Rep: OEB Doc: 1388V Rev: 0 ONTARIO ENERGY BOARD Volume: 14 12 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, 12 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 12 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 SUBMISSIONS BY MS. STREET: [22] SUBMISSIONS BY MR. THOMPSON: [271] 10 EXHIBITS 11 EXHIBIT NO. K.14.1: COMPENDIUM OF DOCUMENTS IN SUPPORT OF ORAL ARGUMENT OF IGUA [274] 12 UNDERTAKINGS 13 14 --- Upon commencing at 11:05 a.m. 15 MR. BETTS: Thank you, everybody. Please be seated. 16 Good morning once again. Today is day 14 of the hearing of application RP-2003-0203. We're now in the argument phase of the hearing, having concluded receiving oral arguments from the applicant on Friday afternoon. And today the schedule indicates that Ms. Street and Mr. Thompson will be providing oral arguments on behalf of their clients. 17 Before we begin that, are there any preliminary matters for the Board's consideration? There appear to be none. And again, the schedule suggests it's Ms. Street, first. 18 MS. STREET: Yes, thank you, Mr. Chair. 19 MR. BETTS: Are you prepared to proceed? 20 MS. STREET: Yes, I am. 21 MR. BETTS: Please do, then. 22 SUBMISSIONS BY MS. STREET: 23 MS. STREET: Thank you. Just by way of introduction, Mr. Chair and Panel Members, let me just remind you who I represent. I represent the Canadian Manufacturers and Exporters. And that is a not-for-profit organization that is funded by membership fees. 24 The CME represents approximately 3500 manufacturers and exporters in Canada, many of which operate in Ontario. CME'S vision, if I can call it that, is to improve the competitiveness of Canadian industry and to expand the export business of its members. 25 CME intervened in this hearing to represent the interests of all manufacturers, from small and medium enterprises to large firms. And in our submission, there is no other intervenor that represents the interests of the small and medium enterprises before this Board. 26 I know you're aware of this, but CME has participated in all aspects of this application, including the ADR conference, and, as has already been pointed out to you, the ADR process was quite successful in that there was settlement on some 48 of 61 issues. Of the remainder, some of those were partially settled, and some, the remaining nine, I believe, were not settled. 27 The Board has proceeded through the evidence in a particular order, and I will do my argument in the same order as the evidence was heard by the Board. On each issue I will first provide some background in terms of facts, and then provide you with CME's position. In some cases our comments are fairly brief, in others they are more detailed. I will not provide you with citations unless you ask me for them. I do have them available but, unless you feel something is contentious, I won't take the time to provide you with all those references. 28 So the first issue that came before the Board is the Union Gas storage contract. And my comments are relatively brief on this issue. 29 Just by way of background, EGD is asking, as you know, for the Board's approval of the cost consequences of a new storage contract with Union Gas. And in essence, what this means is that ratepayers would pay $11.4 million extra in the first two years of the contract, and in return, ratepayers would receive an estimated $31 million of savings in the last eight years of the contract, for an estimated net present value of $8.5 million. 30 The old storage and transportation contract with Union Gas is now replaced by three new contracts. These new contracts were negotiated by EGD even though it believed it had a strong case for a continuation of the old contract, and even though Union Gas was not directly threatening any litigation at the time. 31 The charges for the new storage contract are at negotiated prices under Union's C1 storage and transportation rate schedule, and that contract is not cost-based and it exceeds the costs that are under the existing M12 rate. 32 So for the period of April 1st, 2004 to September 30th, 2005, Union's charges to EGD for storage services under the new contract, which is known as ST039, are estimated to exceed the charges for the cost-based storage of approximately $5.1 million. 33 The second contract is an Easterly Dawn, to Dawn/Liskeard/Kirkwall firm transportation contract and the charges under that contract remain cost-based under M12. 34 And the third contract is a westerly Parkway to Dawn firm transportation contract and the charges for it are negotiated under the C1 rate schedule. 35 So it is the only first contract, LST039, that's conditional on this Board's approval. The other contracts are not conditional. 36 The storage costs associated with this contract would be allocated to the various rate classes depending on their responsibility for storage costs, and it will affect both system and direct purchasers. 37 The company has acknowledged that there's uncertainty in the estimated market price for storage that it used to calculate the net present value for ratepayers. And in light of that, it's CME's position that the Board should not approve the contract, LST039; that the company has entered into with Union Gas because the contract exceeds the charges for the cost-based storage and, in CME's view, the claimed benefits are insufficiently determinable to offset the uncertainty in the market price for storage after April 1st of 2006. 38 And those are my brief submissions on the Union Gas storage issue. I move to the second issue of risk management. 39 MR. BETTS: Ms. Street, if you don't mind the interruption. I just ask you, how would you like the Panel to deal with questions on your arguments? Questions directed to you on your arguments? 40 MS. STREET: Please feel free to interrupt me at any point, as I proceed. I think it's preferable that I respond as the matter is still fresh, at least in my mind. 41 MR. BETTS: Okay. Thank you. And we may just -- I may look to my left and right after each one of those issues to see if any questions have arisen on those, before we go to the next one, then. 42 MS. STREET: That's fine. 43 MR. BETTS: Okay. Please proceed. 44 MS. STREET: Thank you, Mr. Chair. 45 The second issue, then, on risk management. 46 Just by way of background, again, the company is seeking approval from this Board for changes to its current risk-management program; some amendments to its risk management policies and procedures; and amendments to the service level agreements that are currently in place with Enbridge Gas Services. 47 And again, by way of background, as you know, the company, EGD, has undertaken risk management since 1995. But, as a result of the fiscal 2003 ADR process, EGD retained for the first time RiskAdvisory to review its risk-management program. And it is RiskAdvisory's recommendations that EGD is proposing to adopt and which it asks the Board to approve. 48 And those two key changes to its program are, firstly, to remove the 10 percent of volumes that can be hedged at any one time and permit the gas-supply risk-management committee the flexibility to hedge larger percentages; and secondly, to put in place a rolling 12-month hedging program because the current program allows EGD to hedge only within the fiscal year. And, in addition to that, EGD wants to undertake a survey to assess the risk tolerance levels of customers, at a cost of about $8,000, and that would be recovered in EGD's 2005 O&M budget. 49 EGD acknowledges and agrees that the primary purpose of risk management is to reduce price volatility for system-gas customers. And it also believes that volatility will continue in the short to medium term, and it sees no incremental risk, from the customers' perspective, from these proposed changes. 50 The company also acknowledges that the QRAM process already mutes the signal, the price signal, to ratepayers, and that it has the potential to transfer costs from one set of customers to another. 51 And finally, the only reason for initiating these changes now rather than waiting for the outcome of a Natural Gas Policy Forum is, again, to mitigate price volatility for system-gas customers. 52 Now, RiskAdvisory's evidence was that perhaps axiomatically, that some system-gas ratepayers have a high tolerance for risk and some have a very low tolerance. That is not particularly surprising. They also indicated that there is a cost to ratepayers for achieving the lower volatility, and that is primarily an administrative cost because, over time, 15 to 20 years, the evidence was that the cost of the hedged positions themselves would approximate zero. 53 So, although over time they are neutral in the short term, the hedged gas costs may result in higher gas costs to the ratepayer than if there was no hedging activity being conducted whatsoever. But that's the short term only. 54 And in reviewing the risk-management program objectives, it was acknowledged that there had been no previous discussion with stakeholders or with customer groups. 55 So, as I've said, there is no -- it's not contentious that hedging as a principle mutes the price signal to consumers, and this is of some philosophical concern to CME because CME believes that true prices are directly tied to increased or improved energy conservation. 56 Now, as I said, there are some administrative costs associated with the program and they are primarily the operating O&M costs of the staff and the actual transaction costs of the people and the organizations that provide these hedging services. And there has been some net gain that has accrued over the four years that the program has been in place, which was set out in the evidence. But, as I've said, those are short-term gains, as far as RiskAdvisory is concerned. 57 Now, just before I go further, I'd just like to note that on the DSM side, the ratepayers have paid, according to the evidence, over $104 million from 1995 to 2005 for DSM activities, and that brings me to CME's position. The basic issue for CME is whether ratepayers are best served by reducing volatility of natural gas prices through price-hedging. And that, admittedly, is a broad question that will be addressed in the policy forum, but that is the philosophical basis of where we are coming from. 58 We already have reduced price volatility through QRAM, to some extent, and so the question for you to consider is whether the cost of risk management -- is the cost of risk management worth less price volatility and is reduced price volatility, in principle, a good thing? 59 The second issue for CME is that -- or perhaps it's related, is that the risk-management program that EGD has in place and that it proposes to alter to some extent is conceptually at odds, in our view, with the DSM program, which, of course, is a program that provides incentives for energy conservation to try to encourage consumers to be more careful in their use of energy. And the cost, as I've said, has been over $104 million for that program over ten years. 60 So if risk management does, indeed, mute price signals to ratepayers, then it, in our view, undermines the most effective stimulant for energy conservation, which is the effect of higher prices. 61 So CME opposes changing the risk-management program at this point, and spending money on surveys, prior to the whole concept of risk management being examined by the forthcoming Natural Gas Policy Review or similar forum. 62 So we suggest that the Board should defer any decision on the changes to the risk-management program until the merits of risk management, in a broader context, have been fully examined. 63 And finally, in a broader context, again, it's CME's position that the Board should be reconciling its policy on risk management with the DSM concept because they need some reconciliation, in CME's view, as to what they're each trying to accomplish and how they go about doing it. 64 Unless you have any questions on that issue, Mr. Chair, I'll move on to transactional services. 65 MR. BETTS: Just one question, Ms. Street. You indicated that the change shouldn't -- changes should not be allowed. That is on the understanding that there is a risk-management program in place -- 66 MS. STREET: Yes. 67 MR. BETTS: -- and that that would continue? 68 MS. STREET: We don't propose that the existing program be scrapped in this application, simply that it not be amended or changed at -- in this application; that the -- pardon me, let me just read my note here. Let me just summarize for you with the assistance of my client, that what CME is proposing is that the Board reject the company's proposal to remove the current 10 percent volume limit, reject the proposal to put in the 12-month rolling hedging program, and to reject the proposal to undertake the survey. So we would not go further than that. I hope that clarifies. 69 MR. BETTS: Thank you. That is very clear. Thank you. 70 Just one other point. You indicated, and I'm going by my notes so correct me if I am wrong, that these changes were conceptually at odds with the DSM program. And then I know you refined that to say that they were -- that reducing price volatility was at odds with the DSM program. 71 The issue -- the DSM program, to me, and I don't want to put words in your argument, but to me, doesn't focus on price volatility as a primary driver. Am I wrong? What is your assessment of that? 72 MS. STREET: Well, my comment is perhaps in the more philosophical bent: That the DSM program is ultimately about energy conservation and how to achieve that. And muting price volatility, admittedly, is not going to assist in energy conservation. So it is in that context that I suggest that the concepts have to be reconciled from a bigger picture point of view, of how in the long run, what is the best way in the long run to improve energy conservation. And the reducing volatility is clearly not going to accomplish that end. 73 MR. BETTS: Thank you. Please proceed. 74 MS. STREET: The transactional services issue is broken down into two issues. And when we started trying to structure our argument on this, it seemed that issue 4.2 should perhaps be discussed before issue 4.1, because 4.2 deals with, if you will, who is going to sell the commodity. And, depending on the answer to that, it affects the revenue-sharing issue, which is 4.1. 75 So I'm going to deal with 4.2 first, and then come back to 4.1. 76 And issue 4.2, of course, was commodity sales as part of transactional services. And this issue, of course, deals with the inclusion of commodity transactions, bundled together with EGD transactional services assets. And it includes who should undertake those bundled transactions and the conditions that should apply, including credit costs and revenue-sharing. 77 So, just by way of background, EGD currently, of course, has no authority to sell commodity gas as a transactional services asset or otherwise, at least not directly. In the fall, however, of 2002, I believe, November of 2002, EGD allowed or agreed that Enbridge Gas Services would offer services to customers that included the use, i.e., the purchase and sale, of commodity to generate additional transactional services revenue. And that was provided that there was no opportunity to sell a transactional service alone, for similar value; and provided that 100 percent of the gross margin accrued to EGD's account. 78 But it was acknowledged that EGS does not in every case canvass the market to see if the transactional services assets can be sold without bundling with commodity before EGS goes ahead and does that bundling with the transactional services assets of EGD. 79 And EGD, on the other hand, does not advise other marketers of the availability of transactional services assets. 80 The whole concept of EGS bundling commodity with EGD's transactional services assets originated with Enbridge Inc. So, at present, EGS acts as principal in purchasing gas but as the agent for EGD in the sale of transactional services assets that it bundles with the gas that it, EGS, has purchased. And EGD now proposes that EGS now act as an agent for EGD not only in the transactional services assets, but also in the purchase of commodity that would be bundled with the assets as it currently is. 81 And EGD says that that's the way to go, because it will enhance the value of the transactional services assets. And we also know that EGS has the responsibility, right now, of identifying whether or not there are assets in excess of EGD's needs, they're doing that exercise. And as stated already, it's the only organization that's allowed to sell EGD's transactional services assets bundled together with commodity gas. 82 EGD has acknowledged that EGS does not seek any authorization, written or otherwise, from EGD to sell commodity; that EGD provided no written notice to this Board of the arrangement with EGS; that the definition of transactional services, in and of itself, does not include commodity sales, that's been acknowledged. And EGD has acknowledged that intervenors were made aware only in the fall of 2003 of the proposed changes at a stakeholders' meeting. 83 Now, currently, if EGS, acting as principal for the sale of the commodity for its own account, wants to use EGD's transactional services assets, EGS has to go through an RFP bidding process in order to access those assets. But it rarely uses those assets to do something on its own. And the cost of this arrangement, EGD forecasts that it will pay EGS $2.5 million for the services that EGS provides to EGD in 2005. These services, of course, include gas supply, gas supply planning, gas acquisition, risk management, and the transactional services. 84 Now, if EGS is authorized to act as EGD's agent, in those circumstances EGD says it would establish a separate gas cost account to support transactional services. 85 So the proposal before you, there are three proposals, three scenarios, that are put forward. The first is EGS conducting commodity transactions in EGD's name instead of its own. So EGS ceases being a principal in commodity sales and becomes an agent for EGD. Scenario No. 2 involves EGS being allowed to continue to conduct commodity transaction in its own name, subject to certain direction or decisions on the revenue-sharing side, which I'll get to. 86 And scenario No. 3 involves EGS not continuing to conduct commodity transactions for EGD, because the revenue-sharing conditions are not what they want, and that would result in no commodity transactions being bundled with EGD's transactional services assets. 87 So it's CME's position, first of all, that the Board should emphasize as an underlying principle that EGD has an obligation to maximize the value of the transactional services assets. And with respect to the scenarios, it's CME's position that EGD should not be authorized to purchase natural gas commodity as a principal and bundle it with its transactional services assets. 88 And that's because if we believed in unbundling in the first place, if this Board believed in unbundling in the first place, then to allow EGD to purchase natural gas commodity is taking a step back from that concept. And if there is, indeed, going to be a competitive market, to allow EGS to act as an agent for EGD impacts on others in that market. And if EGS is going to continue to have the opportunity to act as principal in commodity sales and bundling those sales with the EGD transactional services, then it's our view that EGS should only have that right if it goes to tender and has to compete in the open market with others who might want that opportunity as well. 89 So, while EGS should have the opportunity to compete in that tender, others should as well. EGS should not be the sole and exclusive provider, or having the opportunity to be the sole provider, in that structure. 90 So that, then, is the scenario that CME urges upon you as the appropriate one. But whatever scenario this Board accepts, the issue then becomes how are the revenues to be shared, and that takes us back to issue 4.1. 91 It's somewhat complicated, dealing with that issue, because we don't know which of the scenarios you will ultimately accept, but let me try to go through them and give you our position on them. 92 Issue 4.1, as I've said, deals with the sharing of revenues from transactional services between ratepayers and the shareholder. The transactional services are assets to the company, such as peak storage, off-peak storage, loans, exchanges, load-balancing, and transportation assignments that are for terms of one year or less, and that are used to provide services to ratepayers but are not currently required by ratepayers and can therefore be released for sale to provide value. 93 Now, beginning in fiscal 2005, EGS says it will no longer enter into commodity transactions involving EGD's transactional services assets in its own name, in EGS's own name, that is, because it does not want to absorb the credit costs and because it says it has no way to recover bad debt. 94 Under the 2003 and 2004 sharing mechanism, ratepayers were guaranteed the first $8 million in gross margin, with the next $2.7 million going to the shareholder, and any additional gross margin being shared 75 percent to ratepayers and 25 percent to the shareholder. 95 So the company argues, in this application, that the $8 million embedded in the 2003 and 2004 rates was a negotiated figure that came out of the 2002 ADR process and that it was not based on an actual 75 percent of estimated 2002 gross margin for those years. And the intervenors, I think, on the other hand, contend that the intention of that 2002 ADR agreement was, in fact, to embed rates -- in rates to 75 percent of the estimated transactional services revenue. 96 What is proposed for the 2005 fiscal year is to embed $8 million of transactional services revenue, provided certain conditions are met. And they put forward, the company puts forward, three revenue-sharing scenarios for 2005 and those scenarios depend on who has the responsibility for the credit risk and which organization bundles the commodity with the assets. 97 So, in scenario number 1, EGD is suggesting that EGS conduct commodity transactions in EGD's name instead of in its own name. So, in other words, EGD would then assume the credit risks, not EGS, because EGS would simply be agent for EGD. That the credit costs would then be deducted from the gross margin prior to sharing. And under this scenario EGD, as I've said, would be responsible for all credit costs and for any bad debts that might arise. And the credit costs were estimated in the evidence at about $50,000. 98 And finally, under this scenario, the current sharing mechanism would remain the same; so that the first $8 million would be guaranteed to ratepayers, the next $2.7 million would go to the shareholder, and the remaining revenues would be captured in the deferral account for future disbursement, and that would be the 75/25 percent split with the O&M costs being borne by the shareholder. So the only thing that changes there from the current structure is that EGS is no longer acting as principal but as agent; EGD is effectively purchasing and selling commodity. 99 Scenario number 2 arises if this Panel does not allow EGD to conduct commodity transactions in its own name. And in that case, what the company proposes is that EGS be allowed to continue to conduct commodity transactions in EGS's name, that's the status quo; that EGS be allowed to charge back to EGD any associated credit costs, and that credit cost has now become $2 million. And I'll get to that $2 million in a moment. And finally, that EGD would be allowed to deduct that credit cost of $2 million from the gross margin before there was the 75/25 split in sharing. 100 The final scenario, scenario No. 3, that the company put forward, would arise if this Board refused to allow EGD to conduct commodity transactions in its own name, or would not allow the sharing of the credit costs between ratepayers and shareholders, the 75/25 split. In those circumstances, then, the mechanism of only the first 4.5 million to ratepayers, guaranteed to ratepayers; the next $1.3 million going to the shareholder; and the balance being captured in the deferral account for the 75/25 percent split. And in that scenario as well, the O&M costs would be borne by the shareholder. 101 Now, with respect to calculating the gross margin, EGD tells us that in 2003 its transactional services gross margin of $10.1 million arose from $275 million of commodity costs incurred by EGS. And gross margin is determined, according to the evidence, by subtracting the direct costs from the gross revenues, adding in avoided costs, and subtracting any further direct costs, and the direct costs are additional fuel while the avoided costs are fuel that is saved. So credit costs are considered a direct cost. 102 Now, the credit costs, according to Enbridge Inc., there are two kinds of credit costs. The first relates to out-of-pocket costs which, as I said, are estimated by EGD at this stage at about $32,500, which was rounded up, I think, to $50,000. But the second credit costs relates to an expected return on capital. So return on capital costs for the transactional services credit protection are not, at the moment, accounted for on Enbridge Inc.'s balance sheet; instead, Enbridge Inc. maintains what they called sufficient equity on the balance sheet to manage the risk of the business. And that risk includes the commodity transactions on behalf of EGS. 103 And what Enbridge Inc. estimates is that an equity capital of about $10 million is needed to support a transactional services program of the size contemplated. And they estimated that a 15 to 20 percent rate of return is reasonable for that kind of investment. And that, it was acknowledged, would yield about $2 million to be set aside, if you will, for the risk of the program. Now, the evidence in this regard was, in our submission, ambiguous, and somewhat fuzzy. The $2 million that supposedly must be set aside and charged as a fee by Enbridge Inc. to cover the commodity risk does not jive with the actual credit costs that the company put forward of either $32,500 or $50,000. There has been no bad debt incurred to date by either EGD or EGS. The company acknowledged that the credit risk on transactional services transaction is relatively modest and suggested it was in the range of 1 in 10,000. So the expected loss is low. There was some ambiguity as to whether this $2 million return or fee would apply whether Enbridge Inc. or EGD is responsible for the credit risks, on the one hand; but in other evidence, it was suggested that EGD could self-insure against that risk. 104 So the question of the $2 million would appear to be simply an attempt by the company to charge a fee to the ratepayers if it does not agree to allow EGD to participate as a principal in commodity sales bundled with transactional services assets. 105 I'd just point out, before I leave this issue, that EGD has acknowledged that it has not looked for an alternative commodity supplier to EGS; it has not considered putting the opportunity to do bundled transactional service commodity transactions out to tender; and it simply says that if EGS no longer purchases commodity gas on its own behalf, because it doesn't get the arrangement it wants on the credit costs, that EGD then will not propose to do either of those initiatives and, in effect, no commodity would then be bundled with EGD's transactional services assets. And EGD would go back to its traditional transactional services business. 106 So CME's position, then, is first of all that the Board should require EGD to embed 75 percent of EGD's gross margin in transactional services revenue for 2005. And the company estimates were that the 2005 transactional services gross margin was $15 million, which would mean, at 75 percent, that $11.25 million would be embedded, not the $8 million which is presently the case. 107 And with respect to the three scenarios put forward by the applicant, as already mentioned, it's CME's position that EGD should not be given the right, whether through EGS as agent or directly, to conduct commodity transactions. But, if you disagree with that and consider that that should be authorized, then CME asks the Board to, firstly, allow EGS to charge back to EGD any reasonable associated credit costs which are assumed to be no more than $50,000 for the coming year; and secondly, to allow EGS's credit costs to be deducted from the gross margin prior to a 75/25 sharing of the residual amount. And by way of example, that would result in a gross margin -- a transactional services gross margin sharing under scenario number 1, assuming a $15 million gross margin, as follows. 108 The first $11.25 million would be embedded in rates. The next $2.7 million would go to the shareholder. The credit costs of $50,000 would be deducted from the remainder, and the residual would be shared 75/25 between ratepayers and the shareholders. 109 Now, scenario number 2 was essentially preserving the status quo of allowing EGS to continue to conduct commodity transactions in its own name and bundle them with EGD's transactional services assets. If that is what the Board considers appropriate, then CME urges the Board to allow EGS to charge back to EGD, again, its reasonable associated credit costs, which are, again, assumed to be no more than $50,000 for 2005; allow EGS's credit costs to then be deducted from the gross margin prior to sharing the 75/25 residual split; and to not allow Enbridge Inc. to charge a cost-of-capital fee, which is estimated at the $2 million, for the risk it claims that it will incur in covering EGS's transactional services-related credit activities. 110 And just before I leave that point on the $2 million, neither Enbridge Inc. nor EGD produced any evidence that EI, Enbridge Inc., would need to increase or would increase its capital to cover these credit risks. That $2 million capital-use fee is, in our view, a rather thinly disguised attempt to extract funds from ratepayers. 111 And, again by way of example, under this scenario, the transactional services gross margin sharing, again, assuming a $15 million figure of gross margin, would be -- the first $11.25 million would be embedded in rates; the next $2.7 million would go to the shareholder; the credit costs of approximately $50,000 would be deducted from the remainder; and the residual would be shared 75/25 between ratepayers and the shareholder. 112 Now, scenario number 3, once again, I emphasize that CME thinks it's important that the Board direct EGD to maximize the value of the transactional services assets. And that would include, where appropriate, the bundling of commodity with its transactional services assets and to seek the best value through a competitive tender process. And this, as I've indicated, is the result urged by CME. And under this scenario, revenue-sharing would then be determined through the tender process. 113 Now, notwithstanding that that is our best-case result, we have to recognize that it is probably too late for the tender process to take place for the 2005 fiscal year, and so for this year only, we would see scenario number 2, the "business as usual" approach, if you will, as the best solution provided that the $2 million use-of-capital fee is not permitted. If the Board thinks that fee has been justified, then scenario number 1 would be preferable for the short term of this coming fiscal year. 114 Those are my submissions on the transactional services issue, Mr. Chair. Unless there are questions, I'll move on to the next issue. 115 MS. NOWINA: I have a question, Ms. Street. Around scenario number 2, that you've been discussing, if that were to be the Board's decision, the company has indicated that it would be open to us directing them to have an independent third party look at these credit costs, the capital credit costs of $2 million. What would CME's position be on that being part of scenario 2? 116 MS. STREET: It's our position that the $2 million charge is inappropriate altogether; that, if that charge was to be supported, it should have been supported in this material; that it has not been supported. So we would not agree that an independent third party should now go back and buttress up the case, if you will, on that particular claim. 117 MS. NOWINA: And it's the nature of the claim as opposed to the number that you're concerned with? 118 MS. STREET: Yes. 119 MS. NOWINA: Thank you. 120 MR. BETTS: Just one question for clarification. The numbers you used, and I thought I had heard them clearly and I'm not certain now, you indicated that the evidence pointed to potential benefits of $15 million in the year 2005; am I correct? Then in terms of the sharing mechanism you talked about, $11.25 being embedded in rates; am I correct still? 121 MS. STREET: That would be the 75 percent of the $15 million gross margin total. 122 MR. BETTS: And then how much to the shareholder? 123 MS. STREET: $2.7 million is the number I have calculated. But if my arithmetic -- it should be 25 percent of $15 million. 124 MR. BETTS: That doesn't add up to 15 million. 125 MS. STREET: No. Just as I've said that, I realize that the $2.7 million, I think, comes from the existing amount, so it would be the higher figure, 25 percent of $15 million. I apologize. 126 MR. BETTS: That's okay. I just wanted to make sure my arithmetic was correct. 127 MS. STREET: No. 128 MR. BETTS: The next point that comes from that is that your -- I understand, then, that your position is that the cost of credit, whether it be $50,000 or $2 million, whatever happens, should not be recoverable unless the $15 million is achieved. 129 MS. STREET: That's correct. 130 MR. BETTS: Thank you. That's all our questions on that issue, thank you. Please proceed. 131 MS. STREET: Thank you, Mr. Chair. 132 The next issue is the class action suit deferral account, issue 11.2. 133 Just, again, by way of background, in April of this year, of course, the Supreme Court of Canada gave its direction of ordering EGD to repay late payment penalties that exceeded the interest limit that's stipulated in Section 347 of the Criminal Code. And so the issue that's been brought before you is whether the Board should establish a 2005 class action suit deferral account, and, if so, what costs should be included in it. 134 The Board, helpfully, in my view, ruled that it would consider whether to approve the establishment of such an account, but it would not be determining whether any of the amounts to be recorded in that deferral account would eventually be recovered from the ratepayers. 135 And in light of this direction by the Board, the issue has taken on less significance than it would have otherwise, but it remains CME's position that what should appropriately be established with respect to the judgment costs is a tracking account and not a deferral account. And I'll just briefly explain why that is so. 136 The company has been admittedly inconsistent over the past years of this litigation as it's wound its way through the courts, as to what it proposes should be included in this account. But I think it's fair to say that over the years it has, more often than not, asked that the deferral account be established to record the costs that the company's incurred in defending the litigation, but excluding the amount of any potential judgment. 137 What is now proposed is that the deferral account be set up to record not only the costs incurred in defending the litigation and continuing to defend it, but also add into that deferral account the legal costs of the plaintiff, which are actually subsumed in the actual amount of the judgment itself, if any. The substance of the judgment, the amount, is unknown. The company repeatedly said -- used the words "if any" after using the words "judgment," but the legal costs owed to the plaintiff will be an amount owed in any event. But it is unknown at this point in time. 138 And in addition to those costs, the company wants to put into the deferral account the cost of expert advice from actuaries, the administrative costs of gathering and analyzing the historic billing records, which sounds to be a daunting task. And, just again by way of background, the company claims that the customers have benefited from the late payment penalty revenue through reductions in cost-of-service, reduced working cash requirements, and lower bad debt expense. 139 They claim that there has been $74.2 million recorded in late-payment-penalty revenue from 1994 to 2002, which is the relevant period, according to the Supreme Court of Canada. And they say that a portion of this $74.2 million may be subject to return to customers that actually paid those excessive interest charges. 140 The company told us that the actual trial of the damages will proceed perhaps next spring, in the spring of 2005, but this must first follow from a certification of the class, which they expect in the fall of this year. And I'd note in passing that that schedule seems somewhat optimistic, in light of what we heard as to the intricacies of collecting the information and identifying the class, the rate at which this litigation has proceeded, we are now some ten years since it was commenced. It seems to me that if it, in fact, is concluded in 2005, it will be a significant increase in the speed at which this has gone forward. 141 But in any case, that was the company's estimate. I'd also note in passing that the company admittedly did not take any steps to mitigate its exposure after the 1998 Supreme Court of Canada decision, and it, I believe, agreed that had it done so, it might have mitigated approximately $37.4 million of the maximum potential. 142 The company finally did agree that if there was an amount recovered from any source to offset the damages, that that would also be reflected in the deferral account. 143 Now, what was admitted as well was that a deferral account is typically used when an account is a receivable and there is a possibility of recovery but there is uncertainty as to the amount. And in this case, there is certainly a lack of certainty, according to EGD itself, whether anything will be recovered by the plaintiff class. There is still a great deal of uncertainty as to what is part of the judgment and what that judgment will be. 144 And the company also acknowledged in the evidence that deferral accounts are criticized as retroactive rate-making. And in our submission, implicit in that phrase, "retroactive rate-making," is the notion that once something goes into a deferral account, some part of that account is going to be recovered and visited upon the ratepayers. 145 So our position on this issue is that it's a bit of a slippery slope to establish the deferral account for the costs of the judgment, and the plaintiff's legal costs, at this point in time. Because, if it is indeed retroactive rate-making as the company says, then what that implies is that, at some point in the future, some portion of those judgment and legal costs to the plaintiff are going to be visited on the ratepayers. 146 So, instead, what we suggest is appropriate is that the Board order EGD to establish an account to track the various costs that have been incurred, and those would include all of the costs, cost of expert advice, and the cost of administering or collecting the information needed to determine the damages. 147 Such an account would not deal in any way, either implicitly or explicitly, with who is liable for the payment of those costs; it would simply be a recording account. 148 And if, in the alternative, you consider that it should be a deferral account, then we would urge you to continue the deferral account on the basis that it has most recently been in effect and that the costs of the judgment and the legal costs of the plaintiff be excluded from that deferral account and recorded elsewhere. And I guess, in the final further alternative, if you disagree with that suggestion and believe that a deferral account should be established and everything, including the costs of the judgment and the cost to the plaintiff, should go into that deferral account along with everything else, then we would ask you to include in your order a very clear direction that this is not to be taken in any way as determining responsibility for any of those costs. 149 Those are my submissions with respect to the deferral account for the class action suit. 150 MR. BETTS: I'd like to -- and you're probably the first person to make this argument, to force this kind of discussion that I'm going to open up. But it's with respect to the use of the term "tracking account" and what you are suggesting that means. If it means entering the transactions into the books of account, I'm not sure of any other way to do it other than to establish it as an accounts receivable, or one portion of the entry as an accounts receivable, which sounds to me like a deferral account. 151 How do you see -- or are you suggesting that the tracking account is nothing more than a spreadsheet program kept separate from the books of account? What is -- 152 MS. STREET: That's what I am suggesting, that it's a spreadsheet program recording all of those costs. 153 MR. BETTS: And therefore not entering the books at all, basically? 154 MS. STREET: That's correct. 155 MR. BETTS: Okay. I understand now. Thank you. Please proceed. 156 MS. STREET: The next issues are -- come under the heading of the partially settled issues: 10.1, DSM, O&M budget and volume target; and the shared savings mechanism, 10.2; issue 15.1, removal of rate seasonality; and 15.2, the monthly customer charge for rate 1. 157 Now, all parties -- dealing first with the DSM O&M budget issue, 10.1, all parties that participated in the ADR discussion on this agreed to a DSM budget of $14.8 million and a volume target of 76.9 million cubic metres. 158 And because, in our submission, because EGD has little or no experience with market transformation as we understand that term, EGD and intervenors agreed only to a market transformation pilot project involving high-efficiency windows for 2005. And that was in the ADR settlement agreement. 159 But Pollution Probe has proposed what is, in effect, a commercial and industrial large boiler market transformation program, and that that program be added prior to January 1st, 2005, and that would necessarily involve an increase in the DSM budget, or a deferral account be created for the associated costs of that expanded program. 160 The evidence was that EGD already has a high-efficiency boiler program to assist customers going to condensing boilers. And it's an incentive program and it utilizes the expertise of its energy-solution consultants. 161 EGD has already agreed to spend some $300,000 of its 2005 DSM budget of $14.8 million on an efficient large boiler program. It's not that this concept has been totally ignored. But Pollution Probe wanted it to go further. And in some of the references it made in giving evidence, it referred to evidence that was filed by the Green Energy Coalition to the effect that EGD has about 7,200 industrial customers, but fewer than 10 percent of those have participated in Enbridge's DSM program since it started doing DSM about ten years ago. 162 Pollution Probe also referred to the statement of the Minister of Education to the effect that the government will help fund $2.1 billion worth of essential major repairs and renovations to Ontario's schools, and suggested -- Pollution Probe suggested that that would dovetail nicely with the market transformation program that it asks you to direct for a large boiler program. 163 Now, it seems that there is some disagreement about -- between the company and intervenors as to what market transformation means. From CME's point of view, it's a relatively new, untried concept for the company. And the company, in fact, admitted that it would require at least four months to come up with a boiler market transformation program, with targets, with time lines, with an implementation strategy. This is not something that they can immediately and easily move into. 164 So it's CME's position that it would be wasteful to undertake another market transformation program at this time, particularly when the company has committed to tabling a longer term strategic DSM plan on or before January 1st, 2005, and that will, among other things, address the whole concept of market transformation. 165 Pollution Probe's advocacy for greater energy conservation. I think that greater energy conservation is a motherhood concept that no one is going to disagree with, but Pollution Probe's advocacy for how to do it is somewhat inconsistent. For example, Mr. Klippenstein, on behalf of Pollution Probe, said that it's a central principle of mainstream economic theory that people respond to price signals. 166 But, notwithstanding that that is admittedly true, Pollution Probe chose not to participate in issue 5.2 dealing with risk management, and that was the controlling price volatility to mute energy prices. They did not participate. One would think, if they agree that price signals are a significant criteria in energy conservation, they would have taken a position in that regard. 167 Pollution Probe also opposed an increase in the rate 1 customer charge, which, again, is a muting of price signals. And they opposed the proposal to remove seasonality for all rate classes except rate 135. So it seems that Pollution Probe, their position on this, in encouraging energy conservation, is not always consistent. 168 So, in our view, a true interest in energy conservation means that there should conceptually be no attempt to shield ratepayers from the true cost of energy through risk management or through increased customer charges. 169 And I think we also have to look at industrial customers being different than residential customers. When Pollution Probe cites the small percentage of industrial customers that have taken advantage of the DSM programs over the years, it ignores the fact that industrial customers are sophisticated business people who are making economic decisions, including equipment, energy equipment, purchases, every day and for reasons that are unrelated or unmotivated by a utility's DSM program. 170 Since EGD already has a commercial, institutional, and industrial large boiler DSM program, and notwithstanding what is now proposed by Pollution Probe to bring in, in our view, Pollution Probe's proposal is a backdoor attempt, if you will, to increase the DSM volume target for the coming year and to increase the budget, which was something that it was unable to achieve in the ADR negotiations. That was not something that the majority of the parties that participated were prepared to agree to. And CME opposes the use of ratepayer money to further subsidize schools or any other customer group which is using ratepayer money to do that subsidization, and that's the implicit suggestion by Pollution Probe and School Energy Coalition. 171 So in conclusion on that particular issue, we urge the Board to reject Pollution Probe's proposal that EGD should undertake a commercial, institutional, and industrial large boiler market transformation program over and above the commitments that have already been made in the 2005 DSM plan. We oppose the increase of the DSM budget for this purpose and we oppose creating a deferral account for any costs that may be incurred. 172 Now, the same arguments apply to any change in the shared savings mechanism. If you agree with our submission on this point, then it's not an issue; if, however, you propose to allow the market transformation proposal that Pollution Probe puts forward, then, in CME's view, the shared savings mechanism should not change from what was agreed between the parties, for the same reasons. 173 So we would reject -- with respect to issue 10.2, we would ask the Board to reject Pollution Probe's proposal that an incentive program be put in place for the large boiler issue. And certainly also, of course, any deferral account for costs that might be incurred. 174 That takes me to issues 15.1 and 15.2, unless you have questions. 175 MR. BETTS: No, thank you. Just to try and anticipate a break in this process, how long do you think you'll need, Ms. Street? 176 MS. STREET: I had hoped, Mr. Chair, to be concluded before the lunch break at 1:00. That's still my hope, although it's taking a little longer than I expected. So I'm ready to continue till 1:00 if that's agreeable to you. 177 MR. BETTS: I'll just make sure, if everybody's okay for another half an hour. Looking to the back of the head of the court reporter more than anything, we're all right. Please go ahead, Ms. Street. 178 MS. STREET: Thank you. 179 Issue 15.1, the removal of rate seasonality except for rate 135. Again, the background, it's not disputed that EGD's delivery charges vary between winter and summer, and this means that December to March delivery charges are higher than those for April to November. But the current seasonal rate difference, according to the evidence, or the rate differential is 2.5 cents. 180 What the company proposes is to remove rate seasonality for all rate classes except rate 135 so that there is a uniform delivery charge year-round, and CME supports the company's proposal in that regard. 181 And I note that all parties that participated in the ADR discussion agreed to the proposal except Energy Probe, Green Energy Coalition, and Pollution Probe. 182 It's our position that, given QRAM and the potential for quarterly rate changes, the benefits of eliminating seasonality outweigh any perceived advantages of keeping it, and eliminating seasonality does not materially reduce the incentive for energy conservation. So we recommend that the Board approve the company's proposal on this issue. 183 Issue 15.2, the increase of the monthly customer charge for rate 1. EGD proposes that it wants -- it suggests it wants to increase the monthly customer charge for rate 1 customers from $10 to $11.25. And this will result in approximately 60 percent of EGD's customer-related costs for rate 1 being recovered, which is up from 50 percent. And the change is revenue neutral to EGD, and it only impacts on rate 1 customers. 184 The high-volume rate 1 customers would see a slight decrease in their annual bill, and small-volume customers would see the small increase already noted. And in most instances, the impact is negligible. 185 The existing monthly customer charge of $10 has been in place since 2000 test year. And the parties that participated in the ADR on this issue agreed to this proposal, except CAC, Green Energy, VECC, and Pollution Probe. 186 CME's position is that it supports the company's proposal on this issue because of the relatively minor amount of the change, and because it makes the recovery of costs closer to the actual amount. And that's consistent with our philosophy of not insulating customers from actual costs. 187 Those are my submissions on those two issues. 188 MR. BETTS: Please proceed. 189 MS. STREET: That takes me to the deferred tax issue, issue 12.1. 190 And the core issue regarding deferred taxes is whether EGD is entitled to recover from ratepayers the sum of $23.9 million over two years. That would be $11.95 million after tax in the 2005 fiscal year, and the remainder in the subsequent year. 191 The company says that those are the deferred taxes payable by two unregulated affiliates, ESI and what's been called Rentco, on rental assets that were owned by one or the other of those companies from October of 1999 to May of 2002. 192 The evidence on this issue was, in my submission, obscure, difficult. And I will certainly defer to Mr. Shepherd's very detailed analysis and argument, which I have reviewed; I wouldn't attempt to try to replicate. 193 But boiling it down, which is what I tried to do to make it as understandable as possible to me, it appears that there are certain facts that are not in dispute, and put as simplistically as possible, they're as follows: 194 First of all, EGD, which was then Consumers Gas, sold the rental assets and other businesses to ESI in October of 1999. ESI then sold those same assets, plus some additional assets, to Rentco in December of 1999. Rentco was established, and the water heater assets transferred to it, because Enbridge Inc. wanted to segregate the assets on which it could claim a deferred tax drawdown. It was not tax planning, it was what we would call regulatory planning. 195 And the result of that sale before the end of December of 1999 was that Enbridge Inc. received a permanent $2.7 million capital tax saving, and in exchange for timing differences on the capital cost allowance. And that benefit was to Enbridge Inc. and not to Enbridge Gas Distribution. 196 Now, notwithstanding that transfer to Rentco, ESI effectively continued to operate the business. The assets were then merged back into one company immediately before a sale of the shares to Centrica in May of 2002, and during the period that the assets were owned by these companies, the affiliate companies, they were entitled to defer taxes on the rental assets. 197 The bulk of that deferred tax liability went to Centrica, along with the shares. But Rentco and ESI had a combined liability for the taxes that had been deferred between October of 1999 and May of 2002, and that is the liability that the company has calculated at $23.9 million. 198 And the company tells us that it has satisfied that liability to CRA, Revenue Canada, by paying cash of about $10.9 million on behalf of Rentco and $2.3 million on behalf of ESI for a total of about $13.2 million. And the company tells that the remainder has been satisfied by applying losses from other companies within the Enbridge family, or by applying excess payments made in the past by those other Enbridge-family companies. 199 There is then a $42 million credit that was paid to the company by CRA as a result of a revised assessment structure. And that went solely to the benefit of shareholders. 200 So EGD takes the position that, even though it didn't have to write a cheque for the full $23.9 million, that that amount is the proper amount recoverable. And they point to a previous Board order that said it is entitled to recover up to $50 million for deferred taxes as they become payable. And there was a great deal of debate about the meaning of the word "payable" versus "paid." 201 Now, the company is maintaining, as I understand it, that it is entitled to have this Board take into account the net effect, on all of the companies within the Enbridge family, and that by using up losses or credits, if you will, that were to the benefit of others in the Enbridge family, that the Enbridge family has lost the benefit or the ability to use those credits or losses in other contexts. 202 But there is also, admittedly, a $5.2 million deferred income tax credit in favour of ESI, which is related to capital cost allowance in excess of depreciation during the period in question, on new, non-utility rental assets. 203 If one were taking the net effect on all of the companies in the Enbridge family, one would expect that that credit would also be taken into account. But the company says no to that. And in our view, there is an inconsistency in that approach. As Mr. Fournier in his evidence said, from a very non-tax expert point of view, one would expect to take the combined deferred taxes paid, including recognition of the tax savings realized. So, if one is going to look at the net -- at the Enbridge family as a whole, one should be looking at both sides of the equation within that family. 204 Mr. Boyle suggested in his evidence that this would not be appropriate, because it would violate the matching principle. But in cross-examination, he admitted that matching, in accounting terms, simply means matching costs to revenues. While he is proposing to match to economic units or economic entities. 205 So, if one is to take a consolidated or net approach, as the company asks when it suits them, then, in our submission, you must also take into account, first of all, the $5.2 million deferred tax credit enjoyed by ESI, but more significantly, you must also take into account the $42.3 million credit that was received when Revenue Canada changed its assessing practice. And clearly, whatever the figure is, if the 42 million is taken into account, it completely offsets all deferred taxes whether paid or payable, and that issue becomes moot. 206 Now, in asserting that the correct figure for the Board to take into account is the $23.9 million figure as tax payable, as I said, the company seems to rely on the Board's previous decision of December of last year. And at paragraph 62 in particular, where the Board ordered, and I'm quoting: 207 "EGDI is entitled to recover from the notional utility account an amount after taxes equal to the deferred taxes that became payable between October 7th, 1999, and May 7th, 2002." 208 Just dealing briefly with this argument on behalf of the company, it appears that -- clearly the company has acknowledged that none of the figures that are now before you were before the Board when that decision was made; and that it is at this hearing that the Board must make the decision as to what the company is entitled to in that regard. And the next sentence, in fact, in paragraph 62 says, and I quote: 209 "EGDI may seek to recover such amount appropriately verified in its next rate application." 210 So, in our submission, that is what is happening at this hearing. The company is before you purporting to appropriately verify the amount that it is entitled to, and it cannot come before you and simply say that it can rely on your previous decision in that regard. 211 So it is our position that you should be setting off the $42.3 million credit and, having done that, there is no amount recoverable in deferred taxes. And I also suggest that, in coming to the Board and asking for recovery of $23.9 million, the company is required to prove its case to you for that entitlement. And, in our submission, it has not satisfied that burden of proving this entitlement in light of the contradictory and the confusing evidence that is before you. 212 The evidence, in fact, appears, from a non-tax practitioner perspective, to be intentionally designed to obfuscate the issue and not to clarify. So it's open to the Board, in our submission, to conclude that the relief sought on deferred taxes can be refused without making any particular finding as to the correct amount of deferred taxes, on the basis that the evidence has failed to satisfy you as to entitlement. 213 And those are my rather simplistic submissions on what is admittedly a complicated topic. 214 MS. NOWINA: Ms. Street, one question. The $42.3 million credit, do you suggest that it should not go totally to EI's benefit, as it has, but rather to the ratepayers? Can you expand on that a little? 215 MS. STREET: I have difficulty in expanding on it because, quite candidly, I don't fully understand the $42 million credit and why it was applied -- given to shareholders. What I do say is that clearly it was paid; it was paid on account of the deferred tax liability, and that it should have been applied firstly to that deferred tax liability. And if the deferred tax liability in the company's estimate is a maximum of $23.9 million, then the liability is completely cancelled out by the credit itself. 216 And I don't know that I am able to provide a more insightful response than that. I think my analysis, or attempted analysis, of that credit was what led me to say to you, to this Panel, that the evidence is insufficient to establish the amount of deferred tax that the company should recover, because the evidence is inconclusive, in my view, on that credit itself. 217 So I think that is really my answer to you, as best as I can make it, that the evidence has not clearly established what the import of that credit was. 218 MS. NOWINA: That's fine. Thanks. 219 MR. BETTS: Thank you. You may continue. 220 MS. STREET: That leads me to the final issue, issue 13.1, the change in the fiscal year-end. And I will attempt to go through this without expanding too -- without being too voluble, if I can put it that way. 221 The issues that arise from 13.1 are: Should the year-end change be allowed, in the first case? The impact of that year-end change on the estimated rate impacts of the four-year phase-in. How will transactional services be shared in the stub period? How will the DSM budget, the volumetric targets, the SSM calculation, the DSMVA, the LRAM for the stub period, all be affected? And finally, should the 2005 rates in the stub period be increased as proposed by the company? 222 The year-end issue arises because the year-end for the company for fiscal, regulatory, and taxation purposes is September 30th, but the parent company, Enbridge Inc., has a December 31st year-end issue -- pardon me, a year-end and, according to the company, the applicant, that quarter lag creates misleading information for users of EI's -- Enbridge Inc.'s -- financial statements. 223 So the company wants to change its year-end to December 31st for purposes of statutory reporting and rate-setting. But it is conditional, the company only wants to do that if the Board will not make any material changes, for example, an earnings adjustment of from $20- to $30 million, and the company further says that a change from its 90 percent of CPI to a zero percent would not, in its view, be a material change. It will make no change with respect to the tax year. That will remain a September 30th year-end. And the company suggests that there are no administrative costs to ratepayers as a result of the proposed year-end change. 224 So, with respect to the first issue, should the year-end change be allowed? CME agrees that the year-end change can be allowed, but we don't agree with all of the conditions that the company attaches to that change. But if it wants to make that change, then CME has no objection to that happening just in and of itself, without the conditions, which I'll get into in more detail. 225 With respect to the changes to existing cost allocation and rate-design implications upstream, at the ADR process, it was agreed that there would be a schedule for a differential phase-in capped at 9 percent of the first three years of a four-year phase-in for upstream costs. With the introduction of a stub period, the issue is whether the start of the phase-in is October 1st of this year or January 1st of next year, given the potential for significant additional work being involved. EGD proposes that it be given flexibility as to when the phase-in should start, and suggests it's a balancing act between fairness to all rate classes and administrative ease, on the other hand. 226 So EGD has proposed to implement the year 2 phase-in on October 1st of this year. These first two years gives the bulk of benefits to the low-volume customers, and by year 3 the trade-off between administrative ease and fairness tilts to administrative ease, if you will. So the company believes that the year 3 phase-in would best be deferred to January 1st of 2007. 227 CME agrees with the company's phase-in approach. We see that as, based on a balance of fairness and administrative ease, but on the other hand, if EGD is not opposed to the Board directing that the year 3 phase-in start in January of 2007, and if that's the case, CME would also support that direction. 228 With respect to transactional services, EGD proposes that a proportion of whatever is embedded in 2005 rates for transactional services revenue be embedded in the stub period. For example, if $8 million is embedded in the 2005 rates, one quarter of that, or $2 million, would become the sharing fulcrum in the stub period. And CME agrees with that approach with respect to how transactional services revenues are handled in the stub period, but we do, as I said, under the heading "Transactional services," believe that the amount that is going to be embed for the 2005 year is the amount approved by the Board. And I've also indicated that, if it's a $15 million gross margin, it would be 75 percent of that figure. 229 With respect to the DSM, for the stub period from October 1st through December 31st of 2005, the company proposes a target of $19.2 million cubic metres, which is one quarter of the annual total, a budget of $3.7 million, the use of the SSM, LRAM, and DSMVA accounts and methodologies as set out in item 10.2 of 2003-0203, and the DSM evaluation report and audit for fiscal 2005 be expanded to include a three-month stub period, and three different ways of calculating -- they give you three scenarios of calculating the SSM incentive. 230 So the CME supports a number of those DSM aspects. We agree with the volumetric target. We agree with the budget. We agree with the SSM, LRAM, and DSMVA methodologies. We agree with the DSM evaluation report and audit for 2005 being expanded to include the three-month stub period, but we would ask that that be segmented into two periods, the 12-month and then the three-month stub, to enable a meaningful comparison when assessing the year-over-year DSM performance. And we agree with an SSM incentive calculated on the aggregate of the volumetric target for the two periods, the 12 months plus the three months, which calculates out at 96.1 million cubic metres for the 15 months. 231 Now, the SSM, the savings allocation, we have some disagreement with. Our support for continuation of a 100 percent savings attribution in the stub period for programs shared with other parties, such as Natural Resources Canada, is conditional on there being no increase in the number of shared programs or no greater intensity of the existing shared programs. 232 So, for example, the company can't meet its obligations in the stub period and get 100 percent savings attribution simply by piggybacking onto another's efforts in a shared program, because what the company -- if the number of shared programs or the intensity of those shared programs increased, and there is a 100 percent savings attribution back to the company, then CME would request that the Board direct the company to increase the volumetric target for that stub period proportionately for purposes of calculating the incentive. 233 And the rationale for that is based on the company's statement that its $76.9 million cubic metre target for the 12-month period is based on it being able to provide 100 percent of savings attribution of the shared programs. And it's based on the company's claim that if the savings attribution for the stub period is less than 100 percent, then the volumetric target for the stub period should be reduced. 234 And while we agree with that logic, it's equally logical that should the company add new shared programs or increase their intensity during the stub period over those in place for the 12-month fiscal 2005, that the volumetric should accordingly increase. 235 Now, by way of background, again, the company tells us that it does not have a DSM plan for the stub period in place; that it simply intends to extend its 2005 12-month plan through to the end of December 2005 in what they called a seamless way. 236 So, in light of that, CME cannot support the alternative proposals by the company to calculate the SSM incentive for the stub period. And what was proposed is that, if the company generates sufficient benefits for the fiscal year 2005 but fails to meet the target in the stub period, then the company would be entitled to their SSM incentive for the fiscal year, the 12 months of 2005, based on the volumetric target of $76.9 million cubic metres. So they would get their incentive even though, over the 15 months, they hadn't met it in total, provided they had met it for the 12 months. 237 They also propose that, if they fail to generate the savings for the fiscal year, the 12 months, but they do generate it for the stub period, that they would get their incentive for the stub period. And what we say is, they should get the incentive provided they meet their volumetric target for the 15 months in total. 238 Now, the company suggested that its proposal was appropriate, based on its volumetric targets for the stub period being extremely aggressive for that quarter of the year. And it also claims that the 12-month target, the 76.9 million cubic metres, is 30 percent higher than its pre-filed target, which was 59.1 million cubic metres. And while that is true, historically, the company has tended to low-ball its volumetric targets, only to significantly exceed those targets when it comes time for the sharing mechanism. 239 So we do not agree that it is an aggressive target. We note that if it were, in fact, a low period of the year, one would expect the company to have come forward with a specific plan for what volumes it could meet during that stub period. It has not done so; it doesn't have a DSM plan for the stub period. 240 So what we say, in summary, then, is that the -- we agree with much of what is proposed, but we propose that the volumetric targets, when it comes to the attribution of savings, be allocated on the basis of meeting the volumetric targets for the full stub period of 15 -- pardon me, the full period of 15 months, both the 12-month fiscal year period and the three-month stub period. 241 Now, finally, with respect to the proposal to increase rates for the stub period, October through December of 2005, the company is proposing a rate increase for that period based on an escalator of 90 percent of the Ontario CPI applied to 2005 rates. And this represents a $4.5 million rate increase for the stub period. 242 The company is also proposing that the calculation of return on equity for the stub period be based on an annual basis and not on a quarterly one. But we note that the company has not filed any cost-of-service information for the stub period or any other evidence to suggest that the resulting rates would be just and reasonable if they are determined strictly by an inflation escalator. 243 So it's our position that, if the Board approves the fiscal year-end change, the Board should order the company to continue with the approved 2005 rates during the stub period and reject the application for an inflationary increase for the three-month period. 244 And alternatively, if this Board should approve the year-end change and allow the application for an inflationary increase, then we urge the Board to put in place an overearnings or an overrecovery adjustment of whatever falls out of that 2005 revenue adjustment, and that the benchmark for determining overearnings should be EGD's return on equity during the stub period. 245 And it is CME's view that the cost of equity that the company incurs in the stub period should be one quarter of the annual allowed cost of equity. 246 So we urge you, in conclusion, to reject the company's claim that, for rate-making purposes, the three-month stub period should be based on principles that are used for 12-month rate-making. The company's applying for a rate increase of a three-month period, in effect, and given that, the company should not expect to use the same rate-making principles as apply for a 12-month period. To do otherwise would, in our view, give them wind fall earnings. 247 That concludes my submissions on the issues. Unless you have any questions that I can address. 248 MR. BETTS: Thank you. No, the Panel has no further questions, Ms. Street. 249 MS. STREET: If I could just then add, I will put on the record our request, CME's request for recovery of costs. We have participated, we feel, responsibly throughout the proceeding, in the pre-hearing technical conferences, the ADR conferences, limited cross-examination, and attempt not to duplicate the work of others, and by putting forward our position in this argument. So we will be seeking recovery of our reasonably incurred costs. 250 MR. BETTS: Thank you, Ms. Street. And the Board will provide information in a letter later on the timing of those submissions. Thank you. 251 I would also allow you, depending on your own personal schedule, to go on with your other activities for the rest of the afternoon. Not to say that you're not welcome to stay, if you would like to. 252 MS. STREET: Thank you, Mr. Chair. I will take advantage of that. As you may recall, this is the only day I am available this week, and I do have a trial tomorrow. So I will be excusing myself. 253 MR. BETTS: Thank you. And thank you for your submissions on this matter. 254 MS. STREET: Thank you, Mr. Chair. 255 MR. BETTS: Let us then take the break. And I'd like to, if we can, as we did on Friday, take a short break. Mr. Thompson son, have you any assessment of how long you might need? 256 MR. THOMPSON: To be honest, no. But I would expect two hours. 257 MR. BETTS: Okay. Thank you. And I appreciate your honesty as well. 258 Let us -- can everyone get by with a 30-minute break for lunch? I see nods of approval. So let us do that. That will bring us back at 1:40 p.m. to hear submissions from Mr. Thompson. Thank you. 259 --- Luncheon recess taken at 1:10 p.m. 260 --- On resuming at 1:45 p.m. 261 MR. BETTS: Thank you, everybody. Please be seated. 262 I believe at this stage, unless there are any preliminary matters, we're ready to receive arguments from Mr. Thompson. And are you ready to proceed, Mr. Thompson? 263 MR. THOMPSON: Yes, I am, Mr. Chairman. 264 MR. BETTS: Thank you. And can I just ask you, as we go into this, if we don't -- if we're not able to receive all of your arguments or submissions today, are you in a position to return tomorrow morning? 265 MR. THOMPSON: I think I am, yes. I'm here. What's happened is, my wife's come down with me and we're going to see that Monet/Turner exhibit and I think we're in the morning, but I'm not quite sure. 266 MR. BETTS: Well, we'll do our very best, then, to complete things today. 267 MR. THOMPSON: If we started early, I think I could certainly -- I think I'm supposed to be there at 11:00, if I'm not mistaken, but... 268 MR. BETTS: Okay. Thank you very much. Please proceed. 269 MR. THOMPSON: Thank you. I've place -- 270 MR. BETTS: Sorry to interrupt one more time. It feels like it's going to get warm in here. The Panel won't object if anyone has to slip their jacket off for a little more comfort. Please proceed. 271 SUBMISSIONS BY MR. THOMPSON: 272 MR. THOMPSON: Thanks. I have provided a compendium of some of the documents I plan to refer to briefly during the course of my submissions, and I know the compendia filed by others were marked, so perhaps I could assume that this will be K -- I think it would be 14.1, wouldn't we? 273 MR. BETTS: 14.1. Yes. 274 EXHIBIT NO. K.14.1: COMPENDIUM OF DOCUMENTS IN SUPPORT OF ORAL ARGUMENT OF IGUA 275 MR. THOMPSON: My argument is divide into four segments -- 276 MR. BETTS: Just for the record, Mr. Thompson, let's give this a title, and we'll call it "Compendium of Documents in Support of Oral Argument of IGUA." Thank you, Mr. Thompson. 277 MR. THOMPSON: Thank you. My argument is divided, essentially, into three sections. There is an introductory portion. I then address the unresolved issues and have some brief submissions with respect to costs. 278 Dealing with the first section, the introductory section, as you're aware, in this application, Enbridge or EGD asks the Board to fix its rates for two periods; the first is 12 months, commencing October 1, 2005, which I will refer to as the 2005 test year rates or 2005 test year; and then the second period for which Enbridge is asking you to fix rates is the three months between October 1, 2005 and December 31, 2005, which Enbridge calls the stub period, and I will call it the stub period as well, and the rates for the stub period I'll refer to as the stub period rates. 279 As others have indicated to you, in its prefiled evidence, Enbridge identified 20 major issues which the application raised. These 20 topics in turn gave rise to some 61 issues on the issues list approved by the Board. Forty-eight of those issues have now been completely settled, four of them partially settled, and nine of them remain unresolved. 280 IGUA submits that hearing time was reduced because Enbridge and intervenors were able to resolve so many of the major issues that the application raised. 281 The issues that remain unresolved are issues of significance. Some of them, in our submission, have important policy implications, while others are significant from a revenue-requirement perspective. And as you know, the issues that remain unresolved are the Union Gas storage contract issue, risk management, transactional services, CASDA (class action suit deferral account), demand-side management, rate design, deferred taxes, and stub period fiscal year-end issues. 282 During the course of the hearing, the Board was called upon to deal with two important process matters: Enbridge's motion to remove the change of fiscal year-end and stub period rates issues from the issues list. And to withdraw that part of its application which gave rise to those issues was denied by the Board. In addition, the Board denied Enbridge's request that certain information pertaining to deferred taxes be held in confidence. 283 The hearing of the evidence with respect to unresolved issues and arguments consumed -- and arguments with respect to the process motions consumed 11 hearing days. As far as my client, IGUA, is concerned, it has been a regular participant in the rate proceedings of Enbridge and its predecessor, as well as Union Gas and its predecessors, for more than 30 years. 284 Even though the financial impact in percentage terms of unresolved issues on the rates which serve IGUA's members may be less significant than the rate impacts on other customer classes, IGUA has traditionally provided submissions to assist the Board in its deliberations with respect to most matters in issue. In this context, the Board in prior decisions has characterized IGUA as an "all-issues" intervenor. 285 In its regulation of Enbridge, the Board applies the stand-alone principle, and you can find a statement to that effect in the recent ROE case, RP-2002-DECISION-158 decision, in paragraph 124. 286 The utility is regulated on the basis of the concept that it does not engage in business activities other than the provision of monopoly services. The business activities of a pure stand-alone utility are conceptually confined to the regulated utility business. Conceptually, the management of a pure stand-alone utility will not be materially dominated or influenced by officials of an energy conglomerate holding company parent. Conceptually, a pure stand-alone utility is not a wholly-owned subsidiary of an energy conglomerate. 287 The direct influence of utility shareholders over the behaviour and actions of the management of a pure stand-alone utility would only be exercised periodically and usually at the annual shareholders meeting of the utility company. Those managing a pure stand-alone utility would not be subject to the day-to-day supervision by officials of an energy conglomerate holding company parent, pressuring them to accord priority to the interests of the parent company. 288 IGUA submits that the ability of the management of a pure stand-alone utility to objectively balance the interests of its shareholders and ratepayers would greatly exceed the ability of a utility management dominated by the influence of officials of its holding company parent to objectively balance those interests. 289 It has become increasingly apparent to IGUA that this Board must monitor with increasing vigilance the behaviour of the holding company owners of the utilities it regulates. 290 In IGUA's view, these holding company owners are increasingly attempting to either direct or influence the utility company to adopt measures which are designed to enhance the returns of the parent company. 291 The relief requested by Enbridge with respect to a number of the unresolved issues in these proceedings will, if granted, operate to enhance the returns of EGD's parent, Enbridge Inc., at the expense of EGD's ratepayers. 292 IGUA submits that because of the dominating influence that officials of EI have over them, EGD's management lacks the ability to objectively balance the interests of its shareholders and ratepayers with respect to these issues. Calgary calls the shots on issues which enhance the returns of EI at the expense of EGD ratepayers, if they are resolved in the manner proposed by Enbridge. 293 The fact that EI personnel now join EGD personnel as witnesses to press Enbridge's position on issues which, if approved, will enhance EI's returns at the expense of EGD's ratepayers, illustrates the reality that it is EI officials and not utility management who are directing the presentation of these claims. In these circumstances, IGUA submits that the utility management has little, if any, ability to balance the interests of its ratepayers and the claims of its parent company. Instead, utility management is under considerable pressure to advocate the position taken by its parent company shareholder. 294 In the context of this reality, IGUA submits that the Board must be increasingly vigilant when scrutinizing claims by EGD which, if allowed, will operate to enhance the returns of Enbridge Inc. at the expense of utility ratepayers. 295 Moving to my second major topic, unresolved issues, and dealing first with the Union Gas storage contract. Just as an aside, I am not providing evidentiary references, in the interests of expediency. I can do so, if you wish, if there's any specific statement I make that you want a reference, I'd be happy to provide it. The other offer I would put forward is I can, following receipt of the transcript of the argument, add the references and send it back to the Board so the Panel would have a version of the argument with references. And perhaps, when I finish, you can tell me whether that would be of any assistance to you or not. 296 MR. BETTS: Thank you. 297 MR. THOMPSON: So what I'll do is just give you the section of the record that contains my cross-examination on each of these issues and leave it at that. 298 With respect to the Union Gas storage contract, you'll find my cross-examination at transcript volume 1, paragraphs 928-1431. 299 The issue is whether the Board should approve for rate-making purposes the proposed cost consequences of EGD's new gas storage contract with Union, effective April 1, 2004. The word "proposed" is emphasized because the cost consequences of the new contract will not be any different from the cost consequences of the old contract, unless and until the Board approves the new pricing that is proposed in the new arrangements. And the new arrangements we're talking about are arrangements for EGD's acquisition of storage from Union between April 1, 2004 and March 31, 2006. 300 The new storage contract with Union is part of a group of contracts that replaces a storage contract that EGD had with Union for transportation and storage services under Union's cost-based M12 rate schedule. The expiry date for the old contract was March 31, 2006. 301 The old and new contracts cover about 20 Bcf of storage. Under the old contract, EGD would pay a cost-based rate for storage from Union, which, for the period between April 1, 2004 and March 31, 2006, would be in a total amount of about $7.8 million below the rates that Union has agreed to pay under the new contract. 302 You'll find the document that supports that number as exhibit -- it's Undertaking J.1.3. And it's at tab 1 of our compendium. It was also at pages 6 and 7 of counsel for the SEC's compendium. And on the third page of this document, the copy didn't come out very well, but the 7.8 million that I'm talking about is the sum of the two numbers that appear in the first and second columns at the bottom of the page, and they are $2,837,300 in the first column, excuse me, and $4,963,300 in the second column. And I apologize for the poor copy. But that's where the $7.8 million amount comes from. 303 MR. BETTS: Sorry, Mr. Thompson. Would you remind repeating those two numbers for me? 304 MR. THOMPSON: Yes. The cost difference in column 1 is $2,837,300 million. That's for the period April 04 to March 05. And then the difference between cost-based and the non-cost-based rates of the second year is $4,963,300. And if you add them together, you get $7.8 million, approximately. And you'll see the NPV of that up in the second column, third-last line, is about $7 million. 305 So that is the difference in this two-year period of between the rates that Enbridge has agreed to pay but is not yet paying, and the cost-based rates that prevail under the old arrangements. 306 Have I been responsive? 307 MR. BETTS: Yes. Thank you. 308 MR. THOMPSON: Good. 309 IGUA submits that by entering into this new gas storage contract with Union, Enbridge has effectively accelerated by a period of two years its transition away from cost-based prices for storage required by its infranchise ratepayers. The Board should be aware of the desire of Enbridge's owner, Enbridge Inc., to separate Enbridge's storage and gas distribution assets. To this end, Enbridge filed, I believe it was in 2002, an application to separate its storage and distribution assets. 310 However, Enbridge decided to shelve that application after the Board rendered its RP-2001-0032 decision dated December 13, 2002, which required Enbridge to demonstrate benefits to ratepayers to justify its restructuring plans. 311 The Board should also be aware that Union's owner wished its gas distribution utility to acquire storage from Market Hub Partners Limited Partnership, a Union affiliate, at market-based prices, in order to enable the Union affiliate to develop incremental storage assets. 312 Union's affiliate did not proceed with the application that it had filed when the Board decided that the prudency of Union's proposed contract with its affiliate would be scrutinized. The proceedings that Market Hub Partners Limited Partnership had commenced were to obtain the requisite Board approvals for the development of new storage facilities. 313 In the context of these prior applications by EGD and Union's affiliate, IGUA submits that it is apparent that the owners of both EGD and Union regard the adoption of a market-based pricing policy for all storage to be in their long-term business interests. 314 The storage policy that the Board currently applies in its regulation of EGD and Union's storage is that the infranchise ratepayers of each utility are entitled to cost-based rates for storage. IGUA accepts that in prior Union cases the Board has approved storage contracts between Union and other utility companies not regulated by the Board, such as Gaz Metropolitain, and the City of Kingston, and that these contracts contain market-based pricing provisions. 315 However, these approvals do not signify to IGUA that EGD's infranchise customers are necessarily obliged to pay market-based rates for the storage capacity EGD acquires from Union to meet their requirements. IGUA submits that if EGD was a pure stand-alone utility, having due regard for the interests of its ratepayers, then it would never agree to acquire storage from Union to meet the requirements of EGD's infranchise ratepayers at prices exceeding Union's cost-based prices for storage. 316 Rather, EGD would claim that its infranchise customers are entitled to cost-based storage from Union by arguing that such a result necessarily follows as a corollary of the existing cost-based pricing policy applicable to EGD and Union's infranchise ratepayers. 317 If EGD was a pure stand-alone utility, then it would argue that a requirement that it pay market-based prices to Union constitutes an inappropriate transfer of resources from EGD ratepayers to Union ratepayers, through the operations of -- operation of Union's transactional revenue deferral account; and, in addition, that such a practice will only operate to enhance the returns of Union's owner at the expense of EGD's ratepayers. 318 It's in this context that it is of concern to IGUA that there was never any timely disclosure by EGD of the fact that in early 2003 it began "negotiating" - and I put those words in quotes - the so-called new storage contract effective April 1, 2004, for the 20 Bcf of gas that EGD was then entitled to acquire from Union until March 31, 2006, at cost-based rates under Union's M12 rate schedule. 319 The so-called "dispute" - I put that word in quotes as well - between EGD and Union that supposedly gave rise to these negotiations turned on an issue supposedly raised by Union with respect to the termination date of the old contract. Union's position with respect to that issue had absolutely no merit whatsoever. EGD's suggestion that it negotiated the new contract - and quotes are from the prefiled evidence - "to avoid potentially expensive litigation" lacks credibility. The basis for the so-called potentially expensive litigation was never articulated in writing by Union. Litigation was never threatened. The only written communication between Union and EGD with respect to this matter appears to have been Union's three-line letter of March 11, 2002. That's filed at exhibit J.1.5. Thereafter, all communications between EGD and Union were apparently verbal. 320 The fact that there are no written communications between EGD and Union pertaining to the alleged dispute strongly suggests that whatever negotiations were taking place were extremely friendly and not initiated to avoid potentially expensive litigation, as asserted by EGD. 321 When you add to this the fact that EGD did not disclose to its stakeholders before April 2004 that it had been negotiating a new contract with Union since early 2003 for non-cost-based storage pricing, and the fact that by April of 2004 it was known that the Board planned to review its regulation of storage, then the inference is irresistible, we submit, that EGD and Union were attempting to finesse Board approval of a non-cost-based contract between EGD and Union with respect to infranchise ratepayers of EGD in order to enhance the prospects of obtaining Board endorsement of a policy calling for a complete transition to market-based prices for all storage. 322 I put this conclusion to Mr. Brennan and his phrase in responding to it, he was quite vocal about this, he said, "Absolutely not." And, to cite a quote from Macbeth, "Methinks he doth protest too much." 323 The evidence indicates, we submit, that EGD first disclosed its new storage contract with Union to its ratepayers after it was a fait accompli, and it was at the eleventh hour during the course of these proceedings. The evidence indicates the details of the arrangements were first disclosed during the course of the ADR conference. Disclosure on the public record of the details of the arrangements only occurred in prefiled evidence submitted by EGD on June 14, 2004. 324 IGUA submits that any further transition towards market-based prices for storage and away from cost-based prices for storage for the infranchise distribution customers of EGD and Union should only take place after the Board completes its review of the regulation of storage and transmission at its Natural Gas Policy Forum, and not before. 325 In terms of the impacts of a transition to fully market-based storage pricing, the evidence indicates that the cost-based rate for 20 Bcf of Union storage in the period April 2004 to March 2005 is $6.7295 million, and that's the number that appears at compendium tab 1, in line 1. So it's about -- a little less than $7 million. According to Mr. Brennan's testimony, the full market-based price for storage is about three times the cost-based amount, which we conclude is about $20 million. 326 Using these amounts as reasonable surrogates for the difference between cost-based and market-based storage prices, it appears that market-based prices for 110 Bcf of storage, which EGD holds, including the storage it contracts from Union, would be about 5.5 times the 20 million, or about $110 million, which is an amount of about $76 million in excess of the cost-based prices for 110 Bcf. 327 Mr. Shepherd did a calculation of this amount in his material, this sort of difference between cost and market, and it's at page 9 of his compendium, K.12.1. He makes it at about $60 million. So mine, at 76, is higher than his. But it's a big number. 328 And on the basis of a very high-level assumption that the amount of cost-based storage that Union holds for its infranchise customers is similar in amount to the storage that Enbridge holds and is about 110 Bcf, then the very high-level estimate of the added costs to Enbridge and Union ratepayers of having to pay market-based prices rather than cost-based rates for Union and Enbridge storage is about $152 million, using my numbers, or in excess of $150 million. 329 The policy which requires the infranchise ratepayers of Union and EGD to pay market-based rates for storage could lead to increases in the costs of delivery services to such ratepayers in a total amount of more than $150 million. Mr. Shepherd's numbers would a high-level estimate of $120 million. 330 IGUA expects that a move away from rather than greater emphasis on cost-based storage rates for the infranchise gas distribution customers of EGD and Union will have significantly adverse economic impacts on some of its members. It is IGUA's expectation that the overall economic impacts of a cost-based pricing policy for the infranchise ratepayers of EGD and Union, compared to a market-based pricing policy for such storage, will be examined by the Board during its Natural Gas Forum, which is to focus on, amongst other topics, the regulation of storage and transmission. The economic impacts of the adoption of a policy which require the infranchise ratepayers of EGD and Union to eventually pay market-based prices for storage should be carefully reviewed before the Board decides whether to place greater or lesser emphasis on cost-based storage rates for the infranchise ratepayers of these distributors. 331 IGUA submits that the Board ought not to be seen to prejudge in any way the outcome of its review of the regulation of storage and transmission. The Board should not approve the cost consequences of EGD's new storage contract with Union effective April 1, 2004. The Board should refrain from granting the relief EGD requests, with the result that the cost-based prices under the old contract will continue to prevail until March 31, 2006. 332 Those are my submissions on that topic. And I'll move on, unless there's some questions. 333 MR. BETTS: You may move on. Thank you. 334 MR. THOMPSON: Thank you. 335 The next unresolved topic is risk management. And IGUA's submissions here are very brief. 336 The pros and cons of either approving EGD's proposed responses to the recommendations contained in the report prepared by RiskAdvisory Inc. or deferring further consideration of these proposals until the Board completes its review of the role of distributors in providing system gas, including pricing, will be adequately covered by other intervenors. IGUA takes no position with respect to the relief that EGD seeks or the postponement remedy suggested by other intervenors. 337 The next topic is transactional services. And the transcript of my cross-examination on this topic is found in volume 4, paragraphs 933-1381. 338 This is one of the issues where the relief being sought by EGD will, if granted, operate to enhance the returns of EI at the expense of EGD ratepayers. If EGD is authorized to buy and sell gas commodity to be used in combination with its sale of transactional services, then the probability is that EGD in future proceedings will seek a thickening of the equity component of its utility capital structure. 339 On the other hand, if EGS as principal continues to acquire the gas commodity which is used in conjunction with its sale of transactional services on behalf of EGD, then the notional credit costs which EI seeks to recover from transactional services revenues will operate to enhance EI's returns. 340 The primary issue as we see it is whether EGD as principal should be permitted to buy and sell commodity in combination with its sale of transactional services such as peak storage, off-peak storage, and/or transportation. If EGD is not permitted to buy and sell such gas, then the issue is whether a portion of the transactional services revenues over and above the amount embedded in rates should be allocated to EI to cover its notional credit costs of supporting purchase of gas commodity by EGS, in combination with the transactional services which EGS sells as EGD's agent. 341 A corollary issue is whether EI's threat to withdraw its support for the purchase of gas commodity by EGS should lead to any reduction in EGD's forecast of TS revenues for the 2005 test year and the portion thereof which the Board embeds in EGD's 2005 test year rates. 342 The evidence indicates that currently EGS purchases and sells gas as principal and combines its sale of such gas with TS services from EGD, which it sells as EGD's agent. All of the margin realized on the so-called bundled transactions are transmitted by EGS to EGD for sharing between EGD and EI, in accordance with the Board-approved transactional services sharing formula. 343 The evidence indicates that, operating in this fashion, EGS has bought and sold, as principal, some $275 million of gas commodity over a recent 12-month period, and sold that gas in conjunction with TS services which EGS sells as EGD's agent. The margin produced by this bundled transaction was about $10 million. 344 The evidence indicates that neither the commodity purchase, nor its sale, is recorded in EGD's books. EGS records the commodity purchase and sale transactions in its books, and transmits the total gross margin to EGD. EGD then allocates the gross margin to a menu of transactional services which exclude bundled commodity transactional services transactions. 345 The evidence indicates that EI provides credit support for EGS, and the actual out-of-pocket credit costs to EI for the credit support that it provides is negligible. 346 The relief that EI is, in effect, seeking is to either shed the risk or be better compensated for the risk that it faces in providing support for EGS's gas acquisition activities in conjunction with its sale of transactional services for EGD. 347 The Board is asked to authorize EGD to purchase and sell the gas commodity used in such transactions. Alternatively, EI, in effect, seeks an increase in its share of the TS margin by an amount which is equivalent to the notional credit costs that EI allegedly incurs to provide support for EGS. 348 And as I've indicated, EI threatens to withdraw this support if it doesn't get what it's asking for. 349 With respect to the 2005 test year forecast of TS revenues, the utility evidence indicates that working with a competent agent such as EGS, which is prepared to acquire gas commodity in its own name and sell that gas in conjunction with its sale of EGD transactional services, EGD can achieve $15 million in transactional services revenues in the test year. 350 With respect to the sharing of these revenues, EGD proposes to embed in rates the same amount as was embedded in its 2003 test year rates. There is an issue as to whether the amount to be embedded is a fixed amount of $8 million or a proportion of the transactional services revenues forecast. EGD's position is that it's a fixed amount and that the fixed amount is $8 million, with the next $2.7 million accruing to the benefit of its shareholder. Thereafter, revenues will be shared 75/25 as between the ratepayers and EGD's shareholder. 351 According to the argument of Mr. O'Leary, any credit costs which the Board allows EGD -- sorry, EI to recover from the transactional services revenues will not affect the amount embedded in rates. 352 The amount that -- well, in the event that the Board refuses to provide -- grant the relief, sorry, that EI is seeking through EGD, then EGD is asking the Board to approve a transactional services revenue forecast for 2005 of only $8 million and to embed only $4 million thereof in rates. 353 The evidence submitted by Mr. Fournier on behalf of IGUA indicates that, in IGUA's view, EGD's primary focus ought to be on the provision of utility services. In IGUA's view, EGD's provision of transactional services should be accorded a lower priority than its system-gas and delivery services obligations to its ratepayers. 354 In this context, it's IGUA's submission that EGD should not be engaged, either as principal or agent or anyone else, in the purchase of gas commodity to be used in conjunction with the sale of EGD transactional services. EGD's gas commodity acquisition activities should be confined to the acquisition of the gas commodity needed to meet its utility system requirements and the requirements of its system-gas users. 355 Without derogating from these views, IGUA nevertheless supports the principle that, within reasonable limits, EGD has an obligation to maximize for ratepayers the value of its utility assets. IGUA submits that the Board should recognize and apply this principle when fixing and determining EGD's 2005 test year rates. 356 IGUA urges the Board to find that EGD can achieve transactional services revenues of $15 million in the 2005 test year, working with an agent which, in its own name, purchases and sells commodity in conjunction with the transactional services that it sells on behalf of EGD. 357 In making its findings with respect to the forecast of transactional services revenues for the 2005 test year and the amount thereof to be embedded in rates, the Board should disregard EI's threat to withdraw its support of EGS if it does not obtain the relief that it seeks. Neither the forecast of the transactional services revenues for the test year nor the amount thereof to be embedded in rates should be influenced by this threat. 358 Clearly what EI is seeking in these proceedings is an enhancement to its returns at the expense of EGD ratepayers. To achieve a greater share of the transactional services revenues in this case, the onus is on EI in this case to demonstrate to the satisfaction of the Board why it deserves an increased share of the revenues, as well as the manner in which the amount of any increased share of TS revenues should be derived. 359 We submit that the evidence in these proceedings fails to convincingly demonstrate why EI is entitled to such a large amount that they seek, and, more importantly, fails to demonstrate how the amount and the reasonableness of the amount is to be established. 360 The hypothetical or notional credit costs that EI seeks in this proceeding should be rejected because EI has failed to discharge the onus of proof. It has failed to demonstrate how a reasonable amount should be derived, or that the estimated amount of $2 million is reasonable. 361 We submit that the rejection of EI's claim in these proceedings to an increase share of TS margin should be without prejudice to its right to renew the claim in a subsequent proceeding. The Board should not, as suggested by EGD in its argument, establish a deferral account or some other form of mechanism to provide EI with a second kick at the cat, an opportunity in this proceeding to later discharge the onus of proof which it failed to discharge during the hearing. 362 So our submission is, they didn't prove it in this case, but they may be able to prove it in a subsequent case. And our submission is, call a spade a spade and come forward with a claim with an increased share to the transactional services margin. Don't try and dress it up with a whole lot of hypothetical credit costs that the parent is not, in fact, going to go out and incur. Had they gone out and incurred legitimate, third-party, arm's-length credit costs, then our view would be that would be a legitimate deduction from the gross margin. 363 With respect to the sharing mechanism, IGUA urges the Board to note that the $8 million amount embedded in EGD's 2003 rates was, in fact, 75 percent of the forecast TS revenues in that case of about $10.7 million. In these circumstances, IGUA submits that 75 percent of the 2005 TS revenue forecast of $15 million, or an amount of about 11.250 million, should be embedded in EGD's rates. The next $3.750 million should accrue to EGD's shareholders. Amounts over and above the forecast of $15 million should be shared 75/25, as between ratepayers and the shareholder. 364 If the Board finds that the amount to be embedded in rates is not proportional, as we submit, but is a fixed amount of $8 million, as Enbridge claims, then the sharing mechanism proposed by Enbridge is the sharing mechanism that should be approved. 365 Those are my submissions with respect to transactional services. And I'll move on unless there are any questions. 366 MR. SOMMERVILLE: Mr. Thompson, in your view, what's the role of a tendering process in the transactional services area? Does it have a role to play with respect to this issue? 367 MR. THOMPSON: I don't know, and the reason we don't know is that no marketers have come forward and offered the Board any evidence with respect to how this service would operate in the competitive market situation. And believe me, I've encouraged them to present some evidence on this issue. So, quite frankly, I don't know. I'd simply be giving you my sort of buzz on the street as to whether it could -- it would be acquired by tender or not acquired by tender. 368 MR. SOMMERVILLE: I don't think we could rely on that for the purposes of our decision, Mr. Thompson, so thank you. 369 MR. BETTS: Mr. Thompson, the question of credit costs, were you going to address that with respect to the sharing mechanism that you just spoke of? Or did you? 370 MR. THOMPSON: Well, not -- well, not in any great detail. My recollection is, and it may be in my brief here, that if you go to tab 2, this is Undertaking J.4.1, and go to the last page of this document, we have here, as I understand it, the scenarios. And so what my client is supporting is the "with commodity" with the three asterisk label on it. This is the status quo, in effect, situation. 371 But we take the view that the $2 million that's being shown there at line 4, "deduct credit costs," has not been proven. But we would accept that credit costs paid to an arm's length third-party service provider, a non-EI company, such as the LC charges, for example, would be a proper credit cost deduction. But, as I understand it, costs of those nature are not being forecast in the test year to be charged against this margin. And the amounts that are being forecast, if I'm not mistaken, are quite small: $50,000 or less. 372 So if that kind of a cost were proved to your satisfaction, then, yes, we would agree that it should come off the margin. Now, I think we'd accept EGD's position that the amount embedded in rates is not going to be affected by any credit cost deduction, but once your revenues are over the embedded amount, then we would accept some deduction for these kinds of costs and allow EI to come back with an opportunity to better prove its entitlement to a greater share of the margin. 373 MR. BETTS: Thank you. I have no further questions on that issue. 374 MR. THOMPSON: Thanks. 375 The next topic is the class action suit deferral account, CASDA. And the issue here is whether the scope of CASDA should be limited to cover EGD's -- what I call EGD's defence costs, consisting of the legal costs of EGD and the costs that it incurs for expert advice from actuaries, and so on; or whether the scope of the account should be broadened at this time to include any judgment amount payable to the plaintiff and any others that fall within the ambit of the class, once it has been certified, and within the phrase "judgment amount," I include costs payable to the plaintiff or plaintiffs. 376 For the purposes of the relief sought in these proceedings, EGD acknowledges that the ambit of the CASDA should be as it was in the 2003 proceedings. There's an acknowledgment from Mr. Ladanyi to that effect in the testimony. 377 I should have indicated that my cross-examination on this topic is at volume 5, paragraphs 1110-1154. 378 In the context of that acknowledgment that the ambit of CASDA should be as it was in the 2003 proceedings, IGUA submits that the broadened scope of CASDA, which was approved in the 2004 test year application, should immediately be set aside so that no costs other than defence costs will be recorded in the 2004 CASDA. The broadening of the ambit of the CASDA account in EGD's 2004 case, which was the accelerated case to get them back on track, was neither explicitly raised by EGD, nor picked up by anybody, it just simply was not addressed on its merits, and it should be narrowed, in my submission, immediately. 379 The creation of a deferral account implies that some portion of the amount recorded therein will be recoverable at a later date. IGUA submits that it's inappropriate and premature to conclude that any portion of the judgment, including costs payable to the plaintiff, will be recoverable from ratepayers. The legal basis for the judgment amount is that EGD engaged in action which was criminal. IGUA submits that the risk that any conduct in which EGD engages may ultimately be found by a court to be criminal is a shareholders' risk. If ratepayers are to be held accountable for such risks, in whole or in part, then the equity risk premium which the Board awards to EGD should be slashed. 380 The fact that EGD's conduct, which the Court ultimately found to be criminal, was based on a joint study co-sponsored by the Ministry of Energy and approved by the Board, does not, in our submission, operate to shift the cost consequences of this risk from the shareholders to the ratepayers. 381 That's a position on the merits that's obviously going to be argued later, but I wanted to put that out there for you. 382 Further, even if it's ultimately found that the ratepayers should bear partial responsibility for judgment amounts, including costs payable to the plaintiff, the amount thereof cannot be reasonably ascertained before the judgment amount is known, and before the consequences of EGD's efforts to mitigate its exposure can be evaluated. At this stage there's no evidence whatsoever upon which findings can be made with respect to these issues. EGD has not even investigated its right to claim contribution from those who participated in the formulation of the late payment policy which gave rise to the Court's subsequent finding of criminal conduct. 383 EGD has not even investigated whether it has any insurance coverage, which might arguably be available to respond to the judgment amount in whole or in part. The evidence pertaining to the extent to which EGD's shareholder or its ratepayers -- whether, sorry -- the extent to which it was EGD's shareholder or ratepayers that benefited from EGD's recovery of amounts attributable to its criminal conduct is clearly incomplete. 384 In all of these circumstances, IGUA submits that it's inappropriate to broaden the CASDA deferral account to encompass any amounts paid by EGD on account of the judgment or on account of the costs to the plaintiff. 385 What is appropriate at this stage, in our view, is the establishment of a tracking account similar to that used to track the differences between Alliance and Vector transportation costs and TCPL costs. And you'll find that tracking account in the excerpt from the Board's decision pertaining to its acceptability at tab 3 of the compendium. 386 This was an account that was established so that the difference between Alliance Vector transportation costs and the traditional TransCanada route could be tracked and brought forward later to ascertain whether those costs were prudently incurred or not prudently incurred. And so, if you go into the fourth page of the document, you'll find the excerpt from the settlement agreement in the RP-2000-0040 case that set up this account. 387 And if you go to the fourth bullet point, the first three are preamble as to why the account is needed. The fourth bullet point is: "ECG and the other parties concur that an examination of this issue --" that's the issue of prudency of Alliance Vector costs "-- would be facilitated by quantifying during the test year the cost differential between the two transportation paths by means of a notional deferral account." 388 Sound familiar? "Notional" there was meant to transmit the result of tracking. 389 "The resultant entries in this account, together with the other information EGD will provide as a condition of this settlement, will provide an evidentiary basis for a thorough examination of this issue in EGD's next rate case." 390 That's the kind of account that we believe should be established with respect to these judgment amounts and costs associated therewith. 391 The Board, if you go back now to the third page of the document at the tab, you'll find the Board's reaction to this account in paragraph 2.2.11 of the reasons in the 2000-0040 case, and there the Board says, in paragraph 2.2.11: 392 "The Board was originally concerned about the concept of establishing a 'notional' deferral account; however, the Board is satisfied with the explanation given by Company witnesses at the oral hearing that this is actually a tracking account. It is 'notional' because the Company is including in the account not only the actual transportation costs incurred by the Company for the new transportation path...," "...but also the 'notional' amount for costs that have been avoided along the traditional TCPL path." 393 So it's an account to aid in the subsequent determination of responsibility for the amounts recorded therein. This, in our view, is the type of account that should be established. 394 And whatever you call it, whether it has the word "deferral" or something else, it needs to be labelled in terms that make it perfectly clear that it is not an asset account and none of the amounts recorded therein will necessarily be recoverable at a later date. We suggest that the account be entitled the "Class Action Judgment Tracking Account," CAJTA, or labelled in some other fashion, so that it makes it absolutely clear that this account is not an asset account, and that its creation does not imply that the ratepayers will ultimately be held responsible for any amounts recorded therein. 395 In our view, this type of account falls outside the ambit of section 36(4.2) of the Act which requires these things to be cleared in a year. And I suggest it's desirable to have an account that falls outside the ambit of that section because you don't want to be rushed into determining the issues that need to be decided to determine responsibility with respect to this matter. 396 So that's what we suggest you consider. And we would simply leave it to EGD's auditors to decide whether amounts recorded in such a tracking account should be expensed by EGD now or later, when the amounts -- any amounts are brought forward by EGD in a claim against its ratepayers. It goes without saying that any amounts recorded in this tracking account should be net of amounts recovered by EGD from any joint tort-feasors and/or insurers or as a result of any other mitigation efforts. 397 For all of these reasons, therefore, we submit that no amounts on account of the judgment, including costs payable to the plaintiff, should be covered by a broadening of the ambit of the 2000 -- a broadening of the ambit of the 2003 CASDA. 398 The extent to which a deferral account, an asset account, as opposed to a tracking account should be created to cover such costs should not be determined by the Board until sufficient information is available and filed by EGD in proceedings before the Board to enable the Board to evaluate EGD's exposure net of mitigation amounts and to address matters pertaining to the assignment of responsibility for such amounts as between EGD's shareholder and its ratepayers. 399 With respect to the question of whether there is a difference between defence costs and judgment amounts, we submit, yes, there is such a difference. Defence costs are clearly distinguishable from judgment amounts and related costs which arise from conduct found by the court to be criminal. Ratepayers are not liability insurers with respect to the wrongful acts committed by EGD and others with whom EGD worked closely to fashion the late payment policy which has given rise to the court's decision. 400 So there is a difference, and the way to deal with it, we submit, is these two separate types of account. 401 Unless there are any questions, those are my submissions on that topic. 402 MR. BETTS: No questions on that one, Mr. Thompson. 403 MR. SCHUCH: Mr. Chair, I wonder if I could just jump in for a second. The compendium that we have in front of us doesn't appear to have an exhibit number. 404 MR. BETTS: We labelled that before you arrived, and it's K.14.1. 405 MR. SCHUCH: Thank you very much, Mr. Chair. 406 MR. THOMPSON: The next topic is demand-side management, and again our submissions here are very brief. 407 IGUA supports the settlement agreement with respect to the DSM plan for the 2005 test year, and urges the Board to refrain from providing the direction requested by Pollution Probe with respect to a commercial, institutional and industrial large boiler market transformation program, for the reasons submitted by EGD which IGUA adopts and supports. 408 The next topic is rate design, which is also -- our submissions on this topic are brief. 409 IGUA adopts and supports the rationale relied upon by EGD to support its proposals to eliminate rate seasonality and to increase the customer charges in rate 1. The priority issues for IGUA in these proceedings were EGD's proposed changes to its existing cost allocation methodology, and the rate design changes linked thereto. 410 These changes had a significantly negative impact on the rates under which IGUA members take service. Despite the fact that EGD's proposed changes to its existing cost allocation methodology constituted a reversal of Board-approved cost allocation practices, which had been used to design EGD's rates for many years, IGUA worked closely with EGD and other intervenors to fashion a solution upon which the matters in issue could be compromised. 411 The four-year differential phase-in of the upstream cost allocation for storage and transportation costs, and related rate design -- and the related rate design was a compromise solution which IGUA could support. IGUA acknowledges the cooperation of EGD and other intervenors in fashioning this practical solution to these complex issues. IGUA also acknowledges EGD's cooperation and support in modifying the authorized overrun provisions of its rate schedules and its curtailment notice practices in response to concerns with respect to these matters raised by IGUA members. 412 My next topic is deferred taxes. My cross-examination with respect to this matter is found commencing in volume 8, paragraphs 1094, and continuing through volume 9 to paragraph 537. 413 This is another unresolved issue, where the relief being claimed will, if granted, operate to significantly enhance the earnings of EI at the expense of EGD ratepayers. Calgary officials are clearly calling the shots on this issue. 414 Exhibit J.9.3 is an exhibit that shows how the burden of any deferred taxes amount would be shared by the rate classes. And you'll see that the bulk of the burden falls on residential customers and rate 6 customers. A total of between 3 and 4 percent falls on the rates that serve IGUA members. 415 So the financial impact of a decision in favour of the company with respect to this issue falls primarily on the smaller rate classes. Nevertheless, IGUA has been a very vocal opponent of the claims for a draw against the notional utility account, because in its view, in the circumstances with respect to the rental program that emerged after EBO 179-14/15 was decided, the claims being made by EI for a draw against this account are, in IGUA's view, not only unreasonable, but are avaricious. And we have been a very active resister to these claims. And it's probably apparent why, but we regard it as unreasonable for ratepayers to be asked to pay on account of a deferred tax liability with respect to a business that did not become non-viable as predicted; rather, it was expanded and sold within two-and-a-half years at a gain, net of taxes, in excess of $200 million. And in addition, we have the refund amount which I'll come to in my submissions. 416 The task of the Board Members in this proceeding is to respond to the $23.9 million claim, which is $37 million grossed up for taxes, that is made against EGD's ratepayers by applying the Board's EBO 179-14/15 decision as that decision was interpreted in the Board's subsequent RP-2000-0135 decision, which I'll call "the 135 decision," and the earlier one I'll call the "179-14/15 decision." As a result of the 135 decision, EGD now accepts that the notional utility account that the Board established in the 179-14/15 decision was an indemnity account. The decision did not impose an unconditional obligation on EGD's ratepayers to pay any amount. 417 Having accepted that the Board's decision created an indemnity account, it is, in our submission, incorrect for EGD to continue to characterize the account in any way as an award of compensation against EGD's ratepayers for past benefits received. And this, in our submission, is the way EGD continues to attempt to characterize this decision. They try to characterize it as compensation for past benefits. And you'll find submissions to that effect in the argument of counsel for EGD in volume 13, I believe. 418 In its 179-14/15 decision, the Board did not make an award against ratepayers requiring them to compensate EGD for past benefits received from the rental program. It considered the past benefits in scoping out a partial indemnity with respect to a portion of the amounts that EGD was forecasting that it would be required to pay in future years, on account of the rental program deferred tax liability at September 30, 1999. The notional utility account was not created to enable EI to pocket the Revenue Canada refund amount in excess of actual deferred taxes paid between October 1, 1999, and May 7, 2002, when the business was sold to Centrica. Nor was the notional utility account created to enable EI to enhance its net gain after taxes on the sale of the business to Centrica, that gain already being in the amount of $240 million. 419 As stated in paragraph 3.3.19 of the 179-14/15 decision, the Board established the account to allow EGD shareholders to pay a portion, a portion, of the deferred taxes associated with the rental program as they became due. The Board relied on its consideration of the past benefits received to cap the ratepayers' exposure at $15 million. And if there's any doubt about that, then I would ask you to look at the decision of the Board on the motion brought by EGD to review and vary the 179-14/15 decision. That decision is found in Exhibit K.7.3, at tab 2B. This is the motion record of the moving parties. And it starts at page 58. But the passage that I submit is important, in terms of what were the benefits considered -- in what context were the benefits considered, is the passage at page 62, where you'll see in the second-last paragraph, the Board says this: "With respect to the capping of the notional utility account at $50 million, in recognition of the benefits the ratepayers had received, as a result of the existence of the rental program..." 420 And then it goes on to describe the applicant's arguments. So that's where the benefits came into play in the context of the Board's original decision, was to set the cap. Accordingly, we submit that a finding against ratepayers with respect to the claimed draw against the notional utility account of $23.9 million does not turn on any matching of costs and benefits. To obtain a finding against ratepayers with respect to any portion of the claim draw, it must be demonstrated that the claim falls within the ambit of the indemnity account which the Board established. Accordingly, we submit the issue is: What are the parameters to have indemnity account which the Board established in its EBO 179-14/15 decision. That's question 1. And then the second question is whether the claim made in these proceedings falls inside or outside the ambit of the indemnity account. 421 To answer these questions, the Board must look to the 179-14/15 decision, as well as the issue of interpretation resolved by the Board in the 135 decision. 422 IGUA submits that, to understand the ambit of the indemnity account that the Board created, the Panel members hearing this case need to have some appreciation of the circumstances which gave rise to that decision, as well as the circumstances which gave rise to the 135 decision, which issued subsequently. 423 Now, I provided some of that context when we argued the confidentiality motion, but there appears to be a need to elaborate on this context because counsel for EGD misdescribes that context in certain material respects. And in that connection, I'd ask you to turn up, if you could, if you have it, volume 13 - these are Mr. Cass's submissions - at paragraph 69, for starters. 424 And I apologize, I don't have these excerpts in a compendium, but I was working on this stuff on the weekend, and there wasn't any staff available to me. And Mr. Cass in his submissions in paragraph 69, said this: "But what Mr. Thompson said to this Board Panel during this case about when he was referring to this motion record was that, during the determination of the 2002-0135 case, there was no evidence before the Board about transactions that took place following October 1, 1999." 425 And then he gives the transcript reference. He's implying here that we were suggesting there was no evidence of anything before the Board that heard the 0135 case. So you have to go back to the passage that he cited to see what was actually said. And what was said in paragraph 190 was this: 426 "Now, the material before the Board when it considered the 0135 proceeding consisted of the two motion records that we've marked as Exhibit K.7.3 and K.7.4. There was no evidence before the Board about the actual transactions that had taken place following October 1, 1999, except the excerpts from the prefiled evidence in prior cases that are contained in these motion records." 427 So he's misstated or suggested there was no evidence, and he's clearly misstated what was said when we argued the motion. But he goes on and, in effect, implies that what the Board was considering in the 135 case was the relief that IGUA sought in its motion of May 30, 2002, and in his compendium that he filed on deferred taxes, K.13.1, he actually included the motion. 428 And I think, in fairness, I have to put this in proper context. If you look at the motion, this was a motion that was dated May 30, 2002. It's at tab 4 of his compendium, and it's also in the -- it's also in K.7.3. 429 The motion that we brought, which was brought two weeks after we had agreed in the settlement conference that this issue should be hived off, was a motion, essentially, for two things. If you look at the motion, if you have his Exhibit K.13.1, the relief in subparagraph (a) was an order dismissing EGD's proposals pertaining to his claim to draw against the notional utility account, and then the second alternative relief was for production and discovery by way of interrogatories and questions of EGD's affiliates. 430 The dismissal proposal was based on the proposition that, in its evidence in the case, EGD had not provided any direct evidence to support the drawdown that they were claiming. By direct evidence, I mean direct evidence from the affiliates. There was some prefiled evidence and that's in the record. 431 But the other aspect of the matter -- so you have "the grounds for the motion to dismiss are," and you'll see those grounds that were argued. The bottom line is, if you go to subparagraph (p) on page 3, we were saying: 432 "There is no direct evidence from EGD's owner or its affiliates to demonstrate compliance with the Board's preconditions for a drawdown of the notional utility account." 433 And then the alternative request, you see on page 4, was for directions. Production and discovery and interrogatories and all the rest. 434 And the reason why that motion was necessary is, you can see from Exhibit K.7.3, for example, if you go tab 2E at page 85, this is an interrogatory that was submitted after the company updated its evidence to apprise the Board of the dismissal of the Divisional Court's decision, as well as the sale of the business to Centrica. That occurred, as I recall it, during the course of these proceedings. And so we've cited a whole lot of preamble there, and then we asked some questions: 435 "Will EGD abandon its claim? If not, then please obtain from EGD affiliates and produce." 436 And so we had a whole lot of requests for information of the type that has now been filed in this case for the first time. And you'll see the response that we got there at page 87, in sub (b), and it's essentially the type of response that intervenors were getting from Enbridge before we had the great dust-up leading to the subpoenaing of Mr. Letwin. And what you'll see here is, for example, Consumers Gas is not a party to the agreement, not a party to the agreement. They proposed to file stuff with the Energy Returns Officer. Again, nothing is going to be on the public record with respect to the information that is now on the public record in this case. 437 So that precipitated from us a motion to dismiss it, or, in the alternative, let's get the facts. And so that was the May 30th motion, which sat with the Board for a number of months. 438 And then it was -- then Enbridge brought this motion, which is Exhibit K.7.4, the motion record of Enbridge Gas Distribution, and that's dated August the 1st of 2002. 439 And this is the motion where Enbridge says, Well, the decision means we get $50 million bucks. It's an unconditional obligation to pay. So let's deal with that issue as a threshold. Before we get into all this evidentiary stuff that IGUA was asking for, let's deal with that issue. 440 And so that's essentially what they -- this motion is. They say, We're entitled to the money, and so the relief that they ask for is establish a -- well, if you go over to page 3 of their motion, in (k), it tells it all: 441 "If this motion is determined in favour of the Applicant, there will be no need for the Board to embark on a hearing of the issues raised by the IGUA motion." 442 And so if he now argues that the Board was disposing of the relief requested in our notice of motion when it heard the 0135 case, I submit that is misleading. 443 What then occurred is the Board issued its Procedural Order - this, again, is some months later - and you'll find that Procedural Order in Exhibit K.7.2. And at tab 3, just to highlight again, you'll see the sabre-rattling correspondence that was exchanged between Mr. Cass and myself with respect to his motion trying to preempt it in front of ours, where we wanted to at least have the documents before the Board. 444 But the Procedural Order is what's scoped out what was to be argued. And you'll see the Procedural Order at tab 5 describes the decision, describes the two motion records. And then the Board said: 445 "Having reviewed the motions, the Board is of the view that the threshold issue raised by the motions is the appropriate interpretation to be given to the Board's original decision. The Board has decided the most effective way to proceed with the two motions is to receive submissions from the parties with respect to the interpretation that ought to be given to that decision." 446 So it was an interpretation issue that the Board was considering. It was not considering our motion to dismiss, nor our motion with respect to production, discovery, and examination. And I would submit the threshold issue was really precipitated by my friends' notice of motion, not ours. 447 In terms of what were the issues of interpretation, there again the Board didn't specify it, and in our submissions, Mr. Cass has excerpts from these in his material, if we could just stay with Exhibit K.7.2, we identified two issues of interpretation, at page 5. We thought the first issue of interpretation was whether draws were tied to and conditional upon the payment of income taxes. And we thought a second issue of interpretation was whether this gain realized on the sale was available to address any tax payments. So we raised those two issues of interpretation. 448 MS. NOWINA: Mr. Thompson, I don't know where you are in the reference on that. 449 MR. THOMPSON: I'm sorry, it's K.7.2. This is the documents brief. 450 MS. NOWINA: Right, I have the document. 451 MR. THOMPSON: Okay. Tab 6 is the argument in chief of the moving parties. And so this was the initial submission in response to the procedural order asking that issues of interpretation be addressed. And I was drawing your attention to page 5 -- 452 MS. NOWINA: Thank you. 453 MR. THOMPSON: -- where we identified two issues of interpretation. 454 The first was identified in paragraph 7 and embellished a bit in paragraph 8. And that was whether it's an indemnity account or, in effect, an asset account. And the second was whether the gain was available to address any payments. And so Mr. Fournier's affidavit had simply pieced together what was available on the public record at that time, with respect to what had happened. It did not have anything of the type that's before the Board in this case. And the Board was not really addressing what was in Mr. Fournier's affidavit other than to provide context with respect to these issues of interpretation. 455 So the two issues of interpretation we identified were the indemnity or no indemnity, and whether the gain was available. We addressed them in-chief. Mr. Cass addressed them in response, and then we had a reply submission dealing with these issues of interpretation. And they did address the linkage of the indemnity account to future taxes, and also the gain on the sale, its availability, to be addressed. 456 And then at the end of the day, our final substantive submission here in terms of the matter, at page 33, was essentially that the interpretation that EGD postulated should be rejected. And obviously EGD's submission was that the interpretation that we postulated should be rejected. 457 So it's unfair, I submit, to characterize what was before the Board as having breadth that encompassed everything we were seeking in our notice of motion. It was confined to issues of interpretation. And what then did the Board interpret? 458 The Board clearly found in our favour with respect to this indemnity account issue. With respect to the availability of -- well, with respect to the Board's ability to consider the gain realized on the sale from Centrica, you'll see that our submissions on that point in the reply argument at tab 8, paragraphs 47 through to 55, were essentially nothing more than the Board can consider it when an application is made to draw down the deferral -- the draw on the notional utility account. 459 That's as far as we went, in my respectful submission. But if you then come to the Board's decision, because it's the Board's decision that indicates how they scoped the interpretation issue, the Board in its decision recited various transactions. It then summarized the submissions of the parties. And if you look at the Board's decision, it's in, again, this same Exhibit K.7.2, summarizing the submissions of IGUA, CAC, and VECC, starting at paragraphs 23 and following. 460 There's nothing in there about the submissions that we were making about whether the sale to Centrica could be considered or could not be considered. The Board didn't reflect any submissions we made on that issue. 461 Similarly, it didn't reflect any submissions EGD made on that issue. And I can't find that it reflected any submissions that we made on that issue in reply. And the Board's decision says nothing about that issue. 462 So that's why I said, when I was giving the overview of this history, when we were arguing the confidentiality motion, I construe that to mean the Board did not decide that issue. It left it open. Mr. Cass says, "Since there's nothing in the decision, they must have decided it against the moving parties." 463 Well, if that's what they had in mind, they didn't say a word about it. And I submit that may be stretching it a little bit. But that's a decision you'll have to make, whether we are foreclosed -- or whether you are foreclosed from even considering that gain when you decide how to deal with this claim for relief that the company was putting forward. 464 The other aspect of the decision that Mr. Cass relied heavily on in his argument in chief, as I understood it, was, he said the Board rejected the hypothetical that we had advanced for consideration. We had argued -- there's no doubt about it -- we had argued that the Board should look at this in the context of what we then understood was a hypothetical, that this business was, at that time, in two affiliates. We didn't know, when this motion was argued, that these companies had again merged. That evidence was not on the record in the proceeding. There's nothing in Mr. Fournier's affidavit. All of the implications of -- we knew that the two companies had split in December 23, 1999. We knew the sale was taking place, but we were proceeding on the assumption that they were still separate and apart. 465 And so this issue, where we talked about, had they stayed in one company, the claim would be less, the last word on that topic is in our reply submission and you'll find that at tab 8 of Exhibit K.7.2. And at paragraph 45 we're talking -- we're responding to EI's submissions with respect to tax mitigation strategies and this kind of thing. And then in paragraph 46, we say that: 466 "The expansion of the rental program business by EI has resulted in such a scenario..." 467 And the scenario we were talking about there was expansion cancelling out the deferred tax liability drawdown in Rentco. 468 "...is neither speculative nor subjective, as EGD suggests. It's a conclusion which follows from an examination of the tax savings which EI realized through its subsidiary ESI as a result of the extent to which CCA associated with the equipment rental business, acquired after October 1, 1999, exceeded accounting depreciation, and then comparing those tax savings to the taxes paid by EI through Enbridge Canada, the other subsidiary through which EI carried on this rental program business after October 1, 1999. The issue is one of evidence and will be resolved later, if necessary." 469 So we were trying to put out there that this is an issue that will need to be resolved on evidence, and the Board, in its decision, the Board in its decision, as I read it, and others may read it differently, in effect, rejected a consideration of hypotheticals. 470 And the Board's decision, then in paragraph 60: 471 "The intervenors argue that EGDI's ability to draw on the notional utility account should be limited to the amount which would have been payable --" 472 MR. BETTS: Mr. Thompson, could you slow down for the reporter. 473 MR. THOMPSON: I'm sorry. Tab 9 of Exhibit K.7.2. I can't speak as slowly as Ms. Street. Anyway, the paragraph of the decision cites our argument: 474 "The intervenors argued that EGDI's ability to draw on the notional utility account should be limited to the amount which would have been payable in taxes had the assets been kept within the first affiliate and operated on an ongoing basis rather than transferred to a second affiliate and operated on a wind-down basis. In our view, the language in the Board's EBO 179-14/15 decision does not support this interpretation. This interpretation would preclude, in effect, EGDI and its affiliates from engaging in normal tax planning in order to optimize exposure to deferred tax liability. In fact, one of the options identified by the Board in the EBO 179-14/15 decision specifically contemplates transferring the rental program assets to an affiliate or selling to a third party." 475 Don't give us any hypotheticals. Come back with the facts. And we now have the facts. We now have the facts. And, as I say, none of the implications of this merging of the two affiliates back into one the day before the sale closed were on the record when the 135 case was argued. 476 But we've now got the facts, and that's exhibit -- Mr. Shepherd's material, and it's probably in my compendium as well. It's the response to Undertaking J.9.1. And this undertaking was provided in response to a series of questions that I had asked of Mr. Boyle. 477 Taking it from the $168 million liability at the date of the decision, and show us how we got to the $111,178,648 number, which was in a response to an IGUA interrogatory. 478 And so these are the facts. This is what has happened. And what in fact happened, the hypothetical that we were putting that they were still two separate companies when we were arguing 135, really ceased to be a hypothetical on May the 6th. These companies that were separate came back together. And the impact, the impact of the actual operation of the rental program is as counsel for the SEC, Mr. Shepherd, indicated to you. I think his math is off by a couple of hundred thousand. But the actual drawdown of the deferred tax liability between the two dates that are specified in the Board's decision is $5.7 million when you eliminate the reductions due to income tax rate changes. 479 And you can go down the list here and pick them off. The reductions due to income tax rate changes, the first one is 8,802,138. You'll see that about -- just above the words "September 30, 2000." The next one is just above the words "September 30, 2001," $36,390,423. And then the last one is four lines from the bottom, $6,351,634. 480 If you add those up, I get the amount to be $51,544,195. The drawdown amount, $57,214,352, less the income tax reductions of $51,544,195, produces an actual drawdown, net of income tax reductions, rate reductions, of $5,670,157. $5.7 million in Rentco, the company that held the rental program asset. And guess what? It's exactly the same number that we got in IGUA's worthless evidence, coming at this in another way. But that is the actual drawdown amount. 481 And in my submission, if you look at this question, the Board finds and orders that, in 62, EGDI is entitled to recover from the notional utility account an amount after taxes equal to the deferred taxes that became payable between October 7 - that should be October 1, the date, and the brackets are the date which assets were transferred out of there, so it's a drawdown between two dates - and May 7, the date assets were sold to a third party. 482 There's nothing in this decision, in my respectful submission, that supports the notion that my friend now advocates that we can hypothetically pretend these two pools of assets remain separate. They didn't, in fact, remain separate. They came together. And the impact of all of that is that the drawdown amount, the drawdown amount that they were forecasting in prior cases of various amounts - it changed almost from year to year - it did not materialize. It did not materialize. They, in fact, optimized, in the sense that most people would read it. They reduced their exposure to deferred tax liability as a result of this merger of the companies. 483 So Mr. Shepherd is right. That's the number. We finally got it. We finally asked the right questions and got it and got it all together. And I haven't checked Mr. Shepherd's retained earnings calculation, but he basically goes through the numbers and comes up that retained earnings increased by $36.3 million or $36.4 million, and I'm not an account, but if you keep a refund account or $42 million, and your actual drawdown is $5.7 million, you should have an increase in retained earnings in the order of $36.3 million. 484 So that, I submit, is what the evidence in this case has revealed. This case marks the first time that these actual circumstances have been disclosed on the record by Enbridge gas affiliates and witnesses from those affiliates. What was on the record before, in Mr. Fournier's affidavit, was simply a compilation of what had been said and what had not been said by the Enbridge group to that point in time. They were refusing to provide this information in prior proceedings. 485 Now, there's another theme that I wanted to just endorse that was expressed by Mr. Shepherd in his submissions. And that theme is that you should scrutinize carefully any factual assertions made by EI's Mr. Boyle with respect to this claim for a draw against a notional utility account. Mr. Shepherd relying on his own experience as a tax planner and tax practitioner submitted that tax planners tend to push semantics to their limits and beyond, and tend to make statements which turn out to be inaccurate and incorrect. And we certainly endorse that. 486 There are many representations made by Mr. Boyle and others with respect to this program, dating back to the initial proceeding, which have turned out to be factually inaccurate. For example, the company's claims in the 179-14/15 proceedings where raised in the context of assertions that the equipment rental business was not viable and had to be wound down. It was asserted that equipment rents couldn't be increased. The business couldn't be sold in the open market, except at a price less than its net book value. And within four months of the Board's decision, the evidence in this case indicates they're planning a business-continuance scenario. So that evidence was, I submit, pushing it somewhat. 487 We had the series of excerpts from the testimony in the 1999, RP-1999-001 proceedings, and then the subsequent proceedings, the 2000-0040, and again the 2001-0032 proceedings, where claims were being made for a draw on the allegation that cash taxes were payable by Rentco and that these cash taxes exceeded the amount being claimed. The evidence in this proceeding, in my submission, strongly indicates that these assertions were incorrect and misleading. 488 And we now have in this case, again, the company's contention that the gain on the sale to Centrica is irrelevant and the added assertion that they're saying the Board has already decided that issue against intervenors. In that context, I submit that the company, in proceedings before this Board, should not at any time be taking a position that's inconsistent and diametrically opposed to reports that it's making to its board of directors. And you now have in this case, Exhibit I, tab 16, schedule 155, citing a report to the board of directors of November 30, 2001, about the sale, saying: "Sale of ESI for cash proceeds of 1 billion would give rise to a gross accounting gain of approximately $296 million, which nets it to $246 billion after deducting a regulatory asset relating to deferred income taxes that were not recovered at the time the water heaters were unbundled." 489 In his cross-examination, Mr. Boyle said, "Oh, this was conditioned by a whole lot of caveats. This was a worst-case scenario. There were attachments to this that went to the board of directors." He took an undertaking in response and came back and said, "There's nothing further." 490 So I submit the only reasonable conclusion that a reader of that note can draw is that the sale proceeds and the draw on the account are connected. The sale proceeds are relevant to a draw on the utility account. And despite that note and despite the, in effect, the impact that the merging had on reducing the company's exposure to deferred tax liability, you're still hearing submissions in this tribunal that the gain on the sale and the draw on the account are unrelated. They're irrelevant to one another. That, in my submission, is directly contradicted by the report to the board of directors. 491 So I submit you're free to consider the gain on the sale, but as it turns out, you really don't need to consider it. You don't need to decide whether you can consider it or you can't consider it, because the amount claimed and the amount of the actual drawdown of $5.7 million is substantially less than the refund amount. And this issue of the refund amount and its implications in the scope of the indemnity, really, everybody had forgotten about, as I think I mentioned in my argument when we were arguing the confidentiality motion. 492 And when you cut through it all, the company's claiming $23.9 million. The actual drawdown on the liability was $5.7 million. So they're asking the ratepayers to pay more than the actual liability drawdown. So there's no apportioning of the liability here. The company's saying, "You get it all, and you get more than it all." And the Board's decision in the 179-14/15 case said: "Whoever has the responsibility for the deferred tax liability gets the refund." So that's one basis on which could be concluded that the company is obliged to account to ratepayers for the refund. 493 More importantly, I submit that what we were talking about here was flow-through taxes, taxes payable on a flow-through basis. And that is cash taxes payable, as far as most utility counsel would understand that, compared to normalized taxes. It's flow-through taxes on a -- taxes payable on a flow-through basis. And I actually think the phrase came from the Enbridge application, that phrase "taxes payable on a flow-through basis." 494 And an application of that tax accounting methodology, in my respectful submission, means that when -- it goes the other way. You get a refund of taxes that have been paid on a flow-through basis, i.e., the $42 million, it goes back to ratepayers. The Board's decision in the 179-14/15 case clearly contemplated that the first $42 million of drawdown would be covered by the refund. And I think, in fact, the company was making a proposal that was similar to that effect. 495 There is in the motion record K.7.3, at page 175, an interrogatory response that dated back to the first case. And this was a question that arose out of the deferred tax liability amount, in effect, increasing when the tax refund amount became known. And so we asked a question: 496 "Assuming that the total amount of unrecorded deferred taxes is $168.2 million, then please estimate the grossed-up revenue requirement which the company seeks to recover in regulated rates, and estimate the annual amount the company is asking ratepayers to provide if the grossed-up sum is paid over ten years and levelized." 497 What you get in the response is, we're not asking for $168 grossed up, which would be consistent with a position that the refund is ours. They were proposing to apply the refund to the -- to the amount of the liability. 498 And so the conclusion that ratepayers have a claim on this refund amount, and that the Board's decision intended that the refund amount be applied to cover the liability and not be pocketed by EGD if the liability didn't exceed that amount, I submit, is open to you. And so I support Mr. Shepherd's submission that the decision is open to the interpretation that the difference between the drawdown amount and the refund is to be paid to ratepayers. 499 And if you agree with that, then, in my submission, you should direct the company to come forward in the next case with a proposal to remit the refund amount to ratepayers. Let the company address how best that should be managed in terms of refund shock as opposed to rate shock. 500 However, if you feel that there's some doubt as to the entitlement of ratepayers to claim against this refund, and that you need further evidence on the issue, I suggest that you direct that the issue be brought forward by the company in its next case, and ask them to address the entitlement to the difference between the drawdown and the refund amount, and ratepayers can respond to that. 501 But the bottom line, in terms of IGUA's submission, is that the refund clearly eliminates the entitlement of any claim to be awarded -- the entitlement of EGD or EI to recover a draw against this notional utility account. And the extent to which the draw -- extent to which the refund exceeds the draw is an issue that should be directed to be brought forward in the next case, either for further evidence or, if you agree that it belongs to ratepayers, then have the company propose how to pay it back. 502 I think I've shot my bolt on deferred taxes, except to lend my support to one submission that counsel for the SEC made, and that is this: That if any amount is recoverable against ratepayers on account of deferred taxes, in other words, if the refund doesn't eliminate the exposure and if the gain on the sale doesn't eliminate the exposure, and you find that ratepayers are going to have to pay something - the maximum, in my view, is the $5.7 million - then I agree with Mr. Shepherd that you're going to need to clearly explain to the EGD ratepayers on the Clapham omnibus why they should be called upon to pay anything to EI with respect to the deferred taxes associated with this business which they've sold for this $240 million gain and they've got in their pockets at the moment a $36.3 million Revenue Canada refund in excess of the actual drawdown. 503 So if that's where this is going, I urge you to make it clear as to how we get there. And that was substantively one of the submissions that I was making on the motion with respect to confidentiality. All of this stuff has got to be on the public record so the poor ratepayers will know why and how we got there. 504 So those are my submissions on that topic. My last topic is stub period rates and change of fiscal year-end, and that could take me a half an hour, 40 minutes, perhaps. Unless there's some questions on this topic. 505 MR. BETTS: Let me confer with the Panel. 506 [The Board confers] 507 MR. BETTS: Mr. Thompson, if we give you a half an hour, can you deliver in that time? 508 MR. THOMPSON: Would you give me the refund? Well, I don't want to put you in a spot if I miss an important issue from my client's perspective. And I guess I'll take what I can get, but I'm in your hands, Mr. Chair. If we resume tomorrow -- 509 MR. BETTS: Sorry, I've got to just go back on here for a second. 510 If we were to -- if we are unable to get your argument completed today, when could you come back? 511 MR. THOMPSON: I could be here tomorrow morning, but I think, if it was not inconvenient, a 9:00 start might assure that I'm not going to get caught in my other commitment, which I believe is at 11:00. And I can take a few minutes now and then finish up tomorrow, or... 512 MR. BETTS: Okay. Well, I think, let us plan on tomorrow morning, and we are prepared to start at 9, if we can't get completed. And I think what we'll do is just take a five-minute break now -- 513 MR. THOMPSON: Okay. 514 MR. BETTS: -- and continue until 4:30, and we'll see how far we've gotten with that. 515 MR. THOMPSON: Right. 516 MR. BETTS: But we'll just -- I'll call it five minutes, and that's probably three minutes after the hour or something, but if everybody could come back as soon as they could after getting some personal relief. 517 --- Recess taken at 3:57 p.m. 518 --- On resuming at 4:05 p.m. 519 MR. BETTS: Please be seated. Thank you. 520 The Board Panel has decided it's probably in your interests and our interests to allow you to continue so that we don't have your arguments disjointed by an evening break. So we'll ask you to try not to repeat any arguments that have been provided thus far, but, as far as we're concerned, we're here until you're done. And that's aiming at a half an hour or 45 minutes. But we're with you, Mr. Thompson. So please... 521 MR. THOMPSON: I appreciate your indulgence, Mr. Chairman. 522 Just before I leave deferred taxes, I just wanted to make three brief points. One is with respect to this refund amount. I just wanted to note -- 523 MR. BETTS: And, sorry, Mr. Thompson, point that mic just a little more at yourself. I think your voice is fading as the afternoon goes on. 524 MR. THOMPSON: I think I'm running out of gas. Should never do that in a gas case. 525 Respect with respect to the refund amount issue, I just wanted to note that this was not addressed by Enbridge in its argument in-chief, and I submit it should have been. It was clearly an issue that had been raised during the course of the proceedings, and we will not have an opportunity to reply to anything that Enbridge has to say about the issue, and I would ask you to take that into account, that it was not addressed in-chief. 526 One other point. I mentioned to you that in the arguments before, in the 0135 case, when we were addressing our hypothetical, that we didn't know that assets had been merged with the two companies on May the 6th. When I said that, I meant we didn't know all of the implications of that, as shown in the Exhibit J.9. But I do, for example, and I wanted to draw this to your attention, note that in Exhibits K7 and K8, these were the documents that Ms. O'Connor had provided doing this hypothetical of the two companies being together. 527 They were being presented there in a two-company scenario. But there is a small note on both of these documents, on the second page. There's a footnote talking about, on May 6th, rental assets were transferred from Enbridge Services Inc. back into Rentco. 528 So we had that before we argued the motion in the 135 case. These materials were not on the record in that case, and so I just wanted to -- I think it would be precise that I guess technically somebody could say to me, Yeah, we disclosed that that had taken place, but what I was trying to transmit was, we did not have the detail that showed the impact of all of that was an actual drawdown of $5.7 million. So, hopefully, that's clear. 529 And the only other point I wanted to just flag on deferred taxes was the issue which is really not for this case but for the 2004 overearnings case, where the company, in Exhibit F2, tab 2, schedule 1, has claimed the write-down of the account receivable, the so-called "account receivable" in the 2004 test year, to create a deficiency situation and thereby eliminate the overearnings protection aspect that was established for 2004. I asked the witness to update that exhibit, and it has been updated. And so I just wanted to flag that as something that does tie in with the deferred tax topic. 530 So, with that, let me move on to the stub period rates and change of fiscal year-end issues. For the record, my cross-examination on this topic is found in volume 10, paragraphs 853 to the end, and then volume 11, paragraphs 56 to 277. 531 The issue is the manner in which the Board should respond to EGD's request to fix its rates for the stub period October 1, 2005 to December 31, 2005. And that's precisely what EGD asks for in its application, it asks you to fix rates for that stub period. And that's a request that is made in the context of EGD's pending application to have the Board fix new rates for the period January 1, 2006 to December 31, 2006, which I call the "2006 test year rates." 532 So, what we have is the Board's fixed rates, it will be fixing rates in this proceeding, for the 12 months on one side of the stub period, and the company will be applying to the Board to have the Board fix rates for the 12 months on the other side of the stub period. And the company is asking you to fix rates for the stub period, which, in essence, is a test period of three months. 533 This issue has been a matter of concern to IGUA, and I believe to other intervenors, from day one. And in EGD's interrogatory response to -- it's Exhibit I, tab 13, schedule 73, where we asked the question about overearnings protection with respect to the stub period, we were told: The Board is our protection. So here we are. 534 According to EGD, the proposals to change the fiscal year-end and the request for stub period rates are inseparable, and you'll recall that's what Ms. Hare said when she was cross-examined on the motion to have issues 13.1 and 13.2 removed from the issues list, and for permission to withdraw the portion of their claim that gave rise to those issues. That motion was denied. And, in our submission, as a result, the issues are to be decided in these proceedings. 535 EGD's proposal to be permitted to withdraw its claim for stub period rates and the year-end change related thereto, in the event that the issue is decided in a materially different manner than what they propose, which is advanced when the witness panel gave its evidence in-chief, appears to IGUA to be an attempt to resuscitate and reargue the motion that has been denied and I urge you to refrain from allowing EGD to do that. It appears to us that EGD is disregarding the ruling on the motion, the Board's ruling on the motion, and it ought not to be allowed to disregard that ruling. 536 There are apparently no precedent decisions of this Board, or any other that anybody can find, dealing with a request for a regulatory tribunal to fix stub period rates for a test period of three months. EGD acknowledges that the method of regulation to be applied is cost-of-service regulation, and that under cost-of-service regulation, cost incurrence determines the level at which rates are to be fixed. Cost-of-service regulation requires that rates be set to recover costs incurred for the period during which the rates are to be in force. The costs to be recovered include the costs of debt and equity, capital, and related income taxes. 537 In an application of the cost-of-service methodology, rates are not established on the basis of maintaining a predetermined continuous cash flow, or a predetermined retained earnings level. The rates are based and established on the basis of cost incurrence. 538 So, in our view, the starting point for considering the manner in which EGD's stub period rates should be established is to recognize the reality that EGD's 2006 test year rates will recover all of the costs that EGD expects to incur in the 12 months between January 1, 2006 and December 31, 2006. Similarly, EGD's Board-approved 2005 test year rates will recover all of the costs EGD expects to incur between October 1, 2004 and September 30, 2005. 539 Accordingly, all of the costs expected to be incurred by EGD in the 12 months before the stub period and the 12 months after the stub period will be recovered in Board-approved rates. 540 The intervenor stub period cost overrecovery or "overearnings" claims is based on the assertion that the stub period rates which EGD proposes will, without any inflationary increase, recover substantially more than the costs of service EGD will incur in the stub period. The phrase "stub period overrecovery of costs" and "stub period overearnings" have been used interchangeably to characterize the intervenors' claim. Of the two phrases, the phrase "stub period overrecovery of costs" best describes the issue and the basis for the claim. 541 The costs of service that EGD incurs in every month that it operates includes O&M expenses, depreciation, municipal and other taxes, the costs of debt, the costs of equity, and related income taxes. That these costs are incurred by EGD in every month and quarter that it operates is an incontrovertible reality. The costs of attracting equity capital are not incurred only in EGD's strong quarters, between October 1 and March 30 in each year, and then suspended for the summer months; they are incurred throughout the year. Similarly, its cost of debt is incurred throughout the year. And the O&M costs and the other costs of service are incurred throughout the year. 542 The cross-examination of EGD's witness panel by counsel for intervenors, the various visual aids filed at exhibit, I think it's K.1.1 - that's Mr. Shepherd's exhibit with the cost overrecovery sticking out like a sore thumb - and Exhibits 10.2 and 10.3, in our submission, clearly establish that EGD incurs its annual costs of service in each and every of the 12 months in which it operates. In my submission, it cannot credibly be asserted otherwise. 543 The evidence clearly establishes that some costs that will be incurred between April 1 and September 30, 2006, these are the weak quarters, as Mr. -- as counsel for EGD describes them, for the O&M expenses, depreciation, municipal and other taxes, return and all the rest, will be recovered in rates billed to ratepayers in the stub period between October 1 and December 31, 2005. They are strong quarters and they are recovering more than the costs being incurred in those quarters. And what they're doing is picking up costs that are being incurred in the weak quarters. 544 Accordingly, we submit that the evidence is uncontradicted that EGD's rates in the stub period, October 1 to December 31, 2005, will recover some of the costs of service that EGD will incur later in weak quarters. We submit that it's equally clear that EGD's 2006 test year rates will be established to enable EGD to recover all of the reasonable costs it forecasts to incur between January 1 and December 31, 2006. 545 Accordingly, it follows that EGD's 2006 test year rates will recover some costs already being recovered in the stub period rates. EGD cannot recover any portion of the costs that it incurs between April 1 and September 30, 2006, twice; once in stub period rates and again in 2006 test year rates. 546 Accordingly, in our submission, without adjustment, the stub period rates EGD proposes, even without the inflationary increment, will recover substantially more than the costs of service incurred in the stub period. 547 The evidence indicates that the amount of the stub period overrecovery of costs will be influenced by the Board's final determination of unresolved issues with respect to EGD's test year revenue requirement. However, once EGD's 2005 revenue requirement has been finalized by the Board, the way to measure the extent to which the 2005 test year rates overrecover costs in the stub period is to determine the extent to which the ROE in the stub period exceeds one quarter of the allowed ROE. 548 This way of measuring the overrecovery of costs in the stub period is appropriate because all amounts recovered in the stub period in excess of the costs incurred in that period, including the cost of debt capital for three months, are accounted for as equity earnings. 549 Now, in the compendium at the last tab, tab 5, I've attached EGD's responses to undertakings with respect to the impact of various revenue requirement scenarios on the stub period cost-of-recovery amount. And in the response to Undertaking J.10.1, you'll see in the second paragraph that without an inflationary increment that EGD proposes, the overrecovery is $29.8 million. So that assumes the rates as originally applied for, no inflationary increment, cost overrecovery, $30 million. 550 Down at the bottom of the page, you have the scenario with the inflationary increment. Assuming an inflationary increment of $4.5 million to the rates as applied for, then the overrecovery amount is $34.4 million. 551 You then go to the next undertaking response, which was to address the situation of the settlement proposal. And so taking into account the revenue requirement reductions that flow out of the settlement proposal, you'll see that the cost-overrecovery amount in the stub period, on page 2 of 9, at line 15, is $25.7 million. 552 And then the next undertaking response, J.10.5, deals with the situation of no recovery against the notional utility account. And there, of course, if there's no recovery, they don't get the revenue and there's not a cost item. But even there, the stub period overrecovery amount reduces from $25.7 million in the case of the settlement agreement to $25.1 million. So, arranging the scenarios from top to bottom, you assume the inflationary increment that the company's asking for, the overrecovery amount, is $30.4 million. If you assume no inflationary increment, it reduces to $29.8 million. If you assume the settlement proposal, the amount reduces to $25.7 million. And if there's no recovery on account of the claim against the notional utility account, the amount reduces to $25.1 million. So those are the amounts that we're talking about here, under those assumptions. 553 We submit that under cost-of-service regulation for the stub period, which EGD requests, EGD's shareholder is not entitled to a stub period overrecovery amount. This is not a case now of having protection for overearnings. We now know, looking at the costs expected to be incurred in this stub period, that an adjustment is required on a forecasted basis. But it was questions about what is the overearnings protection that led us to this issue. 554 We submit that the Board has flexibility to determine the most appropriate manner of reflecting the stub period overrecovery adjustment in EGD's rates. EGD has expressed a lot of concern about the fact that an overrecovery adjustment in the stub period will lead to a reduction in rates as of October 1, and then a subsequent increase in rates, perhaps, on January 1, 2006. That, in my submission, is no reason to ignore the stub period overrecovery adjustment, but it is reason to consider an appropriate manner of dealing with that. And one is, carrying the adjustment amount forward in a deferral account, to be brought into account when the 2006 test year rates are determined. 555 In that scenario we have no change in the 2005 test year rates as of October 1. They continue on without inflationary increment to December 31. The company brings in its application for 2006 test year rates, and the stub period overrecovery adjustment amount is brought into account at that time. 556 Another option is carry it back. You could carry back the stub period overrecovery amount into 2005 rates, and you would then have a level of 2005 rates that takes the adjustment into account. They would continue in force until January 1, 2006 and then new rates would be set. But you have a great deal of flexibility, in my submission, to either carry forward or carry back the adjustment. But the entitlement to the adjustment is clear. And a one-time cost-recovery adjustment should not be ignored or, as the company suggests, it should be treated for rate-making purposes in the same manner as a one-time cost incurrence is treated for rate-making purposes, such as Y2K costs. They get added when they're incurred, and then they're no longer being incurred, they're not brought into account. 557 So we submit it's EGD's approach to the establishment of stub period rates that is wrong, because it contravenes the cost-incurrence, cost-recovery principles that apply to cost-of-service regulation. 558 The conclusion expressed by other counsel that there is no evidence to establish the intervenors' stub period cost-overrecovery adjustment amount is untenable. The various visual aids that have been produced during the course of the proceedings and the responses of EGD's witnesses in cross-examination clearly indicate that the company's rates in the stub period will overrecover costs. They are strong quarters. 559 So, for these reasons, we urge the Board to respond to EGD's application to fix stub period rates by directing EGD to apply the 2005 test year rates, which the Board fixes in these proceedings, for the stub period and then to determine the extent to which the revenues under the 2005 test year rates in the stub period exceed the costs incurred in the stub period, with the difference between revenues and costs to be expressed as a rate of return on equity for the stub period. 560 The extent to which the equity return for the stub period exceeds one quarter of the annual rate of return on equity that results from an application of the Board's equity return guidelines as of October 1, 2005, should be determined to establish the stub period cost-overrecovery adjustment amount, which should then be grossed up for income taxes. The stub period cost-overrecovery adjustment amount should then be carried forward in a deferral account to be cleared when the Board determines EGD's 2006 test year rates. 561 With respect to the company's claim for an inflationary increase in the stub period, we suggest that claim must be rejected because, even without an inflationary increase, the stub period rates the company proposes are too high. They recover more than the costs being incurred. 562 I wanted to conclude my submissions by simply dealing with the points that counsel for EGD raised in his argument with respect to this issue, because he had a whole litany of them, and let me try and quickly deal with them. To deal with them, you may want to turn up the transcript volume 13, paragraphs 543 and following. 563 Mr. Cass, first of all, talked about what EGD was requesting. And we say what EGD requested was that the Board fix rates for a test period of three months to facilitate its proposed year-end change, and according to EGD, these proposals are inseparable. 564 EGD asserted that its 2005 test year rates would be insufficient to recover costs incurred in the stub period, and on that basis requested an inflationary increase. In other words, they tried to dress up their claim for an inflationary increase in a cost-of-service, cost-increase mode. But it did not examine the extent to which its 2005 test year rates overrecovered the costs. 565 In paragraph 579 and following, Mr. Cass makes the point that the rate of return on equity is expressed as an annual percentage rate. IGUA agrees that the cost of equity is expressed as an annual percentage rate, and goes on and suggests EGD incurs the costs of attracting equity capital in each and every month, in each and every year that it operates. EGD does not incur equity costs only in its strong quarters and none in the summer months. They are incurred year-round, just as debt costs are incurred year-round, and the way EGD proposes to treat cost incurrence of equity by tying it to its rate design is not the way the costs are incurred, in my submission. EGD misapplies the cost-of-service rate-making principles. 566 In paragraph 590 and following, there's reference to some cases dealing with the monitoring of actual of ROE versus Board-allowed ROE on an annual basis. We are not dealing with that type of problem in this case; we are dealing with a request that the Board fix its rates for a three-month test period. 567 In paragraph 599 he makes the point again about equity costs being calculated on an annual basis. We agree, and we go further and say they're incurred on an annual basis, regardless of the manner in which the costs are recovered in rates. 568 In paragraph 600, he talks about strong quarters and weak quarters. We say the issue of whether rates in so-called strong quarters do or do not recover costs incurred in weak quarters is a function of rate design and not cost incurrence. 569 In paragraph 601 he talks about, again, strong quarters and weak quarters. Our response is, the extent to which rates in strong quarters recover costs incurred in weak quarters is a function of rate design and weather. If the rate design recovers fixed costs in charges related to volume or throughput, if the fixed costs are recovered in fixed charges, they're not weather-related, not a seasonal recovery of costs. 570 The need for a cost-recovery adjustment in the stub period arises not because the three-month test period converts a seasonal quarter of a larger test period to an average quarter of that test period but because the stub period, for which EGD seeks different rates, is only three months' duration. We are not dealing with rates for an orphaned quarter but rates for a separate three-month test period. 571 An adjustment to the stub period rates which prevents an overrecovery of costs does not confiscate earnings or create a loss; it prevents an overrecovery of costs and thereby reduces the increase to retained earnings that ensues as a result of the fixing of rates which do not overrecover costs. And I went through that with Mr. Ross. 572 Existing rates become unreasonable for the three-month test period commencing October 1, 2002, because they overrecovered costs incurred in that stub period. 573 In paragraph 610 and following, Mr. Cass talked about adjustments being needed to quarters on either side of the test period -- of the three-month test period, if you subscribe to these views. Our response is, adjustments to quarters on either side of the three-month test period are not required, as EGD contends, because the Board-approved 2005 test year rates and the Board-approved 2006 test year rates will recover all costs that EGD expects to incur in those periods. 574 In paragraph 616, he says that the adjustment skews the situation. Our response is that the cost-overrecovery adjustment skews nothing. It prevents an overrecovery of costs and limits the increase to retained earnings to an amount that is consistent with a proper application of cost-of-service regulation principles. 575 In paragraph 617 and following, he suggests the cost-overrecovery adjustment encourages companies to apply for rates based on future periods other than 12 months. We submit it does not do that. It simply responds to EGD's claim that the existing rates are just and reasonable, and require an increase. They are excessive. 576 In paragraph 620, he talks about the Union situation. Our response is, had Union asked to have its rates fixed for nine months, its existing rates would have to be examined to ascertain the extent to which they overrecovered or underrecovered costs incurred in that stub period. Union's rates, they have a different mix of customers, much more industrial. There may be much more fixed costs recovered in their demand charges. But any overrecovery or underrecovery amount would be ascertained, should be quantified and brought forward for a disposition, when the Board determined Union's rates for the following test year. However, no one raised the issue in Union's case, so it hasn't been decided yet. 577 There are a series of points that counsel for EGD lists in his submissions, and I'll just run through these quickly. I've got maybe five pages to go, which should take me ten minutes. Is that putting us beyond the reach of reasonableness, Mr. Chair? 578 MR. BETTS: No. Please proceed. 579 MR. THOMPSON: Mr. Cass's first point, which is in paragraph 65, misses the point of our submission, which is that the 2005 test year rates, even without an inflationary increase, will, as stub period rates, overrecover costs. 580 In paragraph 628 he says there is no precedent. We agree. And EGD appears to have been the first to ask the Board to fix rates for three months. 581 In point 3 he's talking about a quarter within a subset of a year. And our answer is we're not dealing with a quarter in a subset of a year within an existing test year, we're dealing with a separate test period of three months. 582 Point 4, in paragraph 637, he talks about financial reporting over 12 months. We're dealing with the setting of rates for a new test period and we're not dealing with financial reporting. 583 In points 5 and 6 he analogizes to the QRAM process, where changes to rates are made quarterly within the parameters of an existing test year. That's not this situation. We're dealing with a new test period of three months surrounded by two Board-approved 12-month test periods. 584 In point 7 he said rates shouldn't be changed unless there is a change in costs and revenues, and that's precisely the situation here. The test period has changed, the revenue and cost relationship has changed, and the result is that, without an adjustment, the rates overrecover. 585 Point 8, he talks about ignoring the overrecovery amount, and we say it shouldn't be ignored, it should be brought forward. 586 point 9, he talks about, again, this loss and a hit to retained earnings. It's not a loss, it's not a hit to retained earnings; it's constraining the increment to retained earnings. 587 Point 10, he says that if this is allowed, there will be a permanent implementation of the amount that we're seeking, and that's right. The prevention of an overrecovery of costs and the consequential reduction in the increase to retained earnings is permanent, as it should be. The overrecovery amount should be quantified and brought forward, and not ignored. 588 Point 11, and this is in paragraph 647 and following, he says that this issue is -- something about how to measure the reasonableness of test year rates. And that's precisely what this is all about. The issue of how to measure, whether 2005 test year rates will or will not overrecover costs in the new and separate three-month test period is clearly related to the claim EGD makes. They're trying to make the point, Our claim for an inflationary increase has got nothing to do with the intervenors' claim, and I submit this to the contrary. EGD's claim that such rates were insufficient to recover costs to be incurred in the stub period, without an inflationary increment, has turned out to be without merit. In fact, what we've discovered is that without a cost-overrecovery adjustment, the rates will be unjust and unreasonable. 589 So those are the submissions that we have with respect to the stub period cost-overrecovery amount, and I've already indicated this notion that you should give them an option to avoid the decision if they don't like it, is something that you ought not to entertain. 590 The collateral stub period rate issues, just briefly, are the transactional services sharing mechanism. IGUA accepts that the stub period TS sharing mechanism should be based on 25 percent of the full-year TS mechanism which you establish for the 2005 test year. 591 The phase-in of cost allocation and related rate design, IGUA accepts that year 2 of the phase-in should commence on October 1, 2005, for the reasons recommended by EGD, but that year 3 thereafter should commence on January 1, 2007, for the administrative convenience reasons described by Ms. Giridhar in her testimony. 592 With respect to the DSM SSM performance target, it appears to us that EGD is, in effect, seeking an option to either have an SSM target for 12 months, ending September 30, 2005, or an SSM target for 15 months, ending December 31, 2005. And what EGD, in effect, proposes is to exercise this option after its performance is known rather than before its performance commences. 593 IGUA submits that EGD should have the option it seeks, but it must exercise it now, before the test period commences, and not after. Accordingly, IGUA urges the Board to require EGD to address in reply argument which of the two targets it wishes: the 12-month target or the 15-month target. And there should be no separate three-month target, in our view. So give them the option they want, but exercise it now, not later. 594 The final brief submission, I have, Mr. Chairman, is with respect to costs, and I'll just quickly put this on the record. We have actively participated in all stages of these proceedings, which raised a number of major issues. IGUA urges the Board to find that its participation in the proceedings was of assistance, and deserving of an award of 100 percent of its reasonably incurred costs. We actively participated in the two motions that were argued during the course of the hearing. The Board found favour with the positions advocated by IGUA with respect to the matters in issue on those motions. And we ask that the Board find that IGUA's participation in those motions was of assistance and also deserving of an award of 100 percent of the reasonably incurred costs with respect to those matters. 595 And thank you very much. Those are my submissions. And I apologize for keeping you here beyond 4:30. 596 MR. BETTS: That's quite all right, Mr. Thompson. The Board Panel has no questions on that issue. Thank you very much for your submissions, and they will be helpful. 597 With that, we will adjourn, or recess, for tonight to reconvene tomorrow morning at 9:30 a.m. And I think that's the only announcements that the Board has to make at this point, so we will adjourn now until tomorrow morning. Thank you. 598 MR. THOMPSON: Mr. Chairman, just one point. I mentioned at the outset about my willingness to give you references. If you don't need them, fine. But if you think they would be helpful, I can undertake to do that. 599 MR. BETTS: We would like to have that, if that is okay with you, Mr. Thompson. That will probably be helpful. 600 MR. THOMPSON: Thank you. 601 MR. BETTS: And naturally, a copy to the applicant. 602 MR. THOMPSON: Yes. Yes. The reply argument's not due for some time, so I don't have to get this to you, like, tomorrow. Thanks. 603 MR. BETTS: Thank you very much. And we'll reconvene tomorrow morning at 9:30. 604 --- Whereupon the hearing was adjourned at 4:50 p.m.