking, then, those two scenarios; the impact of the $18.4 million elimination of deferred taxes and the impact of a $1 million increase or decrease in the transactional services revenue embedded amount? 937 MR. CULBERT: Yes, we can -- sorry, Mr. Thompson, we can do that. 938 MS. LEA: Thank you. That would be Undertaking J.10.5, and I think Mr. Thompson's last phrasing in the last sentence he gave was probably a good, brief description of the undertaking. 939 MR. CULBERT: If I could just ask Mr. Thompson, if I have the question correctly, the first calculation we're going to do is to remove the inflationary increase in rates. 940 MR. THOMPSON: Correct. 941 MR. CULBERT: The second phase would be to remove the $18.4 million deferred tax recovery within the deficiency? 942 MR. THOMPSON: Right. 943 MR. CULBERT: And then to give you a ballpark of a $1 million overage/underage in transactional services. 944 MR. THOMPSON: That's correct. 945 MR. CULBERT: That's fine. Sorry about that. 946 UNDERTAKING NO. J.10.5: TO PROVIDE THE IMPACT OF THE $18.4 MILLION ELIMINATION OF DEFERRED TAXES AND THE IMPACT OF A $1 MILLION INCREASE OR DECREASE IN THE TRANSACTIONAL SERVICES REVENUE EMBEDDED AMOUNT; TO PROVIDE A CALCULATION WHICH GIVES THE PERCENTAGE OF THE ROE OF 9.76 PERCENT, WHICH IS THE ECONOMIC FORECAST FOR THE JANUARY THROUGH DECEMBER 2005 12-MONTH PERIOD, AND PROVIDE THE RATIO OF THAT CONSENSUS FORECAST ROE AS WELL AS AN ADDITIONAL CALCULATION 947 MR. THOMPSON: That's fine. Now, is there anything else that affects the calculation of the $30 million? You gave a general statement that things can affect this. I'm trying to cover them all off. Have I covered them all off? 948 MR. CULBERT: Additionally, your calculation would assume that the ROE for the one quarter is simply one-fourth of an ROE. If we could get some guidance as to a different calculation to perform if we were to assume what the ROE is for that three-month period that we believe it should be, then we can provide that calculation as well. 949 MR. THOMPSON: Well, an assumption in my question is that the ROE is the 2.423. What are you suggesting? I know you're suggesting it should be 4.143 or the quarterly amount that is embedded in -- what you say is embedded in the annual amounts. 950 MR. CULBERT: Yes. What I was suggesting would be to perform a calculation that would assume the company's quarterly ROE in the October through December 2004 period as a percentage of it's allowed ROE of 9.69. Therefore, I provide a calculation that compares the results to 4.057 as being the allowed ROE for that three-month period. 951 Additionally, I would suggest to provide a calculation which gives the percentage of the ROE of 9.76 percent, which is the economic forecast for the January through December 2005 12-month period, and I can provide the ratio of that forecast -- consensus forecast ROE as well as an additional calculation. 952 MR. THOMPSON: Well, you're going to do it whether I ask for it or not, so please add it to my undertaking response. Mess up mine. So yes, please add those calculations and we can argue the results. 953 Okay. Have you done a back-of-the-cigarette-pack calculation of how low the 30 million can go under the assumption that ROE is one-quarter of the allowed? 954 MR. CULBERT: No, I haven't, actually. I was trying to think if I smoked or not but... 955 MR. THOMPSON: Okay, thanks. Let's move on, then, to what I call information follow-up number two, and this is with respect to precedents. 956 You described in your evidence in chief a couple of precedents, and the first one you mentioned was the Union case. And you gave me a docket number and I failed to write it down. What is the docket number that you were referring to? 957 MS. HARE: No, I didn't have the docket number today. I could get that for you, Mr. Thompson. 958 MR. THOMPSON: Okay. Well, let me just follow up here and then maybe one undertaking will cover all this stuff off. 959 My notes were that you indicated Union changed its fiscal year-end, I thought you said, in 1995; is that right? 960 MS. HARE: That's right, December 1995. 961 MR. THOMPSON: Okay. And my recollection is that Union, prior to moving to a calendar year-end, was on a fiscal year ending March 31; is that your understanding? 962 MS. HARE: Yes, it is. 963 MR. THOMPSON: Okay. And I don't recall Union seeking any rate change for any stub period when it changed its year-end. Did it seek a rate change? 964 MS. HARE: No, it did not. 965 MR. THOMPSON: And are you able to tell me how they went about proposing their change in fiscal year-end, i.e., what did they do for the historic bridge and test year filings? 966 MS. HARE: My understanding is that they stayed out for nine months. 967 MR. THOMPSON: As what, the historic filing, or -- 968 MS. HARE: I believe so. 969 MR. THOMPSON: I see. Well, are there any excerpts from the Union case that will help us understand your reliance on this precedent? In other words, do you have excerpts from the case that you've used to present this as a precedent, or is this just a paraphrase of something you read somewhere? 970 MS. HARE: I am paraphrasing. We can find the decision with the one, I think, mentioned. But the precedent that I was mentioning was that there was, in fact, no adjustment to their ROE and ROE wasn't mentioned as a factor when they changed their year-end. 971 MR. THOMPSON: All right. What I'm putting to you is Union didn't raise an issue with respect to a rate change in a stub period of less than 12 months; therefore, there was no discussion of that issue. 972 MS. HARE: That's right. 973 MR. THOMPSON: And so there's nothing in the case that helps us with this issue; is that right? 974 MS. HARE: I'm not sure if that's exactly the case. I mean that is something, quite frankly, that we considered doing, just staying out for three months, applying for 12 months and then just applying for 2006 starting with January 1st. So in other words, do nothing, which is what we understood Union Gas did. We didn't think that would be right not to tell people that that's what we were doing, but neither did we expect then to have this discussion about overearnings. 975 MR. THOMPSON: Well, would you undertake then to produce any excerpts from the Union case on which you're relying as a precedent to support the relief that you seek in this case? 976 MS. HARE: Yes. 977 MS. LEA: Thank you. So that's a docket number and the -- 978 MR. THOMPSON: Yes, the docket number and the excerpts upon which the company's relying. 979 MS. HARE: But again, Mr. Thompson, I'm relying on that as evidence that there was no adjustment to ROE, there was no discussion as to what an appropriate ROE is for the stub period. 980 MR. THOMPSON: Well, that's fine, I don't want to argue it with you, I just want to make sure we got on the record what there is from that case that you think supports it. 981 MS. HARE: Yes, sir. 982 MR. THOMPSON: Thank you. 983 MS. LEA: That would be J.10.6. 984 UNDERTAKING NO. J.10.6: TO PRODUCE ANY EXCERPTS FROM THE UNION CASE ON WHICH THEY ARE RELYING AS A PRECEDENT TO SUPPORT THE RELIEF THAT THEY SEEK IN THIS CASE 985 MR. THOMPSON: The other precedents that you mentioned, I thought they were both Connecticut cases. 986 MS. HARE: That's right. 987 MR. THOMPSON: And there were two of them? 988 MS. HARE: Yes, that's right. 989 MR. THOMPSON: What was the name of them? 990 MS. HARE: The first one is Yankee Gas Services Company. 991 MR. THOMPSON: And are there reports, is there a report of that decision that you're relying on? 992 MS. HARE: I have the decision and that's what I'm relying on. 993 MR. THOMPSON: Let's just get a brief description of what you say that case was all about and then I'll have you undertake to file these decisions. 994 MS. HARE: Yes, Mr. Thompson. In this application, Yankee Gas Services applied to change its year-end from September 30th to December 31st. 995 MR. THOMPSON: Yes. 996 MS. HARE: They also applied to move from monthly financial reporting to quarterly financial reporting. In Connecticut, a utility has to file, it's either monthly or if they have release to file quarterly, what their ROE is on a rolling basis and that's because the Department of Public Utility Control looks at whether the utility is overearning by more than 1 percentage point for two quarters, two consecutive quarters. And so utilities in Connecticut, at least my understanding from reading these cases, is that they are constantly reporting on what their ROE is, but again, it's for the purposes of seeing if there's overearning, and it's on a 12-month basis. 997 But in this case, Yankee applied to change the year-end. There was a proceeding, there was an intervenor, there was no hearing held and the Department concluded that they should be allowed to change their year-end and there was no change in rates and the Department of Connecticut continues to look at the ROE on every quarter but on a rolling 12-month basis. 998 MR. THOMPSON: So, so far as you're aware, the issue of a claimed rate change was not made by the utility in that case -- 999 MS. HARE: No -- 1000 MR. THOMPSON: -- in the stub period? 1001 MS. HARE: No, it wasn't. 1002 MR. THOMPSON: And the response to that, such a claim, there wasn't any counterclaim, if you will, made, in that case by intervenors. 1003 MS. HARE: With respect to changing the rate? 1004 MR. THOMPSON: To changing rates associated with the change in fiscal year-end. 1005 MS. HARE: No, because again, this is an example of a utility that stays out of the rate case, but they're asked to come and have a hearing if, in fact, they are overearning by more than 1 percentage point. So this isn't a utility that would be coming in annually. So they were coming to change their year-end. 1006 MR. THOMPSON: So it's not a cost-of-service prospective test year annual rate case model that's in use down there, it's a complaint model. 1007 MS. HARE: I believe it is a cost-of-service, but it's not an annual rate case model. 1008 MR. THOMPSON: That's fine. 1009 MS. GIRIDHAR: Not being an expert in U.S. cost-of-service models, but I think that would be consistent with the theoretical construct I talked about which Bonbright also prescribes to which is that philosophically cost-of-service rates, once set, should be good for all time to come unless there's an underlying change in economic circumstances. And I would suggest that if a rolling 12-month ROE indicated an overearnings or underearnings, then that was the test that there was a change in economic circumstances that warranted a rate change. 1010 So I think it's consistent with that theoretical model. 1011 MR. THOMPSON: All right. Well, I won't argue with you on the record. I'll save that for next week. 1012 So is Yankee is distributor? 1013 MS. HARE: Yes, I believe they are. 1014 MR. THOMPSON: And do we know Yankee's rate structure in terms of its recovery of fixed costs? 1015 MS. HARE: No, I don't, but there is mention in this decision that it does have seasonal revenues. So in that respect it's similar to Enbridge Gas Distribution because there is definitely mention of seasonal weather variations. 1016 MR. THOMPSON: That decision is what year? 1017 MS. HARE: That decision is January 10th, 2001. 1018 MR. THOMPSON: Can I have an undertaking to file, then, the copy of what you've referred to, please? 1019 MS. HARE: Yes. 1020 MS. LEA: J.10.7. 1021 UNDERTAKING NO. J.10.7: TO PROVIDE A COPY OF THE YANKEE GAS SERVICES DECISION RE CHANGING YEAR-END DATE 1022 MR. THOMPSON: You mentioned another Connecticut decision, I thought it was. Could you just explain what that one was all about, first of all the name of the case? 1023 MS. HARE: The name is -- well, Petitions of the Office of Attorney General and Office of Consumer Counsel for an Investigation of Overearnings by the Connecticut Light & Power Company. 1024 MR. THOMPSON: So this sounds like a proceeding that was initiated by the regulator. 1025 MS. HARE: Yes, and in this decision it has nothing to do with changing year-end, but why we thought it was interesting was the utility was brought before the regulator because they were overearning by a significant amount and there was quite a bit of discussion as to how ROE should be calculated. And the department concluded that it should be on a quarterly basis but again, using the previous three quarters. So they're looking at the ROE achieved in a particular quarter by setting it in a 12-month period and then the next quarter they do the same thing. So it's a rolling 12-month reporting. 1026 MR. THOMPSON: Okay. Well, then, that's got nothing to do with a fiscal year change or a request for a rate change in a stub period. 1027 MS. HARE: That's correct. 1028 MR. THOMPSON: Could I have an undertaking to file that decision, please? 1029 MS. HARE: Yes. 1030 MS. LEA: J.10.8, please. 1031 UNDERTAKING NO. J.10.8: TO PROVIDE THE DECISION RE PETITIONS OF THE OFFICE OF ATTORNEY GENERAL AND OFFICE OF CONSUMER COUNSEL FOR AN INVESTIGATION OF OVEREARNINGS BY THE CONNECTICUT LIGHT & POWER COMPANY 1032 MR. THOMPSON: Did you find a case where a distributor ever sought a rate change in a three-month stub period? 1033 MS. HARE: Well, we actually weren't successful in coming up with any other cases, I didn't pick and choose but there were very few that we were able to find. 1034 MR. THOMPSON: All right. Thanks. Let's move on to my information topic number 3, and this is some confusion I'm having about EI's financial reporting plans, this is probably for you, Mr. Gruending, I hope I pronounced your name properly. 1035 I understood you to say to Mr. Shepherd that EI is considering reporting EGD's -- sorry, considering including EGD's October 1 to December 31, 2003 results in EI's 2004 report to shareholders, have I got that straight? 1036 MR. GRUENDING: That's correct. That's the status quo as we see it. We would now be adding in, if successful here, likely the December quarter end of 2004, but five quarters into 2004. 1037 MR. THOMPSON: Well, the important words you added there were "if successful here," right? 1038 MR. GRUENDING: Okay. And this is what I want to nail down. What you're seeking for here is a change of fiscal year-end effective December 31, 2005; is that right? 1039 MS. HARE: That's correct, for rate-making purposes. 1040 MR. THOMPSON: Okay. And if -- and so if you're successful here this year in 2004, then you wouldn't wait until December 31, 2005 to include, in effect, 15 months of EGD information in the EI report, you would start with the report for 2004; is that the idea? 1041 MR. GRUENDING: I think that's correct, and concurrent with that we would cease this quarter lag accounting practice as well. As you can see, it's quite confusing and that's really the motive for us to be here today. 1042 MR. THOMPSON: Yes, I understand that confusion is the primary reason why EI would like to have EGD's fiscal year-end changed; is that right? 1043 MR. GRUENDING: Correct. 1044 MR. THOMPSON: Okay. And I guess what I'm a little puzzled about is what happens if you're not successful here? 1045 MR. GRUENDING: We'd have to assess that, but I expect we'd remain with the status quo; otherwise, you would lump up a number of quarters in a year without fixing your problem. 1046 MR. THOMPSON: Okay. So let me just follow up on that a bit, if I could. 1047 At the moment, when Enbridge Inc. reported the results to December 31, 2003, the EGD results for the period October 1 to December 31, 2003 were not reflected in that report; have I got that straight? 1048 MR. GRUENDING: Can you repeat that, please. 1049 MR. THOMPSON: Yeah. The last quarter -- the first quarter of EGD's 2004 test year, October 1 to December 31, 2003, is not reflected in EI's 2003 annual report. 1050 MR. GRUENDING: That is correct. 1051 MR. THOMPSON: And if you're successful here, then you're planning to incorporate that quarter along with four quarters of 2004 in the -- for EGD in the EI 2004 annual report. 1052 MR. GRUENDING: That is the intention. 1053 MR. THOMPSON: All right. And will the results, EGD results for the period October 1 to December 31, 2003 have to be audited for EI to do that? 1054 MR. GRUENDING: Repeat the last part of that, please. 1055 MR. THOMPSON: For EI to, in effect, report the five quarters of EGD's results in its 2004 annual report - you get two questions - do the results for the EGD quarter ending December 31, 2003 need to be audited, and do the results October 1 to December 31, 2004 need to be audited in order for Enbridge Inc. to include those numbers in their annual report? 1056 MR. ROSS: Mr. Chairman, if I can answer that. The financial statements that would have to be audited would be the financial statements for the period ended December 31st, 2004 in addition to the fiscal year ended September 30th, 2004. 1057 MR. THOMPSON: Okay. So you do need an audit of a stub period. 1058 MR. ROSS: We do, because we do need an audited balance sheet as of a calendar year-end in order for comparative purposes when we were to move on to a calendar year basis of reporting. 1059 MR. THOMPSON: Well, what confuses me is why would you propose to the Board that the stub period be December 31 -- October 2005 to December 31, 2005 and yet for the purposes of converting to reporting by EI of the change in year-end, you're using a different stub period that's going to be audited? 1060 MR. ROSS: It has just to do with the timing of the application. In fact, what we're trying to do is harmonize or synchronize these two events, inclusion of Enbridge Gas Distribution's results in EI's financial reports on the exact same time period. It so happens that for reporting purposes, we do need 12 months of history in order to get a full year's report in Enbridge Inc.'s financial reports as well. The reason that we are doing this also is to ensure that we have rates in place up until the end of December 2005 and hence that would help with the synchronization of both those events. 1061 MR. THOMPSON: All right. Now, when the auditor does the stub period audit for the period October 1, 2004 to December 31, 2004, how does the auditor record the cost of debt for the three months? 1062 MR. ROSS: Well, the cost of debt would be contingent on our level of debt at that particular point of time, so they would be able to audit interest expense based on whatever debt requirements we have at that particular point in time. 1063 MR. THOMPSON: All right. Well, assuming the debt requirement is a billion dollars and the interest is 10 percent per annum, am I correct that the audit would record three months of interest expense at 10 percent -- would accrue the debt expense monthly? 1064 MR. ROSS: We do, yes. 1065 MR. THOMPSON: And the auditor would be expected to do that as well. 1066 MR. ROSS: They would, yes. 1067 MR. THOMPSON: Is that your expectation, Mr. Gruending? 1068 MR. GRUENDING: As they would otherwise, yes. 1069 MR. THOMPSON: So that the costs of debt capital are accrued monthly in EGD's books, in EI's books, in all the other EI sub's books. 1070 MR. ROSS: Yes, we prepare financial statements on a monthly basis for internal purposes, on a quarterly basis for external purposes, and those financial statements would include a full accrual for all interest expense that has been accumulated in that period of time. 1071 MR. THOMPSON: I'll come back to that line of questioning in a moment. But just before I leave the EI change in reporting plans, I just want to understand, if I can, what impact possible decisions from this Board will have on these change in financial reporting plans. 1072 The first scenario is the Board decides that the companies will have no inflationary increase for the three-month stub period that it's seeking and the Board decides there will be no adjustment for overearnings or overrecovery in the stub period, and approves the fiscal year-end change. Do I take it in that scenario, EI would proceed to implement the reporting change for annual report 2004? 1073 MR. GRUENDING: I think we would. I think, again, what's motivating this request to begin with is the debt and equity stakeholders' view to get on a calendar year as soon as possible. 1074 MR. THOMPSON: But let's move to another scenario. The Board says, We'll approve your fiscal year-end change, we'll give you an inflationary increase for the stub period of $4.5 million, but there will be an overearnings or overrecovery adjustment of whatever falls out of the 2005 revenue requirement as determined by the Board, say for the sake of argument, it's $20 million. 1075 MS. HARE: I don't think we would, Mr. Thompson, and I think as I was speaking to Mr. Shepherd earlier and he asked me did it point to principle or dollars, I said, it's both. We believe there's no economic impact over this equivalent period so it strikes us as very unfair that the shareholder would be harmed for what essentially would be no change at all. 1076 MR. THOMPSON: No, but you've asked the Board to approve a fiscal year-end change, the Board says, yes, you can have to. You've asked them for an inflationary increase of $4.5 million per quarter, the Board says, yes, you can have it. We've asked them for a so-called overearnings adjustment and the Board said, yes, that's appropriate. How is it, then, that you're going to ignore that decision and stick with a test year, financial year that ends September 30? 1077 MS. HARE: Yeah, I would have to speak to -- let Mr. Cass speak to how we would do that, but the statement I made this morning was that we don't want the change in year-end unconditionally, that we have applied on a certain basis and as long as there's no material difference to how we've applied to implement the change in year-end, then we'd go forward, otherwise we won't. $20 million is a material change to the application. 1078 MR. THOMPSON: Well, let me ask Mr. Gruending, the EI witness, if the Board decides the issues that's been raised by the company's application in the way I've described, what's EI going to do with its reporting of EGD's results? It's got board approval of the change in the fiscal year-end for EGD, knows what the implications of that are, EGD says we're going to ignore it but we don't quite know how yet, what's EI going to do? 1079 MR. GRUENDING: I'm not sure how to answer that, Mr. Thompson, I thought we reserved judgment on that scenario until further evaluation. 1080 MR. CASS: Yes, Mr. Chair, if I might interject at this point, as well, to say that I don't think any witness has said that Enbridge Gas Distribution is going to ignore a decision of the Board. What the witnesses said as I recall the examination in-chief was that in the event that a change in year-end comes with what the intervenors are calling an overearnings adjustment, the company doesn't want the change in year-end. 1081 Now, the Board will make its decision and the company will read the decision and follow what the Board says. It's not a question of ignoring a Board decision, it's a question of informing the Board before it makes the decision that if the price of a change in year-end is what intervenors are demanding, that the company doesn't want the change in year-end. 1082 MR. THOMPSON: Well, let me just follow up on that. This is my last information topic; it's really getting an understanding of this position that you outlined, Ms. Hare, this morning. 1083 It seems to me what you're suggesting is this, that you're asking the Board to decide the issues that were raised by your application. 1084 MS. HARE: Yes. 1085 MR. THOMPSON: And those included your claim for a change in fiscal year-end and its implications, your proposal for a rate increase in the stub period and it's implications, and the counterclaim by the intervenors for a overearnings or overrecovery adjustment. 1086 MS. HARE: Yes. 1087 MR. THOMPSON: Right? And it sounds to me like what you're suggesting is you're asking the Board to, in effect, give you permission in their Reasons for Decision to withdraw these claims and the issues that gave rise to them if they decide the overearnings or overrecovery issue against you. Is that what you're asking the Board to do? 1088 MS. HARE: Mr. Thompson, I'm not sure what exactly I'm asking in that particular case. The point that I wanted to make was that we see that -- and in fact, if we look again at Mr. Shepherd's charts, we see there's no difference in earnings in each of those quarters. That's what the company typically earns. So we see it that there's no impact and the comment I made this morning was that neither the shareholder -- the shareholder shouldn't benefit by a change in year-end, neither should ratepayers benefit by a change in year-end. And we believe that our proposal kept everybody whole. The intervenors' proposal, we believe, really amounts to confiscation of earnings which we think is not fair. So can I, as director of regulatory affairs, say that we will change in any event and give up $20- to $30 million? I don't think that would be responsible of Enbridge Gas Distribution to do that. 1089 So we're simply saying that if the change in year-end comes with a $20 million price tag, I don't see how we can go forward. Of course we'll respect the Board decision, but essentially then the company will be kept whole by not changing its year-end, and that's simply what I was trying to indicate. 1090 MR. THOMPSON: Well, this whole change in the year-end and the claim for a stub period increase were put forward to eliminate confusion, and now you seem to be saying if we don't get what we want, the confusion should remain. Is that what you're saying? 1091 MS. HARE: No, because I wasn't really aware of whether or not any Enbridge Inc. Would go forward and have actually the utility on a different schedule for rate-making purposes and different for financial reporting. I'm not sure if that's an option or not, so I'm not sure if there isn't a way to eliminate the confusion in financial reporting and still keep the utility whole. 1092 MR. THOMPSON: Well, does this -- I'll ask you, Mr. Gruending, does this proposal that's been put forward here, which I characterize as asking again for permission to withdraw claims if they're decided against the company, put EGD in a conflict with the position of EI, which wants to eliminate confusion and have EGD go to calendar year-end test years and reporting? 1093 MR. GRUENDING: I'm not sure there is a conflict. I mean, there are fixed income stakeholders in EGD that share the same concerns as those at EI. 1094 MR. THOMPSON: All right. Let me move on then from informational follow-ups to some further questions about the proposal of EGD that prompted this whole stub period inquiry. And this was EGD's proposal to seek a stub period rate increase which, I believe, has been quantified at about $4.5 million; is that the upshot of this 90 percent of CPI? 1095 MS. HARE: That's what it was when we applied, yes. 1096 MR. THOMPSON: And the precedent on which you were relying in asking for a stub period rate increase was, I believe, the 2004 rate case precedent. 1097 MS. HARE: It was the precedent to the extent that we applied that way in 2004, but I think the Board's decision made it clear in that case not to rely on that as a precedent. So what we were trying to do in this application is justify why an increase is required for the three-month period. 1098 MR. THOMPSON: You would agree with me that the prices that EGD charges for regulated services are prices that are determined by this Board. 1099 MS. HARE: Yes, of course. 1100 MR. THOMPSON: All right. And these are prices for monopoly services that we're talking about here? 1101 MS. HARE: Yes. 1102 MR. THOMPSON: And the extent to which any adjustment is made in prices annually or quarterly is for the Board to determine. 1103 MS. HARE: Yes. 1104 MR. THOMPSON: And, in fact, your prices are adjusted both quarterly and annually under the rate-making regimes that are applied by this Board. 1105 MS. HARE: Yes. 1106 MR. THOMPSON: And would you agree with me that the method of regulation upon which the 2005 test year application was based is the cost-of-service method? 1107 MS. HARE: Yes, that's correct. 1108 MR. THOMPSON: Now, just in terms of the 2004 precedent where an inflationary increment was allowed, that application did prompt some reasons from the Board. I believe they were delivered orally. Do you recall that? 1109 MS. HARE: I'm sorry, Mr. Thompson? 1110 MR. THOMPSON: Your 2004 rates application did prompt some reasons from the Board. 1111 MS. HARE: Yes. 1112 MR. THOMPSON: And I believe those reasons were delivered orally on the transcript; is that your recollection? 1113 MS. HARE: Yes, it is. 1114 MR. THOMPSON: And the Panel that heard that case consisted of the chair in this proceeding Mr. Betts and Mr. Dominy; is that correct? 1115 MS. HARE: Yes. 1116 MR. THOMPSON: Okay. And there was an issue in that case about -- raised by I believe the CAC and others, about the nature of protection that should be accompanied by any Board order that allowed rate increases on a inflationary-adjustment approach instead of a cost-of-service approach; do you recall that debate? 1117 MS. HARE: I don't want to argue with the words -- I don't think it was a generic -- I'd have to look. I don't recall it being a generic issue, that whenever there's an indexing then there has to be overearnings protection. But certainly that was the statement they made in that particular case. 1118 MR. THOMPSON: Well, the settlement agreement, the partial settlement agreement that gave rise to the application in that case and the ultimate decision had in it, I believe it was called, an overearnings adjustment mechanism for the period ending September 30, 2003; is that your recollection? 1119 MS. HARE: Mr. Thompson, I'd have to look at the settlement agreement to see what the words say. 1120 MR. THOMPSON: Okay. Well, would you take that subject to check? 1121 MS. HARE: Yes. 1122 MR. THOMPSON: And then there was a -- the Board, in its decision, felt that there should be a so-called overearnings adjustment mechanism for 2004 as well. 1123 MS. HARE: Yes. 1124 MR. THOMPSON: And the Board ordered such a mechanism as part of its decision and that was modified by some subsequent applications by the company to vary that overearnings adjustment mechanism for 2004. Would you take that subject to check? 1125 MS. HARE: Yes, Mr. Thompson, my recollection was that it was 50/50 sharing above the ROE based initially on actual earnings, and there was a request by the company to review and the decision then was for it to be on normalized earnings. 1126 MR. THOMPSON: Okay. But the nature of the relief requested gave rise to an inquiry about overearnings protection, correct, in that particular case? 1127 MS. HARE: My only hesitation, Mr. Thompson, not arguing with you because it certainly resulted in overearnings protection, is how much discussion there really was at the hearing about overearnings protection, because my recollection was that there really wasn't any except for, I believe it was CAC in argument, and it might have been in the ADR, but I don't recall. 1128 MR. THOMPSON: Well, again, subject to check, I think if you review the settlement agreement, there was an overearnings protection formula built right into the agreement for 2003. The Board just extended it for 2004. 1129 MS. HARE: There was an overearnings adjustment for 2003 because the concern was that the base may have been too high. But I thought -- I'm sorry, I thought we were talking about 2004, which was different, because 2003 had 25 basis points dead band, and if the company, in fact, had earned over the 25 basis points dead band in 2003, then there'd be an adjustment to the 2004. 1130 Now, as it turned out, that threshold was not pure so there was no adjustment to the 2004 base because of 2003 overearnings. But then the Board, and this is the part where I don't recall a lot of discussion, it seemed to me that the Board Panel decided that there should be overearnings protection for 2004, which was the 50/50 initially on actual and then it was changed to on normalized earnings with no dead band. 1131 MR. THOMPSON: Right. Well, I don't want to make a big deal about it, but my only point was that this whole idea of how do you deal with a rate increase that's tied to inflation, not tied to cost-of-service in terms of its potential for overearnings, that all surfaced in the 2004 rate case. 1132 MS. HARE: I feel at a disadvantage, Mr. Thompson, because I'm not arguing with you that the Board didn't decide. But whether it surfaced in the 2004 rate case, my recollection was it was not tied into the indexing issue, it was tied into whether the base is right for 2003. That's what I recall the discussion in the 2003 rate case was. 1133 MR. THOMPSON: In any event, the benchmark from which "overearnings" were being measured in that case was the ROE benchmark. 1134 MS. HARE: That's right. 1135 MR. THOMPSON: All right. And so in this case, then, in the interrogatory process, in the context of the relief that you were seeking for a stub year inflationary increase, there was a question from IGUA. It's IGUA No. 74; it's Exhibit I, tab 13, schedule 74, and you'll find it in this brief of materials that Mr. Cass submitted when we argued the motion. It's Exhibit K.3.1. 1136 MS. HARE: I'm sorry, Mr. Thompson, I'm looking at IGUA Interrogatory 74. Is that the reference you gave me? 1137 MR. THOMPSON: Yes, at tab 4 of Exhibit K.3.1. 1138 MS. HARE: I'm looking at the actual interrogatory, Interrogatory 74, and I don't see that it has anything to do with overearnings. 1139 MR. THOMPSON: Oh, well, let's read it together. 1140 MS. HARE: Okay. 1141 MR. THOMPSON: It says: 1142 "Applying any escalator to rates as of October 1, 2005, even with overearnings protection for ratepayers, may be inappropriate because of declining embedded costs of debt and declining allowed return on equity. Based on information currently available, what is the embedded cost of debt which EGD forecasts for the 12 months ending September 30, 2005 and for the 12 months commencing October 1, 2005?" 1143 So we were looking for costs of capital dealing with this overearnings issue. You go back to 73, which is probably the one I should have referred you to initially. It said: 1144 "The evidence at Exhibit A9, tab 1, schedule 1, apparently seeks approval for an escalator to be applied to EGD rates as of October 1, 2005. What ratepayer safeguards does EGD propose to protect against overearnings as of September 30, 2005 and overearnings in the three-month period October 1, 2005 to December 31, 2005?" 1145 That's pretty clearly about overearnings. 1146 MS. HARE: Yes, it is. 1147 MR. THOMPSON: All right. And basically we're told our protection is the Board; right? 1148 MS. HARE: Yes. 1149 MR. THOMPSON: Okay. We don't -- so further probing is required to find out whether there are or are not "overearnings" in the stub period, because our protection is the Board, according to your response to this question. Would you agree? 1150 MS. HARE: I'm not sure what you're asking me, Mr. Thompson. 1151 MR. THOMPSON: Well, I'm asking you, does that sound like a good argument? 1152 MS. HARE: It has my name on the bottom of this response. 1153 MR. THOMPSON: Anyhow, let's move on with a little further probing here. Now, you've agreed with me earlier that we're dealing with -- what we're dealing with here is an application that's presented under the cost-of-service method of regulation. 1154 MS. HARE: Yes. 1155 MR. THOMPSON: And would you agree with me that it's the forecasts of costs that will be prudently incurred in the period during which the rates will be in effect that is the important consideration under the cost-of-service method of regulation? 1156 MS. HARE: Yes. 1157 MR. THOMPSON: What you, in effect, get rates for is based on cost incurrence; correct? 1158 MS. HARE: Yes, that's correct. 1159 MR. THOMPSON: And the costs to be forecast include the costs of capital. 1160 MS. HARE: Yes. 1161 MR. THOMPSON: All right. And the costs of capital include the costs of debt and the costs of equity; correct? 1162 MS. HARE: That's right. 1163 MR. THOMPSON: And the cost of debt is determined for EGD and other utilities based on an embedded cost-of-debt interest rate; correct? 1164 MR. CULBERT: That's correct. 1165 MR. THOMPSON: All right. And the -- in the period ending September 30, 2005, the embedded cost -- the indicated cost rate for debt shown in Exhibit N1, tab 2, schedule 5, is 7.86 percent; right? 1166 MR. CULBERT: That's correct, for a 12-month period, yes. 1167 MR. THOMPSON: Well, costs of debt are expressed on an annual interest charge; correct? 1168 MR. CULBERT: Correct. 1169 MR. THOMPSON: And the short-term debt, again, it's an annual interest embedded cost of 3.59 percent. 1170 MR. CULBERT: That's right. 1171 MR. THOMPSON: And you told me earlier that you accrue these costs of debt monthly; correct? 1172 MR. CULBERT: That's correct. 1173 MR. THOMPSON: And so when you accrue them monthly, it's one-twelfth of the annual cost being charged in the financial statements on a monthly basis; correct? 1174 MR. CULBERT: That's correct. 1175 MR. THOMPSON: So let's then move to the cost of equity. The cost of equity under the Board's adjustment -- sorry, the equity guidelines is based on a risk premium above the cost of debt; right? 1176 MR. CULBERT: That's correct. 1177 MR. THOMPSON: And it's called the equity risk premium method; correct? 1178 MR. CULBERT: Yes. 1179 MR. THOMPSON: All right. And what is the equity risk premium in basis points implicit in the Board's annual ROE of 9.69 percent? 1180 MR. CULBERT: I'm not sure of the number. I could certainly undertake to find that, but I'm not -- 1181 MR. THOMPSON: Could you give me an undertaking that on that, please? 1182 MR. CULBERT: Yes. 1183 MS. LEA: J.10.9, equity risk premium component of the Board's ROE. 1184 UNDERTAKING NO. J.10.9: TO PROVIDE THE EQUITY RISK PREMIUM COMPONENT OF THE BOARD'S ROE 1185 MR. THOMPSON: Let's assume it's in the order of 380 basis points, just for the sake of argument. Probably in that ballpark. I haven't worked it out myself. It would seem, therefore, to follow that the costs of equity recoverable in utility rates are 380 basis points above the risk-free cost of debt from the Board's adjustment formula. 1186 MR. CULBERT: Okay. 1187 MR. THOMPSON: Would you take that subject to confirming the basis points? 1188 MR. CULBERT: Yes. We're going to confirm that. 1189 MR. THOMPSON: And it would seem to follow that if costs of debt capital are accrued monthly, the costs of equity capital should be accrued monthly; correct? 1190 MS. GIRIDHAR: Sorry, could you repeat that. 1191 MR. THOMPSON: The costs of debt capital are accrued on a monthly basis in financial reporting. Costs of equity is a risk premium above cost of debt. It would seem to follow that the costs of equity should be accrued on a monthly basis. 1192 MS. GIRIDHAR: I wouldn't agree with that statement. If you go to the construct of rate-making again being that revenues equal costs on a 12-month basis, that's the test that's used to determine rates. Now, it follows that if your revenues vary throughout that one-year period in a manner that's different from costs, the fall-out return on equity on any month or any quarterly basis is likely to be different from what the Board approved as an annual ROE. So I do not believe that you can extrapolate from an accrual cost of debt to what the implied accrued cost of equity is, because the cost of equity that's recovered or the contribution that's recovered on a monthly basis then is the outcome of your rate-making process. 1193 MR. THOMPSON: What you're entitled to recover in a cost-of-service regime is costs reasonably incurred for the period under consideration, including costs of capital; agreed? 1194 MR. CULBERT: Yes, we agree. 1195 MR. THOMPSON: You are seeking rates for a stub period of three months. We didn't initiate this proposal, the company did; right? 1196 MS. HARE: Yes. 1197 MR. THOMPSON: And we agree that the cost of debt for three months is one-quarter of the annual cost of debt. There's no seasonality in the incurrence of your debt costs. 1198 MR. ROSS: Mr. Chair, if I may just make a few comments on this. There is actually seasonality in the cost of debt because the higher the earnings and the higher the cash flow of the company, the lower the debt will be. Therefore, in those periods of high earnings and high cash flows, that lower debt interest rates will also -- or interest expense will also be lower. 1199 Conversely, in a period where the company is purchasing an awful lot of gas, as in the summer months, and earnings are lower, cash flow would be -- cash outflow would be much higher, in other words, the cash leaving, the amount of money in the bank would actually be lower and therefore interest expense would rise. So there is a seasonality in the cost of debt also which also follows the pattern of the business. 1200 MR. THOMPSON: Well, sorry, what are you telling me, rates for debt change as time passes? 1201 MR. ROSS: The question was whether cost of debt was seasonal or not, and as I mentioned to you, we do accrue the cost of debt on a monthly basis. 1202 MR. THOMPSON: Right. 1203 MR. ROSS: But that's also correlated to the level of debt that we have in that month and that is correlated to the level of cash flow. 1204 MR. THOMPSON: All right. But the cost of debt is -- I guess what you're telling me is your debt balance can vary month to month. 1205 MR. ROSS: That is correct, yes. 1206 MR. THOMPSON: But subject to that, the annual cost of debt is accrued one-twelfth each month. 1207 MR. ROSS: Not for financial reporting purposes. 1208 MR. THOMPSON: Well, I went through this, I thought, previously where I asked you, how would the auditors treat the cost of debt in the stub period and you told me they would look at it on the basis of monthly accruals. 1209 MR. ROSS: Yes, I told you it would be accrued monthly, but it would be based on the level of debt at the end of that month, or the average level of debt for that month. It wouldn't be taken as one-twelfth of an annual rate. 1210 MR. THOMPSON: Sorry, the rate would not be one-twelfth of an annual rate or the principle against the rate that's applied would differ month to month? 1211 MR. ROSS: The company accrues an expense for interest expense each month, but that is based on the level of debt that exists at that month. 1212 MR. THOMPSON: Give me an example. Have we got in the material -- we're showing in Exhibit N1, tab 2, schedule 5, long-term debt of $1.9 million. That, I assume, is the average for the 2005 test year -- sorry, is it the mid-point or the average? 1213 MR. CULBERT: You're talking about the 1.9 million, Mr. Thompson? 1214 MR. THOMPSON: Right. 1215 MR. CULBERT: Yeah, that's the average of long-term debt. 1216 MR. THOMPSON: And the indicated cost rate is 7.86 percent. 1217 MR. CULBERT: That's right. 1218 MR. THOMPSON: Per annum. 1219 MR. CULBERT: Yes, that's the overall embedded average cost of debt for all debt. 1220 MR. THOMPSON: So just -- let's just take that as a starting point for illustrative purposes. So what -- in month 1, what is going to be accrued for the cost of debt? Is it about one-twelfth of 7.86 percent times the long-term debt amount of $1.9 million? Is that in the ballpark? 1221 MR. CULBERT: It would be approximately one-twelfth of the average indicated cost rate of 7.86 times whatever the debt balances are that Mr. Ross is referring to; i.e., whatever the actual debt balances are of the company for that one-month period. This is an average, so to the extent that that debt balance, for whatever reason, changes throughout the year, it would be multiplied times the debt instruments that support that tax requirement. 1222 MR. THOMPSON: All right. So that the rate is one-twelfth of the indicated annual, that's the rate that's accrued monthly, and it's applied to the principal balance that may be above the average here at one point or below the average at one point; is that correct? 1223 MR. CULBERT: The long-term debt would certainly fall into that category. But it would be a mix of whatever our actual long- and short-term debt balance is or a mix of debt requirements times whatever our debt balance is. 1224 MR. THOMPSON: Okay. But that's got nothing to do with weather. In other words, you don't pay more debt when it's in the fall than you do in the spring necessarily, or vice versa. There's no seasonality in the incurrence of cost of capital. 1225 MR. CULBERT: There's seasonality in the cash balances or cash requirements of the company due to higher gas-to-storage balances or gas-cost requirements, et cetera. So from a cash perspective, there's certainly a seasonality to what we would pay in interest expense overall. 1226 MR. THOMPSON: And would you agree with the principle that if accruing the cost of debt is to be done monthly, then it follows that accruing the cost of equity should be done monthly -- 1227 MR. ROSS: Mr. Chair -- 1228 MR. THOMPSON: -- on the same basis. 1229 MR. ROSS: We don't accrue the cost of equity in financial statements. That is a cost which is borne by the market and is transparent in the financial statement reporting. 1230 MR. THOMPSON: All right. Well, let me just move on, then, to this point in a little more detail, if I might. 1231 The cost of debt is 7.86 percent. That's your embedded cost of debt for the test year; correct? 1232 MR. CULBERT: That's correct. 1233 MR. THOMPSON: And then the risk-free rate is something less than that. For the sake of argument, let's say it's 6 percent. The risk-free rate is something that is determined by the Board's formula; correct? The risk-free debt rate is determined by an application of the Board's formula. 1234 MR. CULBERT: Correct. 1235 MR. THOMPSON: And the basis point add-on for the equity risk premium is determined by the Board's formula; correct? 1236 MR. CULBERT: That's correct. 1237 MR. THOMPSON: And if that annual cost of debt is accrued monthly, then it would be one-twelfth of the annual amount times the equity component of rate base at any particular point in time that would be charged to the financial statement. Just assume that as a -- if that's the way it were to apply. Are you with me so far? 1238 MR. CULBERT: Yes. 1239 MR. THOMPSON: And in terms of recovering those fixed costs, those fixed costs of debt capital and the cost of equity capital, you have rate design options open to you; correct? 1240 MS. GIRIDHAR: That's right. 1241 MR. THOMPSON: And if you were on a 100 percent cost-based rate design, you would be recovering those fixed costs in a customer charge or demand charge. 1242 MS. GIRIDHAR: That is correct. 1243 MR. THOMPSON: Pardon? 1244 MS. GIRIDHAR: That is correct. 1245 MR. THOMPSON: All right. And if you did that, you would recover one-twelfth of your estimated annual cost of debt and one-twelfth of your estimated annual cost of equity each month. 1246 MS. GIRIDHAR: That is correct. If I might just provide some numbers here. Basically for the company, if you look at just our distribution costs, the only truly variable element of that distribution cost is gas losses, and typically they constitute anywhere between 2 to 3 percent of our total distribution costs. So approximately 96 percent or 97 percent of our distribution costs are largely fixed in that they don't depend on the volumes. 1247 What this means, then, is that under the scenario Mr. Thompson's referring to, we would really need to have fixed charges to recover 96 percent of our distribution costs. What we, in fact, have are -- is basically a 70 percent recovery through volumetric charges. What that means, for example, for rate 1 is that our customer charge would go from $10 a month to something like $33 a month. And if I might just mention, we recently had not been successful in getting full settlement on a $1.25 increase in our customer charge. 1248 So the scenario that Mr. Thompson's talking about is certainly something radically different from what we do and what has historically been approved by the Board in terms of rate structure for this company. 1249 MR. THOMPSON: Right. Well, that's a rate design model that you followed your sometime where you have a significant portion of the fixed costs that you incur being recovered in charges that depend on through-put. 1250 MS. GIRIDHAR: Yes, it's the outcome of the regulatory process we've had. 1251 MR. THOMPSON: And if you were like TransCanada PipeLines, for example, that recovered 100 percent of your fixed costs in a demand charge, you would recover one-twelfth of your estimated annual costs of debt and equity each month. 1252 MS. GIRIDHAR: That is correct. 1253 MR. THOMPSON: All right. But you're not that and so what you have is seasonalization in cost recovery. 1254 MS. GIRIDHAR: That's correct. 1255 MR. THOMPSON: Right. And it's your rates that, in effect, recover in the fall stub period and the next stub period far more than one-twelfth of the annual fixed costs for each month. 1256 MS. GIRIDHAR: That is correct. And again, it's an outcome of the fact that the test of revenue should equal costs is really applied on an annual basis and not on any subset of the year; i.e., we don't apply our test that revenues must equal costs on a monthly basis or on a quarterly basis. 1257 MR. THOMPSON: If you had full costs -- fixed costs recovery in a demand charge, it wouldn't matter when you proposed to change your year-end. 1258 MS. HARE: That's right. 1259 MR. THOMPSON: Right. But you proposed to change your year-end and seek rates for a quarter when the costs of capital that are being recovered in rates exceeds one-twelfth of the -- well, exceeds three-twelfths of the costs of capital that are being incurred on an annual basis. That's the reality of the situation. 1260 MS. GIRIDHAR: That's correct. 1261 MR. THOMPSON: And so what we're looking at in the stub period, where your through-put is higher than one-quarter of your annual through-put, is an overrecovery of the costs of capital, and in the other stub periods, we're looking at an underrecovery of the costs of capital. 1262 MS. GIRIDHAR: In certain other quarters, yes. 1263 MR. THOMPSON: So if rates are set in a cost-of-service regime to enable you to recover the costs of capital in the stub period, then I suggest to you it follows that ratepayers are entitled to have the overrecovery remitted to them. 1264 MS. GIRIDHAR: I would suggest that this should be viewed in the context of two things that the Board approves every time it changes rates. First of all, it approves the annual return on equity, not a monthly or a quarterly return on equity. Secondly, it approves a rate structure that allows that return, annual return on equity, to be recovered in a certain fashion over the 12-month period. 1265 Again, going back to that theoretical construct that says that under cost-of-service rate-making, you're seeking an appropriate rate over the company's operating cycle, I think it logically follows that if a year-end change does not change an economic condition but just as a change in the way you report things, that that 12-month operating cycle concept still obtains in this case. It's just that you are accumulating your 12 months from a different start date. 1266 So I would say that rates that are being just and reasonable for a 12-month period starting October 1, 2004 to September 30, 2005 cannot overnight become unjust and unreasonable for a three-month stub period. The appropriate way to look at it is always on a 12-month basis because that's how we set rates. 1267 If we did what TransCanada did, as Mr. Thompson suggested, then it may be appropriate to look at rates on a monthly basis, but that's not the underlying premise of how our rates of set. 1268 MR. THOMPSON: Well, I suggest to you you're mixing up cost incurrence and cost recovery, but I'll leave that for further argument. 1269 You've made it clear in your responses to questions put by Mr. Shepherd that as far as EGD is concerned, it gets to keep what I characterize as the forecasted overrecovery of the costs of capital in the stub period. That's the $30 million that we've been discussing, subject to change. 1270 MS. HARE: It's the exact same amount that the company would earn if there were no change in year-end. 1271 MR. THOMPSON: And Mr. Gruending, you indicated that yes, this will show up in the reporting of -- by EI, this $30 million that is "overrecovery"? 1272 MR. GRUENDING: The regular quarter would be there as it was otherwise, just one quarter earlier. 1273 MR. THOMPSON: And you then go on to say, but the capital markets sort of dismiss that in some fashion? 1274 MR. GRUENDING: Immediately. 1275 MR. THOMPSON: But the money's still there in the bank account, I think is what you said to Mr. Shepherd. 1276 MR. GRUENDING: It's part of retained earnings as it would be without the change in year-end. 1277 MR. THOMPSON: And it's still there to support, if you will, a one-time dividend to EI; right? 1278 MR. GRUENDING: I'm not sure how that other cash flow flows out but... 1279 MR. ROSS: A dividend is a function of the amount available for distribution to shareholders and is also a function of how much cash is in the bank. So it's hard to conceive how a change in year-end would create more cash in the bank and more money available for distribution to shareholders, and, in fact, those dividends would have to be paid out of the retained earnings of Enbridge Gas Distribution which, as demonstrated this morning in an example in K.10.1, would not change under a change in year-end. 1280 MR. THOMPSON: Well, let's turn to that example. This is the coloured page that was missing a column, I think. K.10.1 is the further sheet under file, the coloured version of that, with column T attached. I have a photostat that came over the e-mail that has column T, but I understood you're going to refile something that had all the columns in Exhibit K.10.1. 1281 MR. ROSS: We do have a schedule with column T but it's not in colour. 1282 MR. CASS: I can pass around a black and white version with column T. 1283 MR. THOMPSON: Let's just make sure everybody's got the complete document. 1284 MR. ROSS: Just for clarity, the schedule that's being handed out is exactly the same as the one that was handed out this morning, schedule K.10.1, but includes the column T which, I apologize, was cut out of the print in the colour version. 1285 MS. LEA: So I gather we don't need to give this an exhibit number as you will be refiling this, or do you wish this to be your refiling? It doesn't matter to me. 1286 MS. HARE: It would be better if this was our filing. We don't have a colour printer. 1287 MS. LEA: So we're going to have this as the refiling, and do you want it to replace -- I guess we better make it K.10.3, just to be clear. 1288 EXHIBIT NO. K.10.3: ILLUSTRATIVE EXAMPLE OF CHANGE IN YEAR-END WITH ADDITIONAL COLUMN, COLUMN T 1289 MR. THOMPSON: So Mr. Ross, if we could just take a few moments to check this exhibit, K.10.3, the facing sheet on K.10.1 gave the assumptions that are reflected in this K.10.3? 1290 MR. ROSS: That's correct. 1291 MR. THOMPSON: We went through those this morning. And essentially, the allowed return on rate base is 10 percent, the equity rate base is 1,200 or 1,200 million. Is it 1.2 billion I should be talking about or just $1,200? 1292 MR. ROSS: It's 1.2 billion. 1293 MR. THOMPSON: All right, 1.2 billion. And so the allowed return per annum is $120 million; correct? 1294 MR. ROSS: That is correct. 1295 MR. THOMPSON: And if that were being accrued monthly, as it has accrued monthly, then it would accrue at $10 million a month. This is on a cost -- looking at it from a cost-incurrence perspective. 1296 MR. ROSS: Well, it would be accrued in proportion to the revenues earned during the period in question, so we would not report quarterly one-quarter of that because it would be in proportion to the actual volumes of gas distributed. 1297 MR. THOMPSON: Let me just -- assume with me that we're looking at this from a cost-incurrence perspective similar to debt and we're treating the costs of equity as being incurred equally over the 12-month period. And if you make that assumption, the amount is $10 million per month. Is the math correct? 1298 MR. ROSS: Yes, it is. 1299 MR. THOMPSON: All right, thanks. And in terms of the recovery of those costs, this depends on rate design, and in your particular company where you have so much of the recovery of these fixed costs in through-put-dependent variables, we see that in the period ending December 31, 2002 - I'm just looking at line 8, column B - the recovery on account of, if you will, equity is $50 million, not $30 million. So that's a period of overrecovery as you discussed with Mr. Shepherd. 1300 MR. ROSS: I wouldn't categorize it as overrecovery. That is a period in which the revenues exceed costs by $50 million, and the revenues are based on an implicit return on equity at an annual rate of 10 percent. 1301 MR. THOMPSON: Okay. Well, using the overrecovery/underrecovery language that I used, Mr. Shepherd uses, your exhibit indicates in this illustrative example that the first quarter is a period of overrecovery by $20 million, that's -- it's 20 million above the 30 million; correct? 1302 MR. ROSS: It is. 50 is 20 higher, yes. 1303 MR. THOMPSON: And then in the next period, it's 100 million versus the 30 million; correct? 1304 MR. ROSS: That is correct. 1305 MR. THOMPSON: And then in the other two periods, it's a negative 10 and a negative 20 versus the 30 million. 1306 MR. ROSS: That's correct. 1307 MR. THOMPSON: We would characterize those as periods of underrecovery. But on an annual basis, you're recovering in rates to $120 million for the cost of equity. 1308 MR. ROSS: Correct. 1309 MR. THOMPSON: All right. And really, the nub of this presentation comes down to what you're showing here at -- in columns 2 -- sorry, lines 2 and -- cases 2 and 3 in the middle of column H, what you show in case 2 is the company approach; right? 1310 MR. ROSS: Correct. 1311 MR. THOMPSON: Which, in effect, assumes that you're entitled to recover 50 million in the stub period, not 30 million in the stub period. 1312 MR. ROSS: What this indicates is that everything else being equal, we would always earn that amount of money in that quarter. 1313 MR. THOMPSON: But that's the issue in this case, isn't it? That's the very issue in this case: Are you entitled, in that stub period, to recover $50 million on account of the cost of equity or should it only be 30? 1314 MR. ROSS: The rate-setting mechanism is such that the company, over a period of one year, will earn its allowed rate of return, and in this case, as you pointed out, it is $120 million. In order to earn that over any consecutive 12-month period, it has to be certainly in line with the volumes distributed, and that's under the present assumption. So given that, and given the fact that historically it is earning that amount quarterly, that would seem to indicate that 50 million is the correct amount. 1315 MR. THOMPSON: But in every four-month period -- sorry, in every 12-month period after the stub period, you'll earn your 120 million a year as your case shows. 1316 MR. ROSS: Exactly right. 1317 MR. THOMPSON: And the issue is: What should you get in the stub period? 1318 MS. HARE: That's absolutely the issue, Mr. Thompson. What is the appropriate ROE in a period that's different than 12 months? And the Board has never ruled on what that three-month ROE should be. 1319 Now, we would put forward that the same principle should apply to setting ROE in the three-month period which would be the fair-rate-of-return principle, and those would be looking at other similar companies would make on similar investments in the same three-month period. And we don't believe that it would be a reduced amount over what any other utility that has seasonal rates would be. 1320 MR. THOMPSON: Well that's, I think you're espousing a comparable earnings standard. 1321 MS. HARE: No, I'm not, actually. I'm looking at the fair-rate-of-return principles going back to cases that have been quoted since 1923, and 1944, the Hope case, and they all talk about looking at what a fair return is. 1322 Now, the Board has looked at it on a 12-month period. If we look at anything other than a 12-month period, then it -- the Board has to look at what would be a fair return. And we'd suggest it should be the same amount that the company has earned the previous year, the previous year, what it will earn in that same quarter next year. Anything else would be unfair. 1323 MR. THOMPSON: Well, the -- you'll agree with me the Board sets equity capital by applying the equity risk premium method in Ontario? 1324 MS. HARE: On a 12-month period, yes. 1325 MR. THOMPSON: It doesn't apply a comparable earnings standard. 1326 MS. HARE: That's a technique to establish what the return should be. I'm talking about the principle as espoused in these cases, Bluefield and Hope. 1327 MR. THOMPSON: Well, we'll argue what those cases mean, I guess, but we're not here dealing with an unregulated company whose prices are dictated by the market, we're talking about a company whose prices are changed by its regulator; annually, quarterly, up or down as cost incurrence dictates. 1328 MS. HARE: But I'm looking at -- and I know you're familiar with these cases as well because these are quoted year after year whenever ROE is looked at, but it's: 1329 "A public utility s entitled to such rates as will permit it earn the return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties." 1330 So what we are saying is that if we are going to look at the stand-alone three-month period, we have to look at it in comparison to what another business or even what another utility that has seasonality would earn in that period, and it would not be a quarter of the ROE. 1331 MR. THOMPSON: Well, you have to look at it in terms of your own cost incurrence, but I'll argue that later. 1332 MS. GIRIDHAR: If could just make a comparison again. I talked about this earlier this morning. When the Board has looked at cost incurrence, it has always been in the context of a 12-month period. Even when we do QRAMs, which are intended to last only for a three-month period, similar to the stub period we're talking about here, the Board-approved guidelines asked us to look at a 12-month period of costs; the 12-month rolling period beginning with the period for which you want to set rates. So the test has always been equating revenues and costs on a 12-month operating cycle basis. 1333 Now, you can argue whether the start of that operating cycle is October 1 or December 1 or April 1 or July, and that's the question that we ask in QRAMs but the principle is always that you look at 12 months. 1334 MR. THOMPSON: Mr. Chairman, I'm going to move on into the other areas of stub-period implications and I probably have another half to three-quarters left. Would that -- would this be a convenient time to break for tomorrow or do you want me to plow on? 1335 MR. BETTS: Are you able to attend tomorrow without any particular problem? 1336 MR. THOMPSON: Yes, I am. 1337 MR. BETTS: Then I think this would be an appropriate time for us to break for today, and we will reconvene tomorrow morning at 9:30 and resume with your cross-examination. 1338 Are there any items that should be brought to the panel's attention before we break at this time? 1339 MR. DINGWALL: With respect to tomorrow's scheduling, sir, my client is presenting at a forum at about 9:30 tomorrow morning and I had intended on attending with my client. So I may be here, presuming Mr. Thompson to be well-esteemed in estimating his own verbosity, sometime after 10:00, hoping that I don't miss my turn. If I do miss my turn, I would be happy to follow others. 1340 MR. BETTS: That would be fine, and I assume we'll still be going shortly after 10:00 so that -- I'm sure that will work out appropriately. 1341 I did indicate, too, in closing, just for the record, so that everyone can follow it in the transcripts, that on Monday, July 12th, we would not be convening until 11:00 a.m. on that morning. So that will show on the transcript. 1342 I think that, then, we will adjourn for today and reconvene tomorrow morning at 9:30 a.m. Thank you. 1343 --- Whereupon the hearing adjourned at 4:07 p.m.