Rep: OEB Doc: 13BFH Rev: 0 ONTARIO ENERGY BOARD Volume: 1 14 OCTOBER 2004 BEFORE: J. CARR PRESIDING MEMBER AND VICE CHAIR P. VLAHOS MEMBER 1 RP-2004-0167 2 IN THE MATTER OF a hearing held on Thursday, 14 October 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 Natural Resource Gas Limited for an Order or Orders approving or fixing just and reasonable rates and other charges for the sale, distribution and transmission of gas commencing October 1, 2004. 3 RP-2004-0167 4 14 OCTOBER 2004 5 HEARING HELD AT TORONTO, ONTARIO 6 APPEARANCES 7 MIKE LYLE Board Counsel MICHAEL MILLAR Board Counsel KATHI LITT Board Staff TURGUT HASSAN Board Staff SCOTT STOLL Natural Resource Gas Limited PETER BUDD Natural Resource Gas Limited 8 TABLE OF CONTENTS 9 APPEARANCES: [20] NATURAL RESOURCE GAS LIMITED PANEL 1 - BLAKE, McCALLUM, AIKEN: [30] EXAMINATION BY MR. STOLL: [38] CROSS-EXAMINATION BY MR. LYLE: [86] CROSS-EXAMINATION BY MR. MILLAR: [462] PRELIMINARY MATTERS: [692] NATURAL RESOURCE GAS LIMITED PANEL 1 - BLAKE, McCALLUM, AIKEN: [720] CROSS-EXAMINATION BY MR. MILLAR: [724] PRELIMINARY MATTERS: [1118] NATURAL RESOURCE GAS LIMITED PANEL 1 - BLAKE, McCALLUM, AIKEN: [1150] CROSS-EXAMINATION BY MR. MILLAR: [1154] QUESTIONS FROM THE BOARD: [1385] 10 EXHIBITS 11 EXHIBIT NO. K.1.1: NRG COST OF DEBT FOR 2005 [366] 12 UNDERTAKINGS 13 UNDERTAKING NO. J.1.1: TO BREAK OUT THE 297,600 GROSS DEFICIENCY FIGURE FOR THE 2005 TEST YEAR, SO AS TO SEPARATE THE GAS SUPPLY COMPONENT FROM THE DISTRIBUTION COMPONENT [94] UNDERTAKING NO. J.1.2: TO PRODUCE A PRESS RELEASE FROM ABOUT MAY OF 2004, OR A NEWSPAPER ARTICLE QUOTING SUCH A PRESS RELEASE, AS TO IMPERIAL TOBACCO'S POSITION WITH RESPECT TO PURCHASING TOBACCO IN ONTARIO [227] UNDERTAKING NO. J.1.3: TO PROVIDE A BREAKDOWN OF COSTS RELATED TO A NUMBER OF OTHER LISTED PROCEEDINGS [250] ORAL ANSWER TO UNDERTAKING NO. J.1.1: TO BREAK OUT THE 297,600 GROSS DEFICIENCY FIGURE FOR THE 2005 TEST YEAR, SO AS TO SEPARATE THE GAS SUPPLY COMPONENT FROM THE DISTRIBUTION COMPONENT [274] UNDERTAKING NO. J.1.4: TO PROVIDE AN EXPLANATION FOR THE DIFFERENCE BETWEEN THE ANTICIPATED DRAW ON THE DEBENTURE, AS STATED IN LAST YEAR'S EVIDENCE, AND THE AMOUNT ACTUALLY DRAWN [342] UNDERTAKING NO. J.1.5: BASED UPON THE ASSUMPTION THAT THE IMPERIAL LIFE LOAN AND THE BANCO DEBENTURE WERE REFINANCED EFFECTIVE AT THE BEGINNING OF FISCAL YEAR 2005 AT THE RATE OF 8 PER CENT, AND ASSUMING THAT TRANSACTION COSTS OF $250,000 WERE INCURRED WITH RESPECT TO SUCH REFINANCING, AND ASSUMING THAT PREPAYMENT PENALTIES ARE INCURRED UNDER THE TERMS OF THE IMPERIAL LIFE AND BANCO LOANS AND THAT THOSE PENALTIES CAN BE ADDRESSED IN RATES, AND BEARING IN MIND THAT TRANSACTION COSTS AND THE PRE-PAYMENT PENALTIES WILL BE AMORTIZED, AND THUS THAT THE UNFUNDED DEBT PLUG WILL SHRINK, AND THUS THAT 5.5 PERCENT WILL NOT BE GENERATED ON THAT PORTION OF THE UNFUNDED DEBT, TO PROVIDE A CALCULATION OF WHAT THE INTEREST EXPENSE WOULD HAVE BEEN FOR 2005 RELATED TO THOSE DEBTS, AS COMPARED TO THE INTEREST RATE EXPENSE CALCULATED UPON THE BASIS THAT NO REFINANCING OCCURRED [413] UNDERTAKING NO. J.1.6: TO INQUIRE OF THE AFFILIATE AND ADVISE AS TO THE AMOUNT OF CONSIDERATION RECEIVED FROM BANCO SECURITIES FOR THE SALE OF THE JUNSEN LOAN AND JUNSEN DEBENTURE INSTRUMENTS [429] ORAL ANSWER TO UNDERTAKING NO. J.1.3: TO PROVIDE A BREAKDOWN OF COSTS RELATED TO A NUMBER OF OTHER LISTED PROCEEDINGS [694] UNDERTAKING NO. J.1.7: TO PREPARE AND PROVIDE A RECONCILIATION BETWEEN THE DEPRECIATION FIGURES CONTAINED IN EXHIBIT D5, TAB 4, SCHEDULE 1 (UPDATED) AND THOSE IN EXHIBIT D2, TAB 1, SCHEDULE 1, PAGE 9 OF 12 (UPDATED) [954] UNDERTAKING NO. J.1.8: TO ESTIMATE THE IMPACT OF THE CHANGES IN THE COINCIDENT/NON-COINCIDENT FACTORS [1064] 14 --- Upon commencing at 9:33 a.m. 15 MR. CARR: Please be seated. Good morning. 16 We are sitting today to hear the application by Natural Resource Gas Limited, which I expect will be referred to as NRG throughout, for rates for the fiscal year 2005. 17 This application has been assigned a number by the Board of RP-2004-0167, and an EB number of 2004-0253. 18 My name is Jan Carr. I'll be presiding. And Paul Vlahos is with me on the Panel. 19 With that, may I have appearances, please. 20 APPEARANCES: 21 MR. STOLL: All right. Scott Stoll, and with me is Peter Budd, counsel for NRG. 22 MR. McCALLUM: Sandy McCallum, from Natural Resource Gas. I'm the financial manager. 23 MR. AIKEN: Randy Aiken, consultant, Aiken & Associates. 24 MR. BLAKE: Bill Blake. I'm the president and general manager, NRG. 25 MR. LYLE: Good morning, Mr. Chair. I'm Mike Lyle. I'm counsel for Board Staff. To my immediate left is my co-counsel, Michael Millar. To my right is Kathi Litt from Board Staff. And to my far left is Turgut Hassan from Board Staff. 26 MR. CARR: Thank you. 27 Any preliminary matters? 28 MR. STOLL: No preliminary matters, and I would propose just a couple minutes of direct and updates, and then we can move -- turn it over to my friend, Mr. Lyle. 29 MR. CARR: Okay. So perhaps if we could swear the witness panel. 30 NATURAL RESOURCE GAS LIMITED PANEL 1 - BLAKE, McCALLUM, AIKEN: 31 B.BLAKE; Sworn. 32 S.McCALLUM; Sworn. 33 R.AIKEN; Sworn. 34 MR. AIKEN: My name's Randy Aiken. 35 MR. McCALLUM: Sandy McCallum. 36 MR. BLAKE: And Bill Blake. 37 MR. CARR: Thank you. Please proceed. 38 EXAMINATION BY MR. STOLL: 39 MR. STOLL: Thank you very much, Mr. Chair. I'd like to take just a minute and have Mr. Blake provide a brief introduction for the Panel of who NRG is. It will only take a minute or two. 40 Mr. Blake? 41 MR. BLAKE: Good morning. 42 NRG is a relatively small natural gas utility in the sense of gas utilities in Ontario. We have about 5,900 customers, and we serve an area roughly bounded by Highway 401 in the north -- we have a map in the binder under Exhibit A, tab 5, schedule 1. And that, in general, shows the location of our pipelines and franchise area. 43 So, in general, we are bounded by the 401 in the north. There are some ups and downs in the franchise and certificate boundaries, but -- and then go south from there to Lake Erie, and we run along the lakeshore to just about two or three miles west of Long Point. I don't know if you can recall on the map of Ontario, it's quite a long spit of land that goes out into the lake. And then we cut, then, back up into the northwest and skirt around Tillsonburg and so forth. 44 And some of the towns we service, the largest center is Aylmer. It has a population of about 5,500 people. And then there are some other smaller communities, like Belmont and Straffordville and Brownsville, and these are just small hamlets, sort of thing. And then we have pipelines in between. 45 All our pipelines have been replaced in the last few years, and we finished our pipeline replacement program probably two or three years ago. And we're now doing largely infill projects on our pipeline system to capture customers that didn't have access to gas. You can see from that map, we have the 2004 capital projects, and the 2005 is on that map. 46 So the customers we serve are, of course, residential and commercial customers. We have a couple of industrial customers. We have an Ontario police college in Aylmer, which is our second largest account. 47 A substantial part of our load is based on the tobacco industry, which there are some uncertainties about, both to the Imperial Tobacco processing plant in Aylmer and as well to the individual growers that use it for tobacco-curing or crop-curing in the summertime. 48 So those are -- that's sort of a little general run-down on the system. We have about 20 employees, and we do -- we're fully integrated. We do everything with the customers and so forth. And we operate that out of a new facilitate that we built a couple of years ago in Aylmer. And that's working very well for us. 49 MR. STOLL: Okay. Thank you, Mr. Blake. 50 And if I could just have each witness provide a very brief description of what their role is with NRG and why they're here, starting with Mr. McCallum, followed by Mr. Aiken and then Mr. Blake. 51 MR. McCALLUM: My name is Sandy McCallum. I'm the financial manager for Natural Resource Gas Limited. I'm actually an employee of Cornerstone Properties Inc., and my services are covered through the management fee that is charged to Natural Resource Gas, amongst other companies that are served -- or that I provide services for. 52 I've had a number of appearances before the Energy Board, and between Mr. Aiken and myself, we've accumulated the bulk of this evidence before the Panel at the present time. 53 MR. STOLL: Mr. Aiken? 54 MR. AIKEN: I'm a consultant with Aiken & Associates. I do the evidence preparation. I also do specific parts of the evidence, for example, the throughput and revenue forecasting, the cost allocation and the rate design. And this time around, I've also done the depreciation study and the lead-lag study, as included in the evidence. 55 MR. STOLL: Mr. Blake? 56 MR. BLAKE: I'm the president and general manager of the company, and I've tried to delegate most of the work on this project to the other two. 57 MR. STOLL: Thank you very much. 58 And just before we get into it, there's one additional update that has been provided to Board Staff, and I think Kathi will provide it to Board Members. Okay. 59 Thank you. If I could just get the panel members to adopt the evidence that's been prefiled with the Board, including the update, and after we do that, we'll just go through the corrections. 60 Mr. McCallum, do you adopt the evidence provided in the prefiled materials by NRG? 61 MR. McCALLUM: Yes, I do. 62 MR. STOLL: Mr. Aiken? 63 MR. AIKEN: I do. 64 MR. STOLL: And Mr. Blake? 65 MR. BLAKE: Yes. 66 MR. STOLL: Thank you. 67 Now, Mr. Aiken is going to walk us through, I believe there's three or four corrections to the evidence, and then we'll turn it over to my friend, Mr. Lyle. 68 MR. AIKEN: I just want to make reference that the schedule that you were just provided with was omitted from the updated filing. There wasn't any change. It just didn't go through the printers for some reason. 69 In terms of the corrections, the first one is at Exhibit A, tab 8, schedule 2, page 2 of 5, updated. Again, that's Exhibit A, tab 8, schedule 2, page 2 of 5, updated. 70 And on that page, under the long-term debt section in the middle, the breakdown between Imperial Life -- sorry, the Junsen loan and the Junsen debenture should be replaced by Banco Securities. 71 MR. CARR: How do we spell that? 72 MR. AIKEN: B-a-n-c-o, S-e-c-u-r-i-t-i-e-s. 73 It's the same change on Exhibit A, tab 8, schedule 3, page 2 of 5, updated. 74 MR. CARR: So, I'm sorry, are you saying that the word Junsen is replaced by Banco Securities? 75 MR. AIKEN: That's correct, yes. 76 The next correction is Exhibit B2, tab 1, schedule 1, of the original evidence, the white-page evidence, starting at page 2 of 10. 77 MR. VLAHOS: Sorry, B1, tab 2? 78 MR. AIKEN: B2, tab 1, schedule 1. And when you come to pages 2 through 10, of 10, you will notice that those are labeled schedule 3, and they should be labeled schedule 1. 79 The next change, next correction, is at D1, tab 2, schedule 1, page 4 of 4, updated. 80 MR. LYLE: Sorry, Mr. Aiken, could you repeat that reference, please? 81 MR. AIKEN: Yes. D1, tab 2, schedule 1, page 4 of 4, updated. And the correction on that page is at line 20. The $0.021410 should be $0.021848. 82 And then, finally, at Exhibit E1, tab 1, schedule 3, page 1 of 1, updated, again, that's E1, tab 1, schedule 3, the cost of equity evidence. At line 22, where it says "April 2004", that should read "July 2004". 83 Those are all the corrections. 84 I do have one update that relates to this same schedule. I was in the Board's library yesterday, and there was another, more recent, consensus economics forecast available there. So I can update lines 21 and 22. 21, instead of August 2004, the September 2004 forecast is now available. And instead of the July 2004, which I just corrected, the August 2004 actual differential is available. And, after saying all that, those numbers haven't changed. But it is the most recent information that provides those same numbers now. 85 MR. STOLL: That concludes my part. I turn it over to Mr. Lyle. 86 CROSS-EXAMINATION BY MR. LYLE: 87 MR. LYLE: Thank you, Mr. Chair. 88 Gentlemen, I'm going to start with a couple of preliminary questions, and then I'm going to get into the issue of the fact that you've applied for a one-year test year, and also the issue of your cost of debt. And at that point in time I'll turn it over to my colleague, Mr. Millar, who will proceed to address the remaining issues. 89 If I could turn you first to your application itself, which is found at Exhibit A, tab 1, schedule 1, and take you specifically to paragraph 5, where you stated at that time that you projected that you would incur a revenue deficiency of approximately $83,641 for the 2005 test year. Then if I take you to paragraph 6, you break out that overall revenue deficiency into a sufficiency of 74,829 with respect to gas supply, and a deficiency related to distribution of 158,470. 90 I want to turn you, then, gentlemen, to your updated evidence, and the summary of your application, at Exhibit A, tab 2, schedule 1. And on page 1 of that document, at line 6, you state that you're projecting a gross deficiency of 297,600 for the 2005 test year. Would you be able to break down that 297,600 figure for me, between gas supply and distribution? 91 MR. AIKEN: I could, but I think I'd have to take that as an undertaking, to provide that information. 92 MR. LYLE: Fair enough. 93 MS. LITT: J.1.1. An undertaking to break out the claimed revenue deficiency. 94 UNDERTAKING NO. J.1.1: TO BREAK OUT THE 297,600 GROSS DEFICIENCY FIGURE FOR THE 2005 TEST YEAR, SO AS TO SEPARATE THE GAS SUPPLY COMPONENT FROM THE DISTRIBUTION COMPONENT 95 MR. CARR: When is that undertaking likely to be ready? That's a pretty critical thing, I think. 96 MR. AIKEN: I might be able to do it tonight. If not, it would be done early next week. I'm not sure if the level of information I require is available to me here. But I will let you know tomorrow morning if I've completed it. 97 MR. CARR: Okay. Thanks. 98 MR. LYLE: Now, gentlemen, I also understand that NRG is subject to the Board's QRAM process with respect to setting cost of gas. Can you explain to me, for the record, how this proceeding and the QRAM process interact with each other? 99 MR. AIKEN: Yes. We're not asking for any change in the gas cost rate as part of this proceeding. That is done strictly through the QRAM process. The only place where the gas costs impact on distribution rates is through the working capital allowance in rate base. 100 And that working capital allowance includes an allowance for gas costs. And the gas costs in the updated evidence reflect the rates that were used in the forecast for the October 1 QRAM change. It also reflects the most recent Union Gas rates, and the most recent TCPL tolls that go into the gas cost forecast. 101 MR. LYLE: But, just to clarify, then, the working capital allowance would not, then, be adjusted with your next QRAM order, I take it? 102 MR. AIKEN: No. No. 103 MR. LYLE: Thank you, gentlemen. 104 I'll move then to the question of the one-year test year. And, as is clear in your evidence, you've applied with respect to one test year, 2005. Previous applications, you've applied for two test years. And in the Board's decision in the prior rates case, the Board stated that it believed that "...a move to a two-year test period had proved to be a positive step". The Board then stated that it would welcome a filing for a two-year test period in NRG's next rate filing. The Board said that while it acknowledged the greater difficulty in forecasting three years out, it believed that this was "outweighed by the benefits in reducing the regulatory burden for NRG, its ratepayers" -- I'm sorry, I'll slow that down a little bit. 105 "The Board believes that this is outweighed by the benefits in reducing the regulatory burden for NRG, its ratepayers, and the Board." 106 Now, I want to turn you gentlemen to Board Staff IR No.1, which is found at Exhibit I, tab 1, page 1. And in that answer -- it's an interrogatory where the Board Staff asked you why you'd applied for only one test year, as opposed to three. You indicated, I think, the primary reason was because of uncertainty with respect to the tobacco industry, and the difficulty that led to in being able to forecast for future years. Is that correct? 107 MR. BLAKE: Yes. 108 MR. LYLE: And just so that we're clear, when we're talking about tobacco farmers as customers of NRG, I believe we're talking about the rate 2 seasonal class; is that correct? 109 MR. BLAKE: Yes, when we're speaking of tobacco farmers specifically, they would be in the rate 2 class. We also have tobacco-related sales to industrial -- an industrial customer as well. 110 MR. LYLE: And is that mostly the Imperial Tobacco Aylmer plant? 111 MR. BLAKE: Yes, it is. 112 MR. LYLE: And what class do they belong to? 113 MR. BLAKE: They're a rate-3 contract. 114 MR. LYLE: Okay. I want to move you to Exhibit C5, tab 1, schedule 3 of your prefiled evidence. 115 MR. STOLL: Excuse me, could you provide the reference again? C5? 116 MR. LYLE: I'm sorry, Mr. Stoll, C5, tab 1, schedule 3. Do you have that, gentlemen? 117 MR. AIKEN: Yes. 118 MR. LYLE: And looking there under "Rate 2 Seasonal," in the middle column, for total volume, it's approximately 3,117,000 m3, is your projected volume for 2005, and that's out of a total volume of about 24 million m3. 119 So I make that to be about 13 percent, then, of your total volume comes from the rate 2 seasonal class; is that fair? 120 MR. AIKEN: Subject to check, I would say yes. For rate 2 only. 121 MR. LYLE: I understand. 122 MR. AIKEN: Yeah. 123 MR. LYLE: And you've indicated, then, that there are also tobacco-related customers in the rate 3 contract class. Can you break down for me, out of that total volume of about 4,393,000 m3, what portion belongs to tobacco customers -- tobacco-related customers. 124 MR. AIKEN: Yes. The amount that belongs to the tobacco-related customers in that rate 3 contract category is 2.5 million out of the 4.3 million. 125 MR. LYLE: So that's a further 10, 10 and a half percent, of your volume, then? 126 MR. AIKEN: Yes. 127 MR. LYLE: Now, I understand that much of the uncertainty that surrounds the tobacco industry is related to the level at which the tobacco quota is set and the negotiations surrounding the setting of that quota; is that correct? 128 MR. BLAKE: Yes, it is. 129 MR. LYLE: And this is something I learned last year, but I understand that the tobacco quota is negotiated between an organization called - I'll have to read this one out - The Ontario Flue-Cured Tobacco Growers Marketing Board and the cigarette manufacturers; is that also correct? 130 MR. BLAKE: Yes. I think there are some other groups that sit on an advisory committee as well. I think there are some government representatives as well. But principally it's The Ontario Flue-Cured Tobacco Growers Marketing Board and the cigarette manufacturers; you're correct. There are some other people on the board as well, I think. 131 MR. LYLE: And this is a province-wide quota that gets set? 132 MR. BLAKE: It's a province-wide quota; that's correct. 133 MR. LYLE: And I understand that if a farmer is going to grow and sell tobacco in Ontario, they must have some allocation from this quota in order to do that. 134 MR. BLAKE: Yes, for flue-cured tobacco, which would be cigarette tobacco, that's correct. 135 MR. LYLE: Now, is it fair to say that this uncertainty around the tobacco quota has been going on for several years now? 136 MR. BLAKE: There have been several years where it has, in the past, been late being established. Never, in my knowledge, this late. The industry has been evolving over the last number of years, largely due to the decline in tobacco consumption in Canada. But also, there have been a couple of extra wrinkles added in the last couple of years, and that would be that some of the manufacturers are importing more tobacco from overseas. And as well, the Imperial Tobacco in Aylmer has stopped green-leaf threshing or initial processing of the tobacco at the plant, have actually abandoned the facility -- have abandoned the equipment in the facility. 137 And so that has led to even greater uncertainty, because Imperial no longer needs as much raw tobacco produced in Ontario, and they have now -- it appears to me that they have the option of importing more tobacco or buying it on the Ontario market. And they've stated that they are making no commitment as to how much tobacco they'll buy next year, so it appears this uncertainty will continue, and maybe even become a more serious situation in the upcoming years. 138 MR. LYLE: And we'll get back to that in a few minutes, Mr. Blake. But I just wanted to clarify a couple of things. 139 I believe your evidence is that negotiations did not conclude until May this year. 140 MR. BLAKE: That's correct. The farmers actually were planting tobacco without knowing how much tobacco they were going to be able to sell. It was a very uncertain situation. 141 MR. LYLE: But I believe, also, that negotiations in the previous year didn't conclude until May as well; is that ... 142 MR. BLAKE: I think that there have been some previous years that have been delayed. However, this year, with Imperial having closed their plant, there was concern among growers, and Imperial being the largest purchaser of tobacco in Ontario, there was a lot of concern among the tobacco farmers that Imperial might not be buying any tobacco at all. And farmers, in essence, planted their tobacco on spec. and -- 143 MR. LYLE: But it then turned out that, in fact, Imperial agreed to buy tobacco in Ontario and agreed to this quota as one of the cigarette manufacturers. 144 MR. BLAKE: They did. That's correct. 145 MR. LYLE: Now, I believe your evidence indicates that the quota itself has been in decline since about 1998? 146 MR. BLAKE: You know, again, subject to check, I believe that's probably true. 147 MR. LYLE: And I recollect from your previous year's testimony, Mr. Blake, that at one time the quota might have been as high as 250 million pounds? 148 MR. BLAKE: I think that was the peak, was around 250 million pounds. 149 MR. LYLE: So NRG's already absorbed quite a reduction in the tobacco quota, has it not, over the last several years? 150 MR. BLAKE: We have had some reductions; on the other hand, we've had some rationalization which has allowed us to retain some farms. Probably we've had greater success retaining farms than -- as compared with the decline in the industry, because we, first of all, did not have all the farms in our area connected; and secondly, the farms that we did have connected were more modern farms, given that we started accessing the industry, really, when we took the company over in 1979 and 1980. So the farms were more modern farms. They had what they call bulk kilns rather than the conventional kilns. 151 I'm not sure if you're familiar with the area, but they have these little wooden barns, sort of thing, and they were the older style. And in the late '70s and '80s, they were converting over to what they called bulk kilns, which are lower -- almost looked like a trailer sort of a setup. 152 So we were fortunate enough to have had a substantial number of our farms as we were connecting them in the '70s and '80s that were of the new style, and they have been the farms that have had greater stability, or there's been a greater stability among that group. 153 MR. LYLE: So, in summary, you've managed to handle the reduction in the tobacco quota quite well. 154 MR. BLAKE: We have in the past; that's correct. But that doesn't negate the impact of some substantial changes in the quota. If Imperial Tobacco, for example, did not purchase, the quota could have been -- the amount of tobacco that could have been available for sale -- or could have been purchased, I should say, could have been about 60 percent of what was actually set. 155 MR. LYLE: Well, let's address the worse-case scenario when we -- a little bit later, Mr. Blake. 156 I understand that the quota in 2003 was 94.1 million pounds. And for 2004 it's been arrived at at 87.9 million pounds. And these are calendar-year numbers; is that correct? 157 MR. BLAKE: They're for the growing year. The tobacco's typically grown during the summer months, obviously, and then it's marketed during the fall. They're now just starting to market tobacco, and it can -- depending on the size of the crop and so forth, it can continue on until after the new year. So it's what we call the 2004 crop that they're doing right now. But some of it carries over into 2005. 158 MR. LYLE: I understand most of the curing goes on in the months of August and September? 159 MR. BLAKE: That's correct. 160 MR. LYLE: And occasionally that bleeds into the month of October, where you have, in some years, higher -- higher usage of gas in the month of October, related to curing of tobacco? 161 MR. BLAKE: That's correct. And it usually relates to whether the crop is what we call early or late, which means when they start harvesting it -- has an impact, obviously, on when the crop -- the harvest is finished and the curing is finished. 162 And the other major impact can be from the weather. If you have an early frost, let's say you had a frost in September - we've had frosts in September before, early September - that, essentially, wipes out any curing after that. So, as soon as the tobacco freezes in the field, then the curing just, sort of, over the next week, slides to zero, because it takes about a week to process each kiln through. 163 MR. LYLE: And going back to the tobacco quota itself, as I was saying, in 2003, it was about 94.1 million, in 2004, 87.9 million. And in your evidence, you're projecting an 80.4 million pound quota for 2005, based on the pattern of decline that you've seen since 1998. Is that correct? 164 MR. AIKEN: That's correct; yes. 165 MR. LYLE: So, clearly, up to this point in time, the quotas have been declining over time, but there's nothing to indicate a sudden catastrophic collapse in the quota, up to this point in time? 166 MR. BLAKE: I would have some difficulty saying yes to that answer. Up until this time, there have been -- there has been a steady decline. But there have been potential situations for catastrophic declines in the amount of tobacco grown and harvested. There are other factors as well, such as, we had a blue mould epidemic a few years ago. As I said, early frost. This year, the growing season, as you're aware, the summer months -- we had very few growing degree days during the summer, and that pushed the tobacco crop out later. As it turned out, it was a fairly good harvest. But there are all sorts of other changes that can happen. And catastrophic changes, or catastrophic events, might not just be related to the marketing and sales efforts by the organization. 167 MR. LYLE: But when you're doing it, when you're doing a forecast, whether it's for one year or for three years, it's going to be impossible to predict what that next year is going to be when the great blue mold infestation hits the tobacco crop, right? 168 MR. BLAKE: And we typically don't forecast that that's going to happen. You know, that's a risk, I guess, that the company has taken in the past, and we don't forecast that something like that will happen. But obviously, in the agricultural industry, these things happen frequently, you know. We hear of those things. 169 MR. LYLE: Certainly. But it's a forecast risk, whether you're forecasting one year out or forecasting three years out; isn't it? 170 MR. BLAKE: I guess the risk becomes substantially greater the farther you go out. And we were, we were reluctant to go beyond the one year. And even -- we were even reluctant to come to the Board with a presentation any earlier, because we really didn't know how much tobacco was going to be grown. We were very uneasy about the forecast as it was, let alone now going out and, possibly, looking at two or three years in the future. 171 MR. LYLE: I guess my point was, Mr. Blake, that when it comes to forecast risks related to unexpected weather conditions, or infestations, et cetera, those are unknowables and they're unknowable, whether it's one year out or three years out or five years out. Doesn't really matter how far you're forecasting into the future when it comes to those unknowables. You don't know when those incidents are going to strike. 172 MR. BLAKE: I agree with you, you know, obviously. But, for example, in Quebec, this year, there's no more tobacco grown in Quebec. The tobacco industry is finished in Quebec. And I'm not certain, from my speaking to some growers in our area, they were quite surprised that the tobacco industry was no more in Quebec, there was going to be no more tobacco grown in Quebec. 173 So I think that the farther you go out in these things, the greater chance you have for being incorrect. You know, I guess it's possible that, you know, the farmers decide they're going to grow tobacco for substantially less, and maybe Imperial buys more tobacco. I don't think that there's a very good possibility -- there's much possibility of that. But, you know, there are, I guess, all sorts of different eventualities. But I think that, for us to go beyond one year, given that, you know, 5 million of our 24 million or so cubic metres of annual sales is directly dependent on the tobacco industry, I think, exposes us to a substantial risk. And I don't think that the -- or I know that the company is not interested in exposing themselves to that risk, for the sake of saving a few thousand dollars in regulatory costs. 174 We're quite willing to work with the Board on, possibly, some other ways of saving regulatory costs, and speeding up the hearing process, and that sort of thing. We actually have some ideas. But I don't think that that's the answer, in the tobacco-related industry that we're so dependent on. 175 MR. LYLE: May I suggest to you, sir, that there were other options than just applying for a one-year test year. Let me ask you a hypothetical question. You indicated that you were concerned that possibly - I believe 60 percent was the figure you cited - possible decline in consumption that you might experience if a catastrophic scenario was to arise? 176 MR. BLAKE: Well, I think if Imperial Tobacco stopped buying tobacco in Ontario, then that would be -- that would result in -- I think their purchases are approximately equal to 60 percent of the total tobacco purchased from growers in Ontario. 177 MR. LYLE: So it would not eradicate your rate to seasonal customers? 178 MR. BLAKE: No, but we would go from 3 million to, you know, one and a half million or something. 179 MR. LYLE: And, with respect to Imperial Tobacco's operations, they would continue to process tobacco in their Aylmer plant. They would just be using imported tobacco, I take it, in this scenario. 180 MR. BLAKE: I would think so, but I don't really know the degree of processing that occurs before that tobacco comes to that plant. It may be partially processed, or may not. I'm really not that familiar with how the tobacco comes in there. 181 MR. LYLE: Well, let's imagine a hypothetical scenario in 2007. And in May, tobacco quota negotiations are concluded and you find out that the tobacco quota's being cut in half. And assume, then, that the Board's already set your rate for that time period. Maybe it's set your rate in the previous -- in the previous fall. What would you do in that circumstance? 182 MR. BLAKE: I'm not aware of any precedent or any situation that's occurred that would allow us to come to the Board, if that's what you're inferring. 183 MR. LYLE: Well, isn't that something you would consider? There's a major hit to the utility, an unanticipated event has taken place. Isn't that what is sometimes called in other contexts a Z-factor, that would make it appropriate for you to come in to the Board and apply for some form of, perhaps, interim relief in the short term to address that issue? 184 MR. BLAKE: I'd be reluctant to, you know, to speculate how we would do it, you know, without seeking advice from our regulatory and legal people. 185 But, you know, my understanding of a Z-factor is something that's typically used in the context of PBR, and I don't perceive that we have a Z-factor. I don't know whether you're saying that ... 186 MR. LYLE: I guess what I'm saying to you, you always have the right to apply to the Board. And if you are facing a situation which, when your rates were set, was not anticipated, a situation which has a critical impact on the utility, I would have thought you would exercise that right to apply to the Board. And I guess why I'm asking is, when you were considering putting together this application, and you looked at the direction that the Board had provided in its previous decision where the Board was hoping that you would be making a three-year -- three-test-year filing, did you not consider making that type of a filing and saying to the Board, There's greater uncertainty because of this type of a filing; there's the possibility of some catastrophic scenario because of the uncertainty in the tobacco industry; therefore, Board, be aware that there is a possibility that we might have to come in for some form of relief in a later year. 187 MR. AIKEN: Perhaps I could comment on that, Mr. Lyle. 188 In the paragraph that you -- or the partial paragraph that you read in the previous decision with reasons, it went on to say that: 189 "The Board directs Board Staff to enter into discussions with the company to address any implementation issues which arise from a move to a three-year test period, and to report back to the Board by the end of this calendar year." 190 And I guess that would have been last year. 191 MR. BLAKE: And -- 192 MR. LYLE: And I take it your point is that Board Staff didn't do that; is that -- 193 MR. AIKEN: No, I was going to let the company witnesses talk about the conversations, if any, that did go on. 194 MR. BLAKE: We're obviously interested in decreasing regulatory costs. There's no benefit to the company for -- to have increased regulatory costs. We're interested in having our regulatory costs as low as possible. That impacts on rates, reduces our rate, makes our gas more attractive to more people, and so forth and so on. 195 And so we're very much aware of the Board's suggestions, or -- in the reasons, and we actually contacted Board Staff in, I believe, January -- 196 MR. McCALLUM: December. 197 MR. BLAKE: December, and had discussions with them, and were advised that they were very busy. And we took that to be that it was -- you know, a three-year test year for us was something that would take longer to prepare, would increase costs, would take longer for the hearing. We had these inherent risks of uncertainty about the tobacco industry. And it seemed to us that the common-sense approach was to take -- to do a one-year application and bring that to the Board - and we were late already - bring that to the Board and have it dealt with as expeditiously as possible. 198 And we've sought that assistance from Board Staff throughout the process. And, you know, we haven't had ADR. We've tried to shorten the process to as great extent as possible to have the matter heard. And every time that there are more steps put in that process, there's increased costs associated with that. 199 And if you look at the costs of the hearing, of the regulatory hearing, it's not that great a difference between our annual costs, based on two years in prior years and one year this year. And, you know, our increases in regulatory costs, in general, are largely impacted by a number of other things. The Board costs, for example, have gone up substantially, and so forth. And whether we're on a one-year or a three-year hearing, that's not going to, I wouldn't think, impact what our assessment is from the Ontario Energy Board. 200 So I think that, from our perspective, we just felt that a one-year program or a one-year test year could be handled expeditiously, hopefully get a decision out quite quickly, get the rates in place, and so forth; and then we're working on a longer test period, and we'll probably get into that later. We're looking at some greater planning. We're looking at a three- to five-year capital program that we've started working on already, and so forth, so that we're laying the groundwork for longer test periods. Whether we come to the Board with a one-year test period or a three-year test period, or whatever, in the future, we're laying the groundwork now so that we can do that. 201 MR. LYLE: So are you indicating to me, then, that there were other reasons why you chose a one-year test period other than the uncertainty around at any tobacco industry? You had some difficulty with your forecasting methodology or your planning for that length of time out? Is that -- 202 MR. BLAKE: We had our -- essentially, our rate-filing complete, our one-year rate-filing complete in December. And we worked on -- we actually have -- we have a two-year -- we have the forecasting numbers done for a two-year, and might have been able to file that. 203 But the risks associated with that, the increase in time, we felt the Board time, and so forth, the reluctance of Board Staff to talk to us about a three-year program and how we might develop that, and so forth, we -- it just did not seem to be something that was feasible for us to go ahead with, with a three-year or even a two-year program. 204 MR. LYLE: Well, let's to the future, then, gentlemen. 205 If the Board, in this decision, was to say, Once again, we'd like you to file a three-year test period, and gave you some words of comfort that indicated that the Board would be open to adjusting those rates, if some catastrophic scenario was to occur in the tobacco industry, would that give you some comfort in applying for a three-year test period next year? 206 MR. BLAKE: I guess, you know -- we're talking, you know, in generalities, you know, about what is catastrophic, what is comfort, and so forth? I think that if it makes sense to come forward with a three-year test period, we're more than willing to do that. 207 But in the current case, I don't think it made sense. And, you know, I'm not sure what the mechanism is to come back and have our case reopened and revisit our gas forecast. I'm not aware of that happening. You know, we can maybe speak to Mr. Aiken who's more familiar with that sort of thing. 208 The other situation is that none of the other utilities in Ontario, none of the other gas utilities, anyway, that I am aware of - I guess Union maybe had a longer period with PBR and so forth - but it seemed to me, from looking at sort of the general trend, that it may be going back toward cost-of-service and one-year hearings. 209 MR. LYLE: But those are much larger utilities, as you realize. 210 MR. BLAKE: They are much larger utilities, but regulatory costs and risk and all that sort of thing are just as important to our shareholders as they are to the Union shareholders. I don't understand what the difference is between one or the other. 211 MR. LYLE: And I understand your evidence, that because of the tobacco uncertainty, you perhaps have greater risk than a Union or an Enbridge. But if a mechanism could be devised - as I say, one option is comfort around the ability to apply to open up your forecast; another option might be to have some form of a variance account that would track your lost revenue if, in fact, there was some sort of catastrophic event related to the tobacco industry - if some mechanism could be devised like that to deal with some of the uncertainty that you face and some of the risk that you're concerned about, would you then consider applying for a longer test period in future years? 212 MR. BLAKE: I guess if we can be comforted that the process and the mechanics of the process is such that can be -- that seems to be reasonable, and would seem to function well in the situation, sure, we would be comfortable doing that. 213 But I would think that we're talking about breaking some new ground here that has not been broken and has not -- you know, there aren't precedents for. And the cost to get to that point may be substantial regulatory cost in and of itself. 214 But notwithstanding that, we are in agreement that we would consider that, provided the conditions were acceptable. 215 MR. LYLE: And as you say, you're not Union or Enbridge, so therefore one size may not fit all. 216 MR. BLAKE: From my perspective, I think that some greater efficiencies could be gained through streamlining the current regulatory process that we go through. A little company with 5,900 customers, you know -- we would like to think that maybe we could, you know, have something more like a paper hearing. Maybe save, you know, 10 or 15 people in a room for two days. And all the preparatory work and so forth that goes into that. 217 We don't have any problem preparing the evidence packages, answering the interrogatories. Those are all very inexpensive things for us. The expensive thing comes when we start having to involve lawyers and consultants and bring them to Toronto, and spend days in Toronto, and so forth. And pre-hearing meetings and all that sort of thing. That's the big cost to us. And if we could short-circuit the process so that, instead of it taking several months, many months -- if we could short-circuit it somehow or other so we could do it in several weeks, there would be a substantial saving. I would think that, you know, it would eclipse the savings that we'd have from going to a two- or three-year program. 218 MR. LYLE: I just want to clarify a little further the position of Imperial Tobacco. Can you tell me in what way it has expressed its position that it may not anymore be purchasing tobacco in Ontario? 219 MR. BLAKE: In the press releases that came out when the quota -- when the negotiations were complete, Imperial said that they had agreed to buy a certain amount of tobacco this year, but that they were not going to be bound to purchase tobacco in any future year. So -- and they've been attempting to purchase tobacco directly from farmers, plan purchase tobacco offshore in the last number of years. And they are -- their preference would be not to deal with the Ontario tobacco -- Ontario Flue-Cured Tobacco Marketers Board, but rather to deal directly with farmers. 220 MR. LYLE: Now, you say that's their preference, but as the law stands right now, do they really have that option, to buy directly from farmers in Ontario? 221 MR. BLAKE: I think there's some disagreement between the parties as to what their rights are with respect to purchasing tobacco. 222 MR. LYLE: So you're saying it's uncertain. 223 MR. BLAKE: It is uncertain. 224 MR. LYLE: To the best of your knowledge. Can I get an undertaking to get a copy of that press release? Mark that as Undertaking J.1.2, described as a copy of the press release issued by Imperial. 225 MR. BLAKE: I'm not sure that we would have the actual press release, but we may have a copy of a newspaper article that quotes it. 226 MR. LYLE: That would be sufficient for our purposes. So mark that, then, as newspaper article related to Imperial Tobacco's position with respect to purchasing tobacco in Ontario. That would be around, sometime in May of this year. 227 UNDERTAKING NO. J.1.2: TO PRODUCE A PRESS RELEASE FROM ABOUT MAY OF 2004, OR A NEWSPAPER ARTICLE QUOTING SUCH A PRESS RELEASE, AS TO IMPERIAL TOBACCO'S POSITION WITH RESPECT TO PURCHASING TOBACCO IN ONTARIO 228 MR. BLAKE: I would think it was probably sometime in the month of May. 229 MR. LYLE: Thank you. Just a moment. 230 MR. LYLE: Now, you referred to your regulatory expenses for this year, and I want to turn you, gentlemen, to your prefiled evidence, Exhibit D5, tab 3, schedule 2. 231 MR. AIKEN: Sorry, could you just repeat the final part of that reference. 232 MR. LYLE: Yes, it's Exhibit D5, tab 3, schedule 2. 233 MR. AIKEN: We have it now. 234 MR. LYLE: And looking at that document, the expense you're claiming related to rate cases and other applications is a total of about 84,500. Can you tell me what portion of that number relates to this rate case, and what would relate, then, to the QRAM process? 235 MR. McCALLUM: Just one moment. 236 MR. LYLE: Certainly. 237 MR. AIKEN: I remember an estimate, I think, that Mr. McCallum gave me that each QRAM cost was approximately $2,500. $2,000 or 2,500. So that would mean over the course of a year, the QRAM would be $8,000 to $10,000. 238 MR. LYLE: And do any of these costs relate to your role in any other utility's proceedings? I'm thinking specifically of Union Gas. 239 MR. AIKEN: No, they do not. 240 MR. LYLE: Now, the legal and consulting costs, and I guess even the travel and accommodation costs here are, I assume, based on some assumption about the length of time that this oral hearing will take? 241 MR. McCALLUM: Yes, they were. They encompass more than just this hearing, though. There was other applications that were made by the company that involved legal and consulting expenses. 242 MR. LYLE: And are those the QRAM applications that you've talked about? 243 MR. McCALLUM: It's on top of the QRAM. There was an arc exemption filed. There has also been a GDAR exemption filed. There is a forecast for some increased costs with respect to the reporting of -- the new reporting requirements that are going to be coming out next year, or forecasted to come into place in January. 244 MR. LYLE: And can you break down those costs out of this gross number? 245 MR. McCALLUM: I'd like to do that by way of an undertaking. 246 MR. LYLE: Certainly. 247 MR. McCALLUM: And I may be able to get that information to you later today. 248 MR. LYLE: Thank you. 249 We'll mark that as Undertaking J.1.3. The undertaking is to provide a breakdown of costs related to a number of other listed proceedings. 250 UNDERTAKING NO. J.1.3: TO PROVIDE A BREAKDOWN OF COSTS RELATED TO A NUMBER OF OTHER LISTED PROCEEDINGS 251 MR. LYLE: Now, going back to this proceeding, there was underlying some of these costs an estimate of the length of time that this hearing would take. What was that estimate of the length of time? 252 MR. McCALLUM: We had -- when I was doing the forecast for this, we had anticipated two to three days. 253 MR. LYLE: Okay. If we were able to finalize this hearing by, say, tomorrow around noon, do you have a sense of how much that would change your projection? 254 MR. McCALLUM: I don't have a sense for that right now. It's not as though it would cut it in half. 255 MR. LYLE: No, I understand. 256 MR. McCALLUM: Most of the costs were all up-front costs. So what we're looking at is, you know, shortening by three or four hours of time. Instead of two days, it would be a day and a half, for instance. 257 MR. LYLE: So, just ballpark, based on what I imagine Mr. Stoll's hourly rate is, I'm guessing maybe a couple of thousand dollars, plus Mr. Aiken's time; is that fair? 258 MR. McCALLUM: That would be fair. 259 MR. LYLE: Now, I understand that if you had applied for a three-year test year, that there would have been some greater level of complexity. But I suggest to you, sir, that your costs would not have been three times what you're claiming related to this proceeding. Is that a fair assumption? 260 MR. McCALLUM: That would be a fair assumption, yes. 261 MR. LYLE: So can you explain to me, then, why you think that some of these costs are going to have to be absorbed by ratepayers because the utility has chosen to avoid some shareholder risk by forecasting out for a longer time frame? Why is it appropriate or fair that ratepayers should be asked to absorb some of these costs? 262 MR. AIKEN: I guess I'm having a problem with your characterization of "these costs," because these would be the standard costs for a test-year filing. Doing a multiyear filing reduces costs and, therefore, those benefits are passed on to ratepayers. But I don't think you can say the reverse, that we're saddling ratepayers with additional costs. 263 MR. LYLE: But yet you had clear indication from the Board, though, that they were looking to you to provide a three-year filing. 264 MR. AIKEN: We had a clear indication that the Board wanted Board Staff to talk with NRG and look at the pros and cons and what would have to be done in order to accommodate a three-year test filing, and that the Board did not direct NRG to file a three-year rates case. 265 MR. LYLE: Mr. Chair, those are all my questions with respect to the base-year issue. I don't know whether you would want to break now or have me move on to the cost-of-debt questions. 266 MR. CARR: How -- what's your time estimate for those, Mr. Lyle? 267 MR. LYLE: I'm guessing probably an hour and a quarter, I would think, Mr. Chair. 268 MR. CARR: It sounds like a break would, indeed, be appropriate, so 15 minutes. 269 --- Recess taken at 10:38 a.m. 270 --- On resuming at 10:58 a.m. 271 MR. CARR: Please be seated. Are there any preliminaries that we need to address? 272 MR. LYLE: Yes, Mr. Chair, there is one matter. I understand that Mr. Aiken has been able to locate in the prefiled evidence the answer to the first undertaking, which was the split of the gross revenue deficiency between distribution and cost of gas. 273 Mr. Aiken, could you give us the reference? 274 ORAL ANSWER TO UNDERTAKING NO. J.1.1: TO BREAK OUT THE 297,600 GROSS DEFICIENCY FIGURE FOR THE 2005 TEST YEAR, SO AS TO SEPARATE THE GAS SUPPLY COMPONENT FROM THE DISTRIBUTION COMPONENT 275 MR. AIKEN: Yes, it's in the cost-allocation evidence. It's Exhibit G3, tab 2, schedule 1, updated. That tab is a series of cost-allocation schedules. And it's on the last one of the green update, which is labelled, at line 1, "Schedule 3.3". 276 MR. VLAHOS: Sorry, what was that reference again, Mr. Aiken? 277 MR. AIKEN: G3, tab 2, schedule 1, updated, which I indicated was a series of schedules, and it's the very last one, at line one, labelled "Schedule 3.3: Analysis of Allocated Costs". 278 And at line 18 of that schedule, it shows a deficiency of -- deficiency/sufficency at line 17. Line 18 is gas supply. And in the "Total" column, it shows that the gas-supply component is, in this case, $1.3 thousand, or $1,300. 279 The 297.6 right above it in line 17 is the total deficiency, 297,600. So the gas-supply component is a very small component of that, which, upon reflection, I should have realized, because the QRAM prices that were used and the forecast of volumes used were virtually identical to what was done in the October 1st QRAM. So there's, you know, very little variance in the gas-supply cost. 280 MR. CARR: Is that acceptable, Mr. Lyle? 281 MR. LYLE: Yes, Mr. Chair. I also notice on line 20, then, there's a sufficiency in ancillary services of 50.9? 282 MR. AIKEN: That's correct. 283 MR. LYLE: Thank you. 284 MR. CARR: Mr. Vlahos would like to further question this area. 285 MR. VLAHOS: Mr. Lyle, I just want to make sure that I understand this. So the total revenue and deficiency or sufficiency that is contained in the prefiled evidence, to the extent there is in gas-supply-related dollars, it would only be associated with a working capital, nothing to do with the commodity itself in terms of pass-through. 286 MR. AIKEN: That's right. But the gas commodity is in that gas-supply line, which we're not asking for an adjustment on. 287 MR. VLAHOS: All right. So when I look at the difference in the deficiency, revenue deficiency, from the original evidence to the updated evidence, it is all delivery-related, and very little of that would be -- there will be nothing in terms of the actual commodity itself but rather the commodity-related delivery expenses. Is that a fair way of putting it? 288 MR. AIKEN: Delivery-related ... 289 MR. VLAHOS: That is, the cash working capital because of a difference in gas-supply costs. 290 MR. AIKEN: Well, that's one component, and that would show up under the transmission and distribution line, the following line down. But the increase in the deficiency was also driven by changes in O&M and, I believe, some changes in the revenues as well between the original and the updated evidence. 291 MR. VLAHOS: Okay. I think you're just confirming what -- what I was thinking is -- 292 MR. AIKEN: Okay. 293 MR. VLAHOS: -- that the change in the revenue deficiency from the original to the updated, it is all delivery, not commodity. 294 MR. AIKEN: That's right. 295 MR. VLAHOS: And what we're referring to commodity is, it's commodity-related in terms of delivery expenses, that is, the cash working capital to accommodate a higher gas supply or a lower gas supply. 296 MR. AIKEN: Yes. 297 MR. VLAHOS: All right. 298 MR. AIKEN: Yes. 299 MR. VLAHOS: Thank you for that. Thank you for that, panel. 300 MR. CARR: Okay. Thank you. 301 So you're going to resume, Mr. Lyle? 302 MR. LYLE: Yes. Thank you, Mr. Chair. 303 Gentlemen, I'm going to take you through my questions with respect to the issue of cost of debt. I want to refer you to Exhibit E4, tab 1, schedule 3. 304 And this, gentlemen, is a summary of your cost of debt for the 2004 bridge year. Under "Long-Term Debt," in the third line down, there's a reference to an item titled "Loan," and the average of averages principal for 2004 was $951,000. And I take it that is what was previously referred to as the Junsen loan, and is now the Banco Securities loan; is that correct? 305 MR. McCALLUM: Yes, that is correct. 306 MR. LYLE: And I understand that the interest rate with respect to that loan is tied to NRG's return on equity? 307 MR. McCALLUM: That is also correct; yes. 308 MR. LYLE: And that's subject, then, to a floor of 9.25 percent? 309 MR. McCALLUM: That's correct. 310 MR. LYLE: And that $951,000 figure will remain consistent throughout the year because, as I understand it, you're not paying off any principal on that loan until sometime in the future? 311 MR. McCALLUM: The terms of that loan are interest only until the Imperial Life loan has been discharged, at which time principal payments will commence at that time. 312 MR. LYLE: Let's move, then, to the Imperial Life loan, which is the next line down. And I understand that the interest rate on this loan is set at 11.8 percent? 313 MR. McCALLUM: That's correct. 314 MR. LYLE: And you're paying down principal and interest every month with respect to this loan? 315 MR. McCALLUM: That's correct. 316 MR. LYLE: And the final payment on this loan is due in July of 2009; is that correct? 317 MR. McCALLUM: That's correct. 318 MR. LYLE: Now, taking you, then, to the debenture, on the next line, and that, I believe, is formerly referred to as the Junsen debenture and it's not the Banco Securities debenture? 319 MR. McCALLUM: That is also correct. 320 MR. LYLE: And can you tell me what the interest rate is on that particular loan? 321 MR. McCALLUM: That interest rate is -- just give me one minute. It's 11.03 percent. 322 MR. LYLE: And that's a fixed interest rate, I take it? 323 MR. McCALLUM: That's correct. 324 MR. LYLE: And there's also a standby fee related to this loan; in other words, to the extent that you don't draw on this particular instrument, you have to pay a standby fee? 325 MR. McCALLUM: That's correct. 326 MR. LYLE: And I understand that, in a previous decision, the Board has allowed you to claim .75 percent up to a maximum undrawn amount of 500,000? 327 MR. McCALLUM: That's correct. 328 MR. LYLE: And that's where, when we go back to the first line, we see the carrying costs with respect to standby fee on debenture. That relates to ... 329 MR. McCALLUM: Yes, it is. 330 MR. LYLE: Thank you. 331 Now, just finally with respect to long-term debt, there's also a reference to financing cost amortization, and that's an amount of about $6,000. Can you explain to me where this amount comes from. 332 MR. McCALLUM: That was the original cost of obtaining the Imperial Life loan back in 1994, the legal costs and all other costs associated with obtaining that loan, and those are being amortized over the 15-year term of the loan. 333 MR. LYLE: I see. Now, I want to take you back to the debenture, then. The average of averages principal for that amount is approximately $190,000, and I recollect from your testimony in last year's hearing that you were expecting to draw on that instrument a significantly greater amount than you actually did. Can you explain why you did not draw on that instrument as much as you had anticipated last year. 334 MR. McCALLUM: In our last filing, we had anticipated certain other capital projects that were planned to be undertaken. If you'll recall, we had this Norfolk East project -- 335 MR. LYLE: Mm-hm. 336 MR. McCALLUM: -- and another project that was down in the southern part of our franchise that we did not proceed to build. Those were two fairly expensive projects. And a large part of the demand associated with those projects was related to the tobacco industry, and we didn't feel it was prudent at that time to spend that amount of money, and incur that amount of additional debt, on a number of projects that were devoted to a questionable industry, at that stage. 337 MR. LYLE: As a matter of fact, the Board disallowed one of those projects for that very reason; did it not? 338 MR. McCALLUM: That's correct. 339 MR. LYLE: And my recollection is that, in your past year's evidence, that the average of averages would have been about 1.1 million that you were planning to draw on with respect to the debenture. And that's a difference of around $900,000, then, from what you've actually drawn on the debenture. Can that significant difference all be explained by deferred or other suspended capital expenditures? 340 MR. McCALLUM: I don't have the information from the last filing in front of me, so I'm not able to comment what the full extent of the differences were. Those two particular projects, that I referred to earlier, would not account for the full amount of the difference. 341 MR. LYLE: Well, perhaps you could undertake to provide for me an explanation of the differences related to your anticipated draw on the debenture in last year's evidence, and what you actually drew on. And we'll mark that as Undertaking J.1.4. 342 UNDERTAKING NO. J.1.4: TO PROVIDE AN EXPLANATION FOR THE DIFFERENCE BETWEEN THE ANTICIPATED DRAW ON THE DEBENTURE, AS STATED IN LAST YEAR'S EVIDENCE, AND THE AMOUNT ACTUALLY DRAWN 343 MR. McCALLUM: Okay. 344 MR. LYLE: So, looking back at Exhibit E4, tab 1, schedule 3, and moving to the short-term debt, you have an operating loan and then you have unfunded debt. And the unfunded debt, as I understand, is a plug number, in order to bring you up to your deemed-debt ratio. Is that correct? 345 MR. McCALLUM: That's correct. 346 MR. LYLE: And I take it that, because of the fact that your cash flow needs were not as great as you anticipated last year, and that you -- therefore, you did not draw on the debenture as much as you anticipated, the unfunded debt is accordingly significantly higher than you anticipated in your prefiled evidence last year? 347 MR. McCALLUM: It is higher, and you also have to remember a portion of that unfunded debt, because of the deemed-equity structure, is covered off through the equity component that the company has, in excess of the 50 percent. 348 MR. LYLE: And I guess my question was, I'm just looking for the plug number that you had to calculate here, and when your long-term debt is smaller than you'd anticipated, the plug number is going to be bigger --. 349 MR. McCALLUM: That's correct. 350 MR. LYLE: -- than you'd anticipated. 351 Now, I don't believe you've done a similar exercise as you've done in Exhibit E4, tab 1, schedule 3. You did this for the 2004 bridge year. I don't believe you've done a similar exercise for the 2005 test year. Can you explain why not? 352 MR. McCALLUM: On Exhibit E5, tab 1, schedule 2, what we had anticipated doing was refinancing the entire debt package, consistent with the approach that the Board took in the last decision. 353 MR. LYLE: And so, on the basis that you did not -- that you were planning on refinancing the entire debt package, you did not break out amongst the different instruments? Is that your evidence? 354 MR. McCALLUM: What we've done in here is tried to be consistent with the way the Board rendered its decision in the last rate filing, where they -- sorry -- 355 MR. LYLE: Go ahead. 356 MR. McCALLUM: -- where they deemed a capital structure and assumed refinancing. So we've done the same approach in the updated evidence here. 357 MR. LYLE: So your view is then, that, in the Board's decision, it deemed a debt rate so that your cost of debt is no longer tied to actuals but, rather, to a deemed debt rate, which would then fluctuate with interest rates; is that correct? 358 MR. McCALLUM: That is correct. 359 MR. LYLE: And therefore, even if your actuals went below this, this deemed debt rate, you would still be entitled to a deemed debt rate that fluctuated with the actual; is that your interpretation of the Board's decision? 360 MR. McCALLUM: That was our understanding of how it would work, yes. 361 MR. LYLE: Can I suggest to you that another way to read the Board's decision is that they were concerned that your actual was too high, and that they were imposing a ceiling on your actual? That, in fact, if the actual was to drop down below the ceiling, that you would then be entitled to your actual? 362 MR. McCALLUM: You can suggest that. I'm not sure if that was our interpretation of it. 363 MR. LYLE: But that is, that is one possible interpretation, is it not, of what the Board did? 364 MR. McCALLUM: Certainly. 365 MR. LYLE: Now, we attempted, and Ms. Litt's going to hand you out a document, this document is titled: "NRG Cost of Debt for 2005." And we'll mark it as Exhibit K.1.1. 366 EXHIBIT NO. K.1.1: NRG COST OF DEBT FOR 2005 367 MR. McCALLUM: Excuse me. Can we get one more? 368 MR. LYLE: Now, this is an attempt by Board Staff - and it's somewhat primitive, because it makes certain assumptions - but it's an attempt by Board Staff to replicate something similar to Exhibit E4, tab 1, schedule 3. And we didn't calculate an average of averages but, rather, took the mid-point between the opening balance and the closing balance for each of the long-term debt instruments. 369 The opening balances came from your evidence at Exhibit A, tab 8, schedule 2. You don't have to turn to it, I'm just referring it to you. And the closing balances came from your Exhibit A, tab 8, schedule 3. 370 Subject to check, do these numbers appear to be roughly accurate? 371 MR. McCALLUM: Yes, they do, subject to check. 372 MR. LYLE: And the calculation that we did is that your actual interest expense would come out about around $427,000, which is actually quite close to -- I believe, you're claiming based on a 9.2 percent deemed-debt rate. You're claiming about $432,000 for this year. Is that correct? 373 MR. McCALLUM: That is correct. 374 MR. LYLE: Now, can I turn you to the short-term and unfunded debt line. And it's a plug number we arrived at of $1.8 million for 2005. 375 Am I correct in saying that, based on current projections of where the company is going, the unfunded debt component is likely to grow over the next few years? 376 MR. McCALLUM: If we do nothing with our existing loans, as those are paid down, the unfunded debt portion will continue to increase under this deemed equity structure. 377 MR. LYLE: And as that unfunded debt component continues to increase, and the deemed interest rate on that is at the short-term rate, what I'll call your actual -- using this plug, which is a deemed number in and of itself, your actual interest expense is going to go down over the next few years, is it not? 378 MR. McCALLUM: Yes, it will. 379 MR. LYLE: So it's likely, over the next few years, to decline below the 9.2 that you're applying for and the 9 that you got in the Board's previous year decision? 380 MR. McCALLUM: That is correct, assuming no refinancing takes place. 381 MR. LYLE: But it's your position, though, that in subsequent years, your cost-of-debt interest rate should be set on the basis of what is happening in the marketplace with respect to interest rates, even though your actuals are on a declining trend; is that correct? 382 MR. McCALLUM: What we had said in our evidence was what we felt consistent with the way the company interpreted the Board's decision from the last filing. 383 MR. LYLE: Yes, I understand that. And based on that interpretation, then, you would anticipate that if interest rates went up half a percent next year, you would be applying for 9.7, even though your actuals likely would have been declining because of the growing unfunded debt component; is that fair? 384 MR. McCALLUM: It could work out that way. If the interest rates grow by half a percent, the unfunded debt interest rate would also be growing by, all things being equal, another half percent as well. But the long-term portions, as they're paid down, more is being allocated to principal as opposed to interest, so the interest expense would continue to decline through 2009. 385 MR. LYLE: Thank you. 386 Now, you mentioned the possibility of refinancing. In your last case, you indicated in your evidence that you'd engaged in some preliminary discussions re refinancing your debt. And your evidence at that time, I believe, was that the outcome of these preliminary discussions was that a rate of somewhat higher than 8 percent had been discussed. 387 Now, you haven't refinanced these debts. Can you explain why. 388 MR. BLAKE: We've continued to have discussions with a couple of lenders, and we are going to continue to pursue those discussions over the next several months. 389 One of our concerns is the need to determine the amount of debt that's required. And the lenders, obviously, want to know what that funding is going to be used for. So we are working on, as I said earlier, a five-year capital forecast, and so forth, so that we can be assured that, to the best of our abilities, the loans that we would be obtaining would match the company's needs over the next five years. 390 We're probably seeking a five-year term, and we're looking at, you know, 10- or 15-year amortizations, in all likelihood. But the level of indebtedness or level of the loans will depend on the company's need for funds for additional capital expenditures, and so forth. 391 MR. LYLE: Do you have some sense of when those negotiations might come to fruition? 392 MR. BLAKE: We're working on, as I said, a five-year forecast right now, and we've targeted for sometime in February or March to have those plans complete. And that would sort of coincide with when we would be making more formal requests of those lenders. 393 MR. LYLE: So that will be approximately two years after you first had those preliminary discussions. Why has it taken so long? 394 MR. BLAKE: The principal -- the basic reason is -- one of the basic reasons is we're not sure of how much financing we would require over that five-year period, because we haven't formalized our capital expenditure program. Initially, in some of the negotiations we had, we were looking for sort of a tiered financing where we would obtain certain levels of financing in order to pay out our current loans, and then have the option or have additional funds available at a later time. 395 And the lenders that we spoke to were really not interested in doing that. It would have required -- for example, if we were to have borrowed $3 million to pay out the existing loans, and then, sometime over the next two years or sometime during the initial period of the loan, the term of the loan, we required, let's say, another $1 million for some additional projects or something or other, they would charge a substantial fee on having those funds available. Or we would have to go in and break the original loan and be subject to redeployment costs, and so forth, in order to then refinance it. And -- 396 MR. LYLE: When you say -- 397 MR. BLAKE: -- the third possibility would be that we would get sort of second-mortgage financing, if you'd like, and we know that that is very expensive. 398 So we didn't need additional funding during the last 12 to 18 months, so we've forestalled pursuing obtaining new financing, replacement financing. 399 MR. LYLE: Have you had any further discussions about what kind of interest rates you might be able to obtain? 400 MR. BLAKE: I'm told that not much has changed, was the comments from the individuals that I talked to, and they are the same people that we talked to prior. So they're telling us rates haven't changed much, and so we're probably still looking at something in that 8 percent range. 401 And the one lender suggested that he's anticipating rates will go up in Canada over the next few months, and he anticipates probably a quarter to possibly a half a percent over the next number of months. 402 But we're still looking at, likely, in all likelihood, something in the same range as we were looking at before. Of course it depends on the covenants, the amounts, and so forth. That will all affect the rates. 403 MR. LYLE: Can you explain why, when you're a relatively low-risk monopoly regulated utility -- and I think it's fair to say that your financial position has been improving significantly over the last few years; is that fair? 404 MR. BLAKE: I think our financial position has been fairly stable over the last number of years. We had the occasion last year, with the gas cost recovery matter, where $550,000 was not recoverable during the period in which the costs occurred, and those sorts of things are a little bit of a setback. But I'm sure, as those funds get recovered and that matter is resolved, that will go away. 405 But aside from that, you're correct; our earnings are relatively stable. We have some risks. The lenders see some risks associated with the decline in the tobacco industry, and so forth, you know, as you can well imagine. 406 MR. LYLE: But in light of your relatively low risk and your stable position, can you explain why you can't get a better rate than 8 percent in the current -- in the interest rate environment that has existed over the last year and a half, since you first had your preliminary discussions? 407 MR. BLAKE: There may be -- it may be that we can obtain a better rate, I'm not sure. You know, I guess, just listening to the lenders, and, you know, attempting to determine what their best guess is, and so forth, we have not attempted to negotiate with them. We've asked them to provide us with what, you know, their best guess is. And we haven't asked for anything in writing or anything formal. And once you get to that stage, then they're starting to charge fees for those services. So we've, so far, just been on a sort of a no-names basis, and asking for the sorts of things that we think we need. 408 MR. LYLE: I want to turn you back to Exhibit K.1.1. 409 And I'm looking for an undertaking from you gentlemen. I want you to assume that you refinanced the Imperial Life loan, the Banco loan, the Banco debenture, effective the beginning of the 2005 fiscal year, and you refinanced at an 8 percent rate. Assume that you had $250,000 in transactions costs, which I believe was at the high level of the evidence last year, as to how much it would cost to deal with the transactions costs related to such a refinancing. Assume, also, that there are prepayment penalties in accordance with the terms of the contracts related to the Imperial Life loan and the Banco loan, that can be recovered, or that can be addressed, in rates. 410 And I want you to then calculate what the interest expense would have been for 2005 related to those instruments, as compared to your calculations of what the interest rate expense is, having not refinanced those instruments. And when you're doing your calculations related to the refinancing, I want you to take into account that, in light of the fact that you're going to be amortizing the transactions costs and the prepayment penalties, that your unfunded debt plug will shrink and, therefore, you won't be generating 5.5 percent on that portion of your unfunded debt. Do you think you can do that for me, gentlemen? 411 MR. McCALLUM: We can do that. 412 MR. LYLE: So that's marked as Undertaking J.1.5. 413 UNDERTAKING NO. J.1.5: BASED UPON THE ASSUMPTION THAT THE IMPERIAL LIFE LOAN AND THE BANCO DEBENTURE WERE REFINANCED EFFECTIVE AT THE BEGINNING OF FISCAL YEAR 2005 AT THE RATE OF 8 PER CENT, AND ASSUMING THAT TRANSACTION COSTS OF $250,000 WERE INCURRED WITH RESPECT TO SUCH REFINANCING, AND ASSUMING THAT PREPAYMENT PENALTIES ARE INCURRED UNDER THE TERMS OF THE IMPERIAL LIFE AND BANCO LOANS AND THAT THOSE PENALTIES CAN BE ADDRESSED IN RATES, AND BEARING IN MIND THAT TRANSACTION COSTS AND THE PRE-PAYMENT PENALTIES WILL BE AMORTIZED, AND THUS THAT THE UNFUNDED DEBT PLUG WILL SHRINK, AND THUS THAT 5.5 PERCENT WILL NOT BE GENERATED ON THAT PORTION OF THE UNFUNDED DEBT, TO PROVIDE A CALCULATION OF WHAT THE INTEREST EXPENSE WOULD HAVE BEEN FOR 2005 RELATED TO THOSE DEBTS, AS COMPARED TO THE INTEREST RATE EXPENSE CALCULATED UPON THE BASIS THAT NO REFINANCING OCCURRED 414 MR. LYLE: Now I want to turn to what you actually have done with respect to what was previously referred to as the Junsen loan and the Junsen debenture. I believe your affiliate has assigned those instruments to Banco Securities; is that correct? 415 MR. McCALLUM: I don't think "assigned" is the correct term. I think the word we used was "sold." 416 MR. LYLE: Okay. Can you tell me a little bit about Banco Securities. 417 MR. BLAKE: I'm not really that familiar with it. The arrangements were made by someone in our other office, and I'm not that -- really that familiar with Banco, other than where we -- the address and so forth that we send the payments, and so forth to. 418 MR. LYLE: Well, where is that address? 419 MR. BLAKE: It's a Toronto address. I'm not sure, off the top of my head, but it's -- their office is in Toronto. 420 MR. LYLE: And are they any kind of a financial institution that would be registered, or regulated, or is there any particular status to this organization? 421 MR. BLAKE: I really don't know. My suspicion is that it's not. I think it's a private company. I really don't know, though. I shouldn't probably comment. 422 MR. LYLE: And is Banco totally at arm's length, then, from NRG, or any of its affiliates, or any of the officers or directors or employees of NRG, of any of its affiliates? 423 MR. BLAKE: That's my understanding. 424 MR. LYLE: Now, can you tell me what -- you say that these instruments were sold by NRG's affiliate to Banco. Can you tell me what the sale price was? 425 MR. BLAKE: I don't know that. 426 MR. LYLE: Is that information you can obtain from your affiliate? 427 MR. BLAKE: I could ask that question. 428 MR. LYLE: Okay. Undertake to ask of your affiliate the consideration received from Banco Securities with respect to the sale of the debenture and loan instruments. And we'll mark that as Undertaking J.1.6. 429 UNDERTAKING NO. J.1.6: TO INQUIRE OF THE AFFILIATE AND ADVISE AS TO THE AMOUNT OF CONSIDERATION RECEIVED FROM BANCO SECURITIES FOR THE SALE OF THE JUNSEN LOAN AND JUNSEN DEBENTURE INSTRUMENTS 430 MR. LYLE: Now, gentlemen, I just want to address with you your deemed debt-to-equity ratio as currently at 50/50. And I understand that this ratio was established sometime ago; is that correct? 431 MR. BLAKE: Yes, it was. 432 MR. LYLE: Do you recall when? 433 MR. BLAKE: A long time ago. 434 MR. LYLE: Before any of our time? 435 MR. BLAKE: I think it was, our actual debt-equity ratio at that time was, I think, 40 percent, I believe. 436 MR. AIKEN: I have no idea. 437 MR. BLAKE: I believe our -- the actual, the actual equity component was much closer to 50 percent at that time. Well, the debt component was actually more -- was closer as well, closer to the 50 percent. 438 MR. AIKEN: It would have been shortly after the OMB's guidelines on return on equity came out. Because, just prior to that, NRG had Kathy McShane as a witness and I think she was the one who recommended the 50/50 structure with a formula. The Board didn't approve that at the time, but the formula guidelines came out shortly thereafter. And at NRG's next rates filing, I believe that's when we first started following the formula, and the ratio hasn't changed from at least that point in time. 439 MR. LYLE: Was that 1998? 440 MR. AIKEN: It was the late nineties. 441 MR. LYLE: Okay. 442 MR. AIKEN: I think. Yeah. 443 MR. LYLE: Now, is it fair to say that, when that ratio was established, that NRG was in poorer financial shape than it is today? 444 MR. BLAKE: I don't know the answer to that question. I guess I would -- well, I guess if you were assessing risk based on, you know, on a higher debt component, yes. Whether the company was in poor shape, I don't think so. But anyway... 445 MR. LYLE: I'm sorry, you're telling me that your financial position has not improved in the last several years? 446 MR. BLAKE: I think the financial position of the company has improved, if you're looking to the company having a higher debt -- or higher equity component and a lower debt component. If that's your measure, then I would say, yes. Was the company's earnings ability different at that point in time, and the rate of return, and so forth? I don't think so. 447 MR. LYLE: Well, the Board did find, in last year's decision, that your financial position has improved greatly in the past few years. Have you given any thought to whether it's an appropriate time to raise your deemed debt level? 448 MR. BLAKE: To raise our deemed debt level? 449 MR. LYLE: In other words, you're a lower risk than you were before. You could become more -- in your debt-equity, deemed debt-equity structure, more like other gas utilities, which have a higher deemed debt level than you currently have. 450 MR. BLAKE: They also have a very much higher actual debt level than we have. Their debt-to-equity ratio more closely resembles actual than ours does. 451 MR. LYLE: But do you believe it's fair for ratepayers to pay the higher return on equity component in rates when, in fact, the company is in a financial position that it could handle the higher debt level? 452 MR. BLAKE: I guess, you know, the answer is, I'm sure the company could handle a higher debt load than what it currently has. So the answer to your question is yes. But I'd like to also say that, you know, I don't think it's a reasonable approach that the company be assessed a higher -- a higher debt level when the difference between -- when the difference flows into unfunded debt at 5.5 percent and the shareholder is sitting there with a substantial equity position and he's earning 5.5 percent on that. I don't think that's -- I don't think that's a reasonable proposition either. 453 So I think that what we've got is we've got a balancing situation here where we're attempting to seek fairness and equity for both the customer, the consumers, and for the shareholder. And I think that that's the mandate of the Board, is to guard or to ensure that both those situations occur. 454 We spoke to Kathy McShane recently about possibly doing an equity study, and it was her opinion that it probably didn't need doing; she thought it would be a waste of time. So we spoke to her about possibly doing that for this hearing, and so we -- so, based on that, we said, Well, there's no use in us wasting money on an equity study that she thought unnecessary. 455 MR. LYLE: Well, what was it about the circumstances of the company that twigged you that maybe you should be talking to Kathy McShane? 456 MR. BLAKE: Well, over time the rates of returns changed, and there was a review of the process that established the returns that have been used for Enbridge. And we thought it might be timely to have our process reviewed to see whether it was still adequate and matched, and so forth. 457 And it was her opinion that it was unwarranted to do a study at this time, and that she felt that the current methodology was still appropriate. 458 MR. LYLE: One moment, please. 459 Those are all my questions, Mr. Chair. I don't know whether the Panel has any questions before we move on to Mr. Millar's cross-examination. 460 MR. CARR: No. We will reserve our questions until you have completed everything. Thanks. 461 MR. LYLE: Thank you, Mr. Chair. Then I'll hand it over to my colleague, Mr. Millar. 462 CROSS-EXAMINATION BY MR. MILLAR: 463 MR. MILLAR: Thank you, Mr. Lyle. 464 Again, by way of introduction, my name is Michael Millar. As most people here know, I'm very new to the Board; I've just started a month ago. So Staff has been very diligent in getting me into shape for this hearing. 465 But that being said, there's only so much they can do. So I'm going to ask people to bear with me a little bit. I'm very new to some of this material, and I'm going to be stumbling a little bit here and there, I imagine. But I don't want any of the blame for that to fall on the Staff, who have been excellent in getting me ready, so any errors are my own. 466 I have a number of topics to go through. Some of them, I think, will go very quickly, in fact; some of them we'll have to go into a little bit more deeply. 467 Mr. Chair, what time would we typically be taking lunch? 468 MR. CARR: My thought was sometime between 12 and 12:30. 469 MR. MILLAR: Okay. 470 MR. CARR: What is the first, sort of, module you have? 471 MR. MILLAR: Well, I think I have a few matters that can be done within the next half hour, 45 minutes, quite easily, and then I'd be getting into a topic that might require a little bit more -- going a little bit more in depth. So I would propose, depending on how the timing goes, perhaps after I've finished the two or three initial matters I have, that if that's convenient for the Board and for the panel of witnesses, we could break then? 472 MR. CARR: That sounds reasonable. 473 MR. MILLAR: Okay. 474 The first issue I'd like to touch on is, I understand there's been a change in the accounting policy with respect to meter maintenance. And just if I could explain a little further. 475 I understand that, and correct me if I am wrong, it's correct that for meter maintenance, you used to capitalize 100 percent of the costs of that; is that correct? 476 MR. McCALLUM: That's correct. 477 MR. MILLAR: Okay. And as of, I believe it was, 2003, you started to expense these costs? 478 MR. McCALLUM: We started to expense the portion of the costs that related to the repairs of the meters. 479 MR. MILLAR: Okay. And could you tell me why you made that change? 480 MR. McCALLUM: Well, when we were actually looking at the uniform system of accounts, we found that we should have been doing it that way all along. And we realized, after we started to take a look at the nature of some of what we were doing, we started to question whether those costs were providing any lasting benefit to the company, or to those meters, and we determined that they were not. 481 MR. MILLAR: And it was just -- the change was made in 2003. I guess the real question might have been why it was not done earlier. And I guess what you're saying is that you had to -- it was only at that time that you noticed that this was an appropriate change to make; is that correct? 482 MR. McCALLUM: That's correct. 483 MR. MILLAR: Okay. And I understand -- this is more of a housekeeping matter. Maybe you can just confirm for me. I'm looking at Exhibit I, tab 1, page 10 of 29. This is the Board Staff Interrogatory No. 9 -- Exhibit 9, I'm sorry. And could you just confirm for me that your anticipated meter maintenance costs for the 2005 test year are, in fact, $52,500? 484 MR. McCALLUM: Sorry, could you repeat the reference. 485 MR. MILLAR: It's Exhibit I, tab 1, page 10 of 29, and it's Interrogatory No. 9. In fact, I'm looking to the response for letter C. 486 MR. McCALLUM: Yes, that is correct. 487 MR. MILLAR: Okay. 488 Moving on, I'm going to touch on the capital projects. Now, there was actually a fair amount of change from the original filings and the updated filings with regard to capital projects for the 2005 test year. As I understand it, originally, there were two items listed under "Main Additions," and those were the Seville to Heritage line, and then down Richmond; and the other one was "Miscellaneous Additions"; is that correct? 489 MR. McCALLUM: That's correct. 490 MR. MILLAR: And in the updated filings, we now have a total of 10 main additions; is that correct? 491 MR. McCALLUM: Yes. 492 MR. MILLAR: So there's eight new projects? 493 MR. McCALLUM: Yes, there has been eight projects added to the list. 494 MR. MILLAR: I'm wondering if it might be helpful here, would these lines or the towns or the roads be shown on -- there was a map in Exhibit A, I think. Would it be helpful if we pulled out Exhibit A just so perhaps we could see where some of these items are? 495 I think that's Exhibit A5; is that correct? I'll start with a few questions about the projects that were in the original filing. I guess there's only one that's really listed, and that's Seville to Heritage line, and then down to Richmond, and I see the cost is estimated at $73,056. And I see the Town of Richmond here and I see Heritage. I don't -- is Seville a town or a hamlet? 496 MR. McCALLUM: It's just a location where the line starts. 497 MR. MILLAR: Oh, I see, so it doesn't refer to a town? 498 MR. BLAKE: It's a very small little collection of houses -- 499 MR. MILLAR: Okay. 500 MR. BLAKE: -- sort of commonly known in the area as Seville. 501 MR. MILLAR: Okay. But it's not large enough to warrant a town name on the map, or something like that. 502 MR. BLAKE: No, there's something like five houses there, I think. 503 On the map, if you were looking at the west extremity of that line, that would be where Seville is. 504 MR. MILLAR: Pardon me? Is that the Richmond -- the line by Richmond? 505 MR. BLAKE: If we're looking at that Richmond project -- 506 MR. MILLAR: Right. 507 MR. BLAKE: -- on the west end of that project, where it's joining to the existing pipe, is where Seville is located. 508 MR. MILLAR: Okay, now the way this project reads -- is this project, in fact, being conducted in two phases, or is this all one, one project? 509 MR. BLAKE: The portion that's on the map would be one project. There's going to be another leg at sometime in the future, probably in 2006 or 2007, which will join the Richmond project and the Red Oak project. 510 MR. MILLAR: Okay. 511 MR. BLAKE: But we've defined the economics of these projects separately. 512 MR. MILLAR: But that project wouldn't be included in the $73,000? That's something in the future? 513 MR. BLAKE: That's correct. The leg to join the two is a future project. 514 MR. MILLAR: Okay. And just -- I'm sorry if I'm being a little slow here. You're proposing to -- I see there's a Heritage and Richmond. Are you joining those two with a pipeline? I just see both their names in the line, and I'm wondering if -- 515 MR. BLAKE: That's all one project, that's all the Richmond project, that continuum of purple on the map is the Richmond project. Oh, I'm sorry. Maybe you're thinking of the Heritage one that's by Straffordville. 516 MR. MILLAR: Yes. Yes. Maybe I wasn't clear. 517 MR. BLAKE: That's a different project. 518 MR. McCALLUM: It's just on the same road. 519 MR. BLAKE: Just happens to be on the Heritage line. 520 MR. MILLAR: I see. So this all refers to a single project. Just to repeat, this line item refers to a single project? 521 MR. McCALLUM: Yes, it does. 522 MR. MILLAR: Okay. When do you anticipate you will begin this project? 523 MR. BLAKE: We're hoping sometime in the spring. 524 MR. MILLAR: Okay. 525 MR. BLAKE: Relatively, I would say, early spring to early summer. 526 MR. MILLAR: And just so I'm clear, fiscal 2005, in fact, started a couple of weeks ago? Does it start in October? 527 MR. BLAKE: Yes, you're correct. 528 MR. MILLAR: So we're already in fiscal 2005. 529 MR. BLAKE: Yes, you're correct. 530 MR. MILLAR: And again, you anticipate you'll start in the spring? 531 MR. BLAKE: Yes. 532 MR. MILLAR: And when do you think that project might be finished? 533 MR. BLAKE: Definitely before the heating season. So probably July, sometime in July, I would think. 534 MR. MILLAR: Okay, so in fiscal 2005. 535 MR. BLAKE: Yes. It hasn't been scheduled. These projects haven't necessarily all been structured or scheduled yet. 536 MR. MILLAR: So are you 100 percent certain that you'll be going ahead with this project? 537 MR. BLAKE: This one, we are. We have done all the market surveys, and so forth. So this project ranks very high on our list. 538 MR. MILLAR: And who does the actual work? Is it conducted by NRG or do you contract that out? 539 MR. BLAKE: Principally we do it with our own forces. Periodically, we hire subcontractors to do portions of the job. Some larger jobs, we hire a ploughing contractor, and sometimes drilling contractors. For example, on the Red Oak job, which is a 2004 project, we used TW Johnstone from London to -- we used their plough for one day, and I think their drilling crew was there for two or three days. 540 MR. MILLAR: So for this particular project, you anticipate you'll be using anyone outside of NRG to conduct any of the work? 541 MR. BLAKE: I would think that there would be some work conducted by other forces, yes. 542 MR. MILLAR: Have you already contacted these other organizations to see if they're available at that time, or have you entered any contracts, or anything like that? 543 MR. BLAKE: No. The -- what we do, with a couple of different firms, is we obtain, usually in the spring, prices for various work that they would do for us. Ploughing, for example, we have an hourly rate. Drilling, we have a footage rate, or a per-metre rate, depending on the size of the pipe we're putting in, 2-inch, 3-inch, 4-inch, 6-inch, whatever, we get per-foot prices or per-metre prices from them for that. 544 MR. MILLAR: Did you get any bids or quotes from these other organizations for what they might charge for the services you might need of them? 545 MR. BLAKE: For the total project? 546 MR. MILLAR: Yes. 547 MR. BLAKE: We didn't. We have, in the past, done it. In fact, we have a price for the Shackleton project now, which is substantially higher than what we anticipate we can do with our own crews. Our crews are not -- our staff is not unionized, and our labour rates are lower, probably because we're located in a smaller community. And much of our equipment, we've had for a number of years, so our operating costs for equipment may be lower as well. 548 MR. MILLAR: Okay. Thank you. 549 And looking at the second item that was on the original list of capital projects, it's called miscellaneous additions. Could you please just describe more fully what you mean by that? 550 MR. BLAKE: We have a number of customers who call us and request gas service who are not on the pipelines, who are -- for whom we'd have to build an extension off the line. And it's difficult to identify them, because they just sort of call you one day and say, you know, I'm building a new house or a barn or a tobacco set-up, or whatever, and I'd like to get natural gas extended down a side road or on a different road. So those projects all go into that pool of projects. 551 MR. MILLAR: So are any of these -- the cost is $25,000. Is this just in anticipation of these types of expenses? Or have there actually been people who have already requested that they be hooked up to the system, I guess? 552 MR. BLAKE: I don't think we have any drawn from that pool yet. But there will be some. In fact, I think there's a couple of small lines that aren't on this map -- the people that have called in the last week or so -- that we're anticipating there are going to be another couple of projects, already. 553 MR. MILLAR: So the $25,000, that figure is probably pretty much the same from year to year, it's just what you anticipate over the course of the year? 554 MR. BLAKE: I think we've been budgeting approximately the same amount year after year. 555 MR. McCALLUM: Except for 2004. 2004 we had a higher number than 2003. I believe in 2004 we were up at $35,000. That's pretty much actual now. 556 MR. MILLAR: And did that relate to -- there were new standards regarding oil tanks; is that correct? And people were switching to natural gas? 557 MR. McCALLUM: No, that didn't really have too much to do with it. It's just, as Mr. Blake had indicated, it's people called in and said, I've got a new house or I've just moved to the area, and I'm 400 metres or so from the end of your pipeline. And we do the economics on each one of those projects individually, and determine whether they're economic or not. 558 MR. MILLAR: Okay. Thank you. 559 MR. McCALLUM: For instance, in 2003, the actual for this miscellaneous category was almost 41,000. And all of these would be small main extensions. 560 MR. MILLAR: Okay. Moving on, now, to the eight new projects. I guess my first question is, the total amount for these new projects is $144,722; is that correct? 561 MR. McCALLUM: Subject to checking your math. 562 MR. MILLAR: You may wish to check my math, actually. But it's around that figure? Can you tell me why -- I mean, eight new projects is a fair number. Can you tell me why these were not included in the original filing? 563 MR. McCALLUM: Well, one of these, the first one on the list, was actually deferred from 2004 to 2005, that Springwater Road, north from Jaffa, is a 2004 project that is largely to serve one larger industrial customer. And we were not able to obtain a commitment from him in 2004, so that project has been deferred. So you would have seen that one on the list on the last go through. 564 MR. MILLAR: Okay. Now, what about the other seven? 565 MR. McCALLUM: Largely, these are dependent upon customer inquiries. Some of them are for system integrity. For instance, the line that's marked on the map, called "Creative," is largely to join up two ends of the pipeline system. And other projects, for instance, "Heritage," "Orange Hall", are to meet customer demands that have come to light since the original evidence was prepared. 566 MR. MILLAR: And what is the time lag between when the original evidence was prepared and we received the updates? Approximately? 567 MR. McCALLUM: The original evidence would have been -- the capital projects would have been gathered up in the winter, and then the updates for these capital projects would have been put together in August. 568 MR. MILLAR: Now, you may have to help me out a little bit here. Is it typical that there would be this many new additions in an update for a filing? 569 MR. McCALLUM: I'm not sure if it's typical or not. As I say, this -- we've evaluated each one of these projects independently to determine their economic worth based on customer interest, and we're very interested in pursuing all possible customer additions that are economical for the company. 570 MR. MILLAR: So I guess what you're saying is that there's no mystery here; it just happened that this is when these projects came up and they simply weren't available for the original filing? 571 MR. AIKEN: I'm just going to comment that some of these projects are driven by existing housing, not new building, and I think, you know, between last winter and, I guess, the August time frame, two things, as an economist, that I would see driving customer requests or inquiries would be all the media attention to electricity and electricity prices and, of course, what's going on with oil prices and the impact that has on home-heating fuel. So it may be atypical because of what's driving it. 572 MR. MILLAR: Thank you. 573 I propose -- I don't want to spend a whole lot of time on this, but I'd like to go through these very quickly, each one of them. 574 Mr. McCallum already spoke about the Springwater Road project, and I guess that was deferred from last year. We've already talked about Seville to Heritage. The Lyons line to West Dorchester Road to Horlick? 575 MR. BLAKE: That's following an inquiry from Mr. Horlick, a request for gas service from him, and there are, I believe, some other accounts on that road as well. 576 MR. MILLAR: Okay. I think I'll actually skip the next two, because they're only -- they're under $8,000 each. 577 Guysborough West County Road 55, that one is just over $20,000. What can you tell me about that? 578 MR. BLAKE: That is, again, generated from a customer inquiry, a customer -- actually, I spoke to one of the customers on that road, and he was actually -- the fellow that I contacted was the engineer who was working on this Lynwood subdivision for -- he was the site superintendent, or something like that, on the Lynwood subdivision project for the municipality, I guess, or the developer. And he said, you know, I live on Heritage line, near Guysborough. Why can't I have gas? And I said, Well, we'll have a look at that and send someone out. We found that there was a collection of houses there, and in contacting them, they were all interested and so that became a project. 579 So that project got generated probably in August, when we were doing that Lynwood subdivision in Aylmer. 580 MR. McCALLUM: And there was -- once we did the economics, we found there was 15 houses, one business, and one tobacco farmer along that particular route. 581 MR. MILLAR: And when do you anticipate starting this project? 582 MR. BLAKE: It will have to be complete before tobacco season next year to have -- to acquire that tobacco farm. 583 MR. MILLAR: And you haven't started it yet, so I -- 584 MR. BLAKE: No. 585 MR. MILLAR: -- assume you'll probably start it in the spring? 586 MR. BLAKE: No, we have not started it yet. The Shackleton project is underway right now. The locates were done, I think, yesterday or the day before. So it's the next one on the list. And the Red Oak project was actually delayed a little bit from -- and it's got two little parts of it that we've got left to do yet. So, although it's a 2004 project, it still has a couple of legs to do. And so as soon as those legs are done, the Shackleton project is done, then we'll start going through the rest of the list, depending on what the weather is. 587 MR. MILLAR: You spoke on this line about 15 houses, a small business, and a tobacco farmer; is that correct? 588 MR. McCALLUM: That's correct. 589 MR. MILLAR: And what is the tobacco farmer's share of the demand, approximately? 590 MR. McCALLUM: We would typically go in at the average use for a tobacco farmer, is how we would typically forecast it. So based on the average consumption that you see in section C is what we would use for the economic forecast. 591 MR. MILLAR: So, to ballpark it, would you guess 25 percent or 50 percent, or is it -- am I way off with those figures? 592 MR. BLAKE: The tobacco farmer's consumption occurs in the summer period when the residential farms -- or the residential houses, rather, are not using a substantial amount of gas. So tobacco is an offpeak load. 593 So, as a percentage of the demand on that line, I don't know what it is, and I can't, sitting here, tell you what the flowing capacity of that line would be. But the tobacco farmer would definitely be an offpeak-load customer. 594 MR. MILLAR: Okay. 595 MR. McCALLUM: It's approximately -- just over half of the total volume on that line would be associated with that tobacco farm. 596 MR. MILLAR: And do you anticipate that this project will pay for itself? 597 MR. McCALLUM: All of these projects are economic. This project has got a benefit-cost ratio of approximately 2. 598 MR. MILLAR: You spoke earlier, when speaking with Mr. Lyle, of the uncertainty in the tobacco industry. Had you given any thought or contemplated what might happen with regards to the profitability of this line if the tobacco farmer were to disappear, were to stop farming tobacco or what not, or not get his quota? 599 MR. McCALLUM: Well, in the forecast we didn't anticipate the tobacco farmer coming on until 2006, was the basic indication. Primarily, this line was to service residential customers. 600 MR. MILLAR: Okay. 601 MR. McCALLUM: So I have not done the economics on it without the tobacco farmer in there. 602 One of the other reasons for doing this project as well is to get some additional gas from one of those Union stations that's on the eastern edge of our franchise. You see along that Heritage line we're gradually closing it in. And what we'd like to do is, one of these future projects would be to completely infill that to take advantage of the larger capacity of that Union station. 603 MR. MILLAR: Thank you. 604 Okay. Moving along -- 605 MR. CARR: Mr. Millar, could we just interject just before you do. Mr. Vlahos had a clarification question. 606 MR. VLAHOS: Just a clarification, gentlemen. 607 Of all the capital projects that are listed here on Exhibit A5, tab 2, schedule 2, all of this will have an in-service date in the fiscal year? 608 MR. McCALLUM: That is the plan, yes. 609 MR. VLAHOS: An in-service date -- 610 MR. McCALLUM: Yes. 611 MR. VLAHOS: -- with gas actually flowing? 612 MR. McCALLUM: That is correct. 613 MR. VLAHOS: Thank you. 614 MR. CARR: Thank you. 615 MR. MILLAR: Moving quickly along, then, County Road 45 to Mount Salem, Mount Salem to Carlton, or to Calton -- I'm not sure if that's a typo or if it's Carlton. 616 MR. BLAKE: It's Calton, actually. 617 MR. MILLAR: Calton, okay. What can you tell me about that? 618 MR. BLAKE: I believe there's several customers on that road, but the primary purpose of that line is a reinforcement. We're, again, eventually attempting to fill in the blank, if you'd like, between Calton and Plank Road. It's difficult to see. I apologize for the map, the small printing. But Plank Road is the next road to the east that goes north and south, that main road there. So in 2006 or 2007, that space will be filled in as well, we anticipate. 619 MR. MILLAR: Okay. 620 MR. McCALLUM: There are approximately 27 customers along that road. 621 MR. MILLAR: All residential? 622 MR. BLAKE: Actually, a grain dryer -- 623 MR. McCALLUM: There's a small grain dryer along there as well, and one tobacco farm on that road. Again, we don't forecast 100 percent of those customers will connect. 624 MR. MILLAR: Okay. Thank you. 625 The next one is County Road 55 East to Houton Centre, and north to existing, and that's just under $30,000. Can you just briefly describe that project, please. 626 MR. BLAKE: Again, there are some houses on that project, but it is largely tobacco load-driven. And the farms on that section are all very established farms. We think that they will have good longevity in the industry, we hope. 627 MR. MILLAR: And what do they grow? These are tobacco farms? 628 MR. BLAKE: Tobacco is the primary focus of those. Maybe Mr. McCallum can give us the rundown on that. 629 MR. McCALLUM: There's another 25 houses along that road as well. 630 MR. MILLAR: Okay. 631 MR. McCALLUM: And two small commercial operations in some of those smaller communities, smaller commercial operations. 632 MR. BLAKE: If I can just add something else, as well. As part of our longer-term planning, we're looking at -- we're doing a survey of all the roads where we do not currently have gas supply. So that we make sure that we aren't leaving some of these collections of houses behind. And some of these projects came out of some of our early surveys. But we're currently conducting surveys of the rest of the roads in the area. And that will be incorporated in our long-term capital project plan, and hopefully that will assist us in better forecasting the projects over the next number of years. 633 Our first phase of that sort of a project was -- in the past year, we've actually identified the non-customers, or the customers, potential customers, on the existing pipelines, that don't currently have gas service. We've identified them, and we have them in a database now, and we can actually direct mail to them and that sort of thing. And so now we're working on developing that same sort of database, or expanding that database, on to the areas or the roads that we don't currently have gas line. 634 Some of the areas where there's probably going to be some expansion are -- in the northeast quadrant of the system, there's quite a large area that's totally unserviced. There's a village called Verschoyle there, unserviced, and that's probably another target, just to give you another example. 635 MR. MILLAR: Thank you. And just the final item here is Lyons Line East to Putnam Road and south to Putnam Road. This is just under $10,000, so a relatively small project. Can you just tell me a little bit about that? 636 MR. BLAKE: That's the project we call Shackleton on here, and that's the one I said was actually located and they're going to start installing the pipe, I believe, next week. 637 MR. MILLAR: Oh; is that right? 638 MR. BLAKE: That's a new home and a grain dryer. 639 MR. MILLAR: Can you install pipe in the winter? 640 MR. BLAKE: Typically not. 641 MR. MILLAR: Typically not. Or it would be more expensive, I presume, if you wanted to? 642 MR. BLAKE: We, as a rule, continue to run service lines up until the mid- to latter part of December. And then only in -- sort of, on an emergency basis, or an urgent basis, would we install during the winter. 643 MR. MILLAR: Okay. 644 MR. BLAKE: And then we start up, typically, again, in March or April. 645 MR. MILLAR: So of these - I guess there's nine listed projects here, plus the miscellaneous - how many have you actually begun? Is it just the Shackleton project? 646 MR. BLAKE: The Shackleton one will be the first. As I said, the Red Oak project was delayed slightly, and we've actually just been finishing it in the last week or two. 647 MR. MILLAR: You have a fairly ambitious program for expansion and capital projects for 2005. Are you confident that you can get them all finished in the 2005 fiscal year? 648 MR. BLAKE: I believe so. Most of the projects aren't major in terms of size of the pipeline. Most of them are smaller lines, 2-inch and that sort of thing. There are a couple that have larger pipe, but the 2-inch lines are much easier to put in than 4- or 6-inch lines. Just the ploughing and the ease of installation -- it's hard to believe the difference between the size of the pipe. 649 MR. MILLAR: Do you anticipate you'll be starting - and correct me if I've already missed one - but will you be starting any other ones before winter, aside from the Shackleton line? 650 MR. BLAKE: I would think that, if the weather holds, we would be trying for either the Lyons or the Ron McNeil one. 651 MR. MILLAR: You have two Lyons listed. There's one for 17,000 and one for 9,000. Which one were you referring to? 652 MR. McCALLUM: The Shackleton one is the one that's going ahead next week. 653 MR. MILLAR: Right. 654 MR. McCALLUM: And then the other one going west on Lyons line, just titled on the map "Lyons", would be the other one that we would look at. 655 MR. MILLAR: I see. Thank you. 656 MR. McCALLUM: Generally, in the fall, we're pretty busy putting in service lines. 657 MR. MILLAR: If I could direct your attention to Exhibit C5, tab 2, schedule 2. Do you have it? 658 MR. AIKEN: Yes, we have that. 659 MR. MILLAR: Okay. I notice that you've listed the number of new customers you will gain, or you anticipate gaining, from these new capital projects. For example, rate 1, you have 225 residential consumers. 660 MR. McCALLUM: That is not just from these new projects, that's also infill projects, as well. 661 MR. MILLAR: Oh, that's infill as well, okay. 662 MR. AIKEN: And also, to clarify, this is the net customer additions. These are not gross additions. It's gross, plus customers lost. 663 MR. MILLAR: Okay. Thank you. 664 You also have a number listed, for example, seasonal contract under your different rate categories. Can you tell me how many of these are tobacco-related? 665 MR. McCALLUM: They all are. That category is all tobacco. 666 MR. MILLAR: Seasonal is all -- 667 MR. McCALLUM: Yes, it is. 668 MR. MILLAR: Okay. And what about industrial, for example? 669 MR. AIKEN: Those are grain dryers. 670 MR. MILLAR: Okay. And you also have -- 671 MR. AIKEN: Sorry, rate 4 industrial are grain dryers. Rate 1 industrial are the small industrial customers. 672 MR. MILLAR: I see. And how many of the non-residential gross customer additions are tobacco-related? 673 MR. McCALLUM: Sorry, non-residential -- 674 MR. MILLAR: -- gross customer additions -- 675 MR. McCALLUM: -- are tobacco -- 676 MR. MILLAR: -- are tobacco-related, yes. 677 MR. McCALLUM: Just one moment. For 2005, it's the two that are listed there. 678 MR. MILLAR: Thank you. 679 MR. CARR: Could I just ask a clarifying thing there. I thought you said these were net figures. Your question related to gross. 680 MR. McCALLUM: Yes. 681 MR. AIKEN: Yes, no forecast of zero customer losses in the seasonal category for that year. 682 MR. MILLAR: Thank you. That concludes my questions on capital projects. 683 Mr. Chair, I think it's about 20 after 12 now. Are you happy to take a break now? 684 MR. CARR: Let's take a break now. Is one hour acceptable for you folks? You can do what you need in one hour? 685 MR. BUDD: It appears that most of the undertakings that will have to be dealt with later cannot be dealt with during lunch, so 1:15 is fine, or 1:30. 686 MR. CARR: Thank you. We'll reconvene at 1:15, then. 687 MR. BUDD: Thank you. 688 --- Luncheon recess taken at 12:18 p.m. 689 --- On resuming at 1:24 p.m. 690 MR. CARR: Thank you. Be seated. 691 Any preliminary matters? 692 PRELIMINARY MATTERS: 693 MR. STOLL: We have one preliminary matter. We have an response to Undertaking J.1.3, and I would ask Mr. McCallum to provide that information. 694 ORAL ANSWER TO UNDERTAKING NO. J.1.3: TO PROVIDE A BREAKDOWN OF COSTS RELATED TO A NUMBER OF OTHER LISTED PROCEEDINGS 695 MR. McCALLUM: That undertaking was to request a breakdown of the costs of other proceedings, including regulatory costs. 696 What we had included in there was the QRAMs for about four at $2,500 a piece, the new reporting and record-keeping requirements that are due to come in place January 1st, 2005. There was also an exemption application that NRG is going to be making with respect to that. We've estimated compliance costs and exemption costs to be about $10,000 as well. There is also another application that is about to be submitted regarding a change in control, and we've included $10,000 in costs with respect to that item. And the balance of $54,500 is related to the main rates proceeding. 697 MR. CARR: I believe you mentioned ARC, and what was the other one? 698 MR. McCALLUM: QRAM and the record-keeping requirements? 699 MR. CARR: No, there were two others, ARC and ... 700 MR. McCALLUM: The ARC was included in last year's costs. These were the costs for 2005. 701 MR. CARR: Your preliminary answer indicated those were there. What you're saying is, when you looked into it, they are not in the current file. 702 MR. McCALLUM: Those costs were included in 2004, for the ARC. The numbers I was giving were for 2005. 703 MR. CARR: GDAR was the other one I was trying to think of. 704 MR. McCALLUM: Yes. That was included in last year's as well. 705 MR. CARR: Okay. Thank you. 706 MR. VLAHOS: Mr. McCallum, what's this change of control? Did I hear that -- what is that proceeding or that expense? 707 MR. McCALLUM: That was for $10,000 in estimated costs. That is probably going to be filed within a week. We are waiting on some material that was requested by the Board prior to filing that. And that was just received, I believe, yesterday or the day before. 708 MR. VLAHOS: Sorry, I'm still lost. The change of control? This is NRG we're talking about, is it? 709 MR. McCALLUM: Yes. 710 MR. VLAHOS: Okay. So there's a pending application? 711 MR. McCALLUM: That's correct. 712 MR. VLAHOS: Okay. So the balance, then, for this hearing is -- what is it? 713 MR. McCALLUM: 54,500, excluding the OEB's cost. 714 MR. STOLL: That concludes the preliminary matters, so I'll turn it over. 715 MR. CARR: Thank you. 716 Do you have anything, Mr. Millar? 717 MR. MILLAR: No. 718 MR. CARR: So proceed. 719 MR. MILLAR: Thank you, Mr. Chair. 720 NATURAL RESOURCE GAS LIMITED PANEL 1 - BLAKE, McCALLUM, AIKEN: 721 B.BLAKE; Previously Sworn. 722 S.McCALLUM; Previously Sworn. 723 R.AIKEN; Previously Sworn. 724 CROSS-EXAMINATION BY MR. MILLAR: 725 MR. MILLAR: Just before the break, we finished off the topic of capital projects. 726 I'm going to move now on to the capital budget, and I'm going to be referring to a number of exhibits, so it may be helpful if you had them ready. The chief ones I'll be referring to are B3.2.1, B4.2.1, and B5.2.1. 727 Does everybody have those? 728 MR. McCALLUM: Yes, we do. 729 MR. MILLAR: Okay. Thank you. 730 In preparation for this hearing, I read through the transcripts of the previous hearing that was about a year ago, I understand, and one of the issues at that hearing was, there were some questions on a perception that NRG tends to overforecast its capital spending, perhaps, or it underspends on its capital budget. And there were a number of figures referred to from 2002, 2001, 2000. I'd just like to, perhaps, confirm a few of the figures. And please correct me if I am wrong. 731 For 2003, I believe the Board approved 134 -- or, pardon me, 1.34 million in capital -- in capital spending; however, NRG ended up spending $186,942 less than that approved amount; is that correct? 732 MR. AIKEN: That's correct. 733 MR. MILLAR: And if we look back, all the way back to 1998 - and if you disagree and you need to look up these figures, please let me know - but if we look at 2002, NRG actually overspent by $11,000; back to 2001, they underspent by almost $32,000; in 2000, it was $111,000; in 1999, in fact, they underspent by $410,000; and in 1998, it was just under $200,000. 734 So if you take the total difference between the Board-approved and the actual spending between 1998 and 2003, I've got a figure of -- you've underspent by $927,668. Does that sound accurate? 735 MR. McCALLUM: Subject to check, I'll take your word for it. 736 MR. MILLAR: If you wish to check -- if you wish, you can give an undertaking to check that. These are just figures I've pulled out of the evidence. So if it doesn't sound right, please, you're more than welcome to check them at a later time and come back. 737 MR. McCALLUM: Let's assume that they're right for now, and we'll see where we go with it. 738 MR. MILLAR: Okay. So, as I said, this was an issue at the last hearing, and I believe you three gentlemen were on the witness panel at the last hearing; is that correct? 739 MR. AIKEN: That's correct. 740 MR. MILLAR: And you remember that this -- I believe it was Mr. Lyle asked a few questions about this? 741 MR. AIKEN: Yes. 742 MR. MILLAR: Have you made any changes in your capital budget forecasting process since the last rate hearing? 743 MR. McCALLUM: Not substantially in terms of any major changes. We've tried to be a lot more definitive on the main projects, and not including them unless we are virtually certain that we're going to proceed with those projects. 744 MR. MILLAR: And the 2003 actual spending figures actually came after that hearing; is that correct? Those figures would not have been available at the last rates hearing, the actuals for 2003? 745 MR. AIKEN: We think that's correct. 746 MR. MILLAR: Or were they? I may be wrong. 747 MR. AIKEN: No, I think you're correct, yes. 748 MR. MILLAR: Okay. And in that year, again, we had a difference between the approved and the actuals of $186,942. How do you account for the fact that you still have a fairly significant difference between what was approved that year and what was actually spent? 749 MR. AIKEN: One of the reasons, if you you're looking at B3, tab 2, schedule 1, in the bottom right-hand corner, in that variance column, there's 54,000 variance there for meters. Virtually all of that 54,000 relates to the expensing that actually happened in 2003 rather than the capitalizing that was forecast at that point in time. 750 And I think some of that regulator variance, the 40,000, was for the same reason. I'm not -- I can't tell you the proportion of that 40,000. 751 MR. MILLAR: So, even taking that into account, we would still be left with a difference of approximately $91,000; is that correct? 752 MR. AIKEN: That's correct. And you can see from that variance column that there is basically 48,000 for main additions and just under 65,000 in the automotive category. 753 MR. MILLAR: So, just to make it very clear for me, the money that you had anticipated in spending on line additions, not all of that was spent in that year? 754 MR. AIKEN: That's correct. 755 MR. MILLAR: Or you didn't -- pardon me, if I could be more clear, you didn't spend as much as you anticipated spending on line additions in that year. 756 MR. AIKEN: That's correct. 757 MR. MILLAR: And thinking back to this morning, some of those projects were carried over into test year 2005; is that correct? Am I remembering that correctly? 758 MR. McCALLUM: There is one project from 2004, the Springwater Road project -- 759 MR. MILLAR: I see. 760 MR. McCALLUM: -- that's been moved to 2005. 761 MR. MILLAR: But that wasn't in 2003. 762 MR. McCALLUM: No. 763 MR. MILLAR: Okay. 764 I'd like to break down a little bit the -- for the sake of convenience, I'll call it $185,000, although the difference is really 186, closer to 187, but just for the sake of keeping some of the math a little more simple, let's say that the underspend was about $185,000 for 2003. Approximately $185,000. 765 Maybe you can help me with -- and I've had Ms. Litt help me with some calculations and I'll see if we all agree. I'm looking for some quantification of the revenue requirement impact of this underspending. So can you confirm for me that the return on $185,000 would be about $17,000? 766 MR. AIKEN: Yes. That would be approximately right, assuming that 186,000 was in rate base. But only half of that would actually have been in rate base. 767 MR. MILLAR: And, by the half, you mean the $91,000 that we had discussed? 768 MR. AIKEN: No. The capital expenditures -- if you spend $200,000 in capital expenditures in the test year -- 769 MR. MILLAR: Mm-hm. 770 MR. AIKEN: -- because rate base is defined as the average of the monthly averages, unless that 200,000 is spent in the first month, it goes into rate base right away. The averages -- if you spend the 200,000 equally over the course of a year, your average rate base is going to increase by 100,000, not the 200,000 that you spend. 771 MR. MILLAR: I understand. Okay. And that's assuming that the money is spent evenly over the 12 months? 772 MR. AIKEN: Well, if you're comparing it to the forecast, the forecast would have had that 200,000 going in evenly over the 12 months. 773 MR. MILLAR: Okay, I understand. So, actually, since -- if the rate of return on $185,000 is about $17,000, you're actually suggesting we should cut that in half. 774 MR. AIKEN: Yes. 775 MR. MILLAR: Okay. So that's $8,500, approximately. 776 MR. VLAHOS: Mr. Millar, if I may, for a minute. Mr. Aiken, why would you divide by 2 on this? You've got, say, $100,000, or, say, $90,000, which is half of the total under expenditure, and the rate base would attract a return of about 17 cents to a dollar. So why would you take the $17,000 and divide by 2? 777 MR. AIKEN: I'm not sure where you're getting the 17 cents on the dollar. 778 MR. VLAHOS: Well, one dollar in rate base, it's about 17 cents in terms of revenue requirement, the way it will be capitalized based on the company's proposal, and grossed up for taxes, is about 17 cents. 779 MR. AIKEN: I'm assuming that the 17,000 that has been referenced is based on the return on capital, alone. That there would be depreciation expense I would flow into that revenue requirement as well, but, basically, a return on capital of about 9 percent, or equity- and debt-weighted, 9, 9.2 or some percent, I think, works out to that $17,000 on the 185,000 of capital expenditures. 780 And I was just raising the point that the capital expenditures do not translate 1:1 to rate base. 781 MR. VLAHOS: No, I understand that. So if you have $185,000, that's not from day one. So you've got to assume throughout, even throughout the year. Therefore the impact on rate base is about half. 782 MR. AIKEN: That's right. 783 MR. VLAHOS: Okay. So you take that half of 185, whatever the number is, 90-something, and then try to calculate the impact -- the revenue requirement change, because of the $90,000 adjustment, it would be about 17,000. It would not be half that amount. In any event -- 784 MR. AIKEN: -- it would be the after-tax. I'm assuming, I'm dealing with the after-tax amounts, and I think you're dealing with the pretax -- 785 MR. VLAHOS: -- well, if it's revenue requirement, it has to be before tax. In terms of the impact on rates and customers, we have to gross it up. So it has to be before tax. In any event -- 786 MR. AIKEN: Well, okay. 787 MR. VLAHOS: Sorry, Mr. Millar. 788 MR. MILLAR: No, please interrupt whenever you have any questions that I haven't -- that I haven't explored enough for you. So, sorry. 789 Continuing on, I think we agreed that the return on $185,000 would be about $17,000, and then divide that by 2, to take into account that it was spent over a year, we would get $8,500. The depreciation on $185,000, by Ms. Litt's calculations, actually, would come to about $7,500, and again, dividing that by 2, you would get $3,800; does that sound correct? 790 MR. AIKEN: You wouldn't divide the depreciation expense by 2 because the depreciation is based on the year-end balances. 791 MR. MILLAR: Okay. 792 MR. AIKEN: But I agree with the $7,500. 793 MR. MILLAR: Okay, so it's actually 7,500. My mistake. So the total, the total net sufficiency, therefore, would be $8,500 plus $7500, which is $16,000; is that correct? 794 MR. AIKEN: Yes. 795 MR. MILLAR: What marginal tax rate would you apply to that figure? Again, that's the $16,000. 796 MR. AIKEN: The marginal tax rate for 2003 would have been, I believe, if I'm adding this up correctly, 37.12 percent. 797 MR. MILLAR: So, correct me if I am wrong, that's about, approximately $6,000 off of 16,000. 798 MR. AIKEN: Yes. 799 MR. MILLAR: Okay. And pardon me, but adding up all of these figures, in the end, we get a figure of approximately $22,000, then. 800 MR. AIKEN: As far as the analysis goes, yes. There would be, as mentioned before, some of it is because of the main additions -- 801 MR. MILLAR: Right. 802 MR. AIKEN: -- being done. So there would be lost revenue from what was forecast if those customers weren't added. And on the tax side, you would have the capital cost allowance. That would be reduced, because you didn't spend that 185,000. 803 MR. MILLAR: Okay. But the total gross sufficiency -- 804 MR. AIKEN: -- also on property taxes, less pipeline and service, so the property taxes would be lower. 805 MR. MILLAR: Okay. I understand that, but the total gross sufficiency is just under $22,000. 806 MR. AIKEN: Yeah. I think I could accept that, yes. 807 MR. MILLAR: Okay. Subject to any questions the Board may have, I'd like to move on to the next topic. 808 MR. CARR: Carry on. 809 MR. MILLAR: I'm going to be dealing now with depreciation. And just to get us started, can you please confirm for me that the depreciation expense for the 2005 test year is $677,250? 810 MR. AIKEN: 677,250, yes. 811 MR. MILLAR: Yes. Okay. And I believe the -- in the 2004 bridge year, the amount was $556,275? 812 MR. AIKEN: That's correct. 813 MR. MILLAR: And just for the sake of the record, these figures are taken from the 2005 test year as Exhibit D5, tab 1, schedule 1. And updated, pardon me. And for the 2004 bridge year, it's Exhibit D4, tab 1, schedule 1, and that's updated, as well. 814 So can you confirm for me that there's a $120,975 greater depreciation in the 2005 test year than there was in the 2004 bridge amount? And that's just subtracting the one figure from the other. 815 MR. AIKEN: Sorry, could you repeat that number. 816 MR. MILLAR: Yes, I'm sorry. If we take that the -- in 2005, the figure is 677,250; in 2004, it's 556,275. The deficiency in 2005 is $120,975 greater than it was in 2004. 817 MR. AIKEN: That's correct. And that figure's actually shown on Exhibit D5, tab 4, schedule 2, updated. 818 MR. MILLAR: Okay. And I think we've already discussed this point, but can you confirm for me that the net revenue deficiency for 2005 is $190,107? I believe we discussed that this morning. 819 MR. AIKEN: Yes. That revenue deficiency, 190,107. 820 MR. MILLAR: Okay. So the difference -- the $120,975, which is the difference between 2004 and 2005, correct me if I am wrong, that makes up 63 percent of the net revenue deficiency? 821 MR. AIKEN: Yes, I'd accept that. 822 MR. MILLAR: Okay. And we'll get into the legal costs a little bit later, but if you can just confirm for me right now that you're anticipating spending $175,000 on an appeal of another OEB decision? 823 MR. AIKEN: That's correct. 824 MR. MILLAR: So, if we were to ignore that amount, and we were to subtract that amount from the deficiency, and just for -- just as a hypothetical, if we were to subtract that, then we would actually have the difference between the $120,975, that's actually 800 percent of the net revenue deficiency; is that correct? 825 MR. AIKEN: Sorry, could you go over those again. 826 MR. MILLAR: Sorry, maybe I wasn't clear on that. If you subtract the legal fees from the net revenue deficiency, you're left with just over $15,000; is that correct? 827 MR. AIKEN: That's correct. 828 MR. MILLAR: So $15,107, I believe. 829 MR. AIKEN: Yes. And that's ignoring the tax impact of removing the $175,000 expense. 830 MR. MILLAR: Okay. But if we work with that figure, and then we look at the $121,000 difference between 2004 and 2005 in the depreciation, that's actually eight times -- approximately eight times the amount of the deficiency. 831 MR. AIKEN: If for some reason -- 832 MR. MILLAR: Before taxes. 833 MR. AIKEN: Yes. If, for some reason, you could lock in depreciation at the previous year's value, yes. 834 MR. MILLAR: Okay. I understand there's been a new depreciation study that's been submitted with this application; is that correct? 835 MR. AIKEN: That's correct. 836 MR. MILLAR: And why was this depreciation study done for this year? 837 MR. AIKEN: It's been general regulatory practice to file a depreciation study roughly every five years. NRG's last depreciation study was done more than five years ago, I believe. It was filed in EBRO 496, which was December of 1997. 838 MR. MILLAR: Okay. 839 MR. AIKEN: So NRG was overdue for an update. 840 MR. MILLAR: So there were no critical events or anything like that; it's just a process that you like to -- that should be conducted about every five years? 841 MR. AIKEN: That's correct. And I believe in the last proceeding as well, either the Board or Board Staff had indicated that they would want to see a depreciation study in NRG's next rates filing. 842 MR. MILLAR: Okay. Can you tell me how much this study cost? I understand -- did you conduct this study? 843 MR. AIKEN: I did. 844 MR. MILLAR: And how much did it cost? 845 MR. AIKEN: I'm trying to think how long it would have taken me to do it. I would estimate that it would have been under $4,000. 846 MR. MILLAR: 4,000? 847 MR. AIKEN: Yes. 848 MR. MILLAR: I'm just looking at Exhibit D5, tab 3, schedule 1, updated, and I note that there's an entry for $40,000 under "Consulting Fees". 849 MR. AIKEN: Sorry, which schedule are you looking at? 850 MR. MILLAR: This is D5, tab 3, schedule 1. 851 MR. AIKEN: Yes. 852 MR. MILLAR: And you'll note that there's an entry for $40,000 under "Consulting Fees". 853 MR. AIKEN: Yes. 854 MR. MILLAR: So I guess this study is only a small portion of those fees. 855 MR. AIKEN: No. Actually, my fees are under "Regulatory Consulting". That 40,000 for consulting fees are for non-regulatory consulting fees. 856 MR. MILLAR: I see. So, looking at schedule 2, then, Exhibit 5, tab 3, schedule 2 -- 857 MR. AIKEN: Yes. 858 MR. MILLAR: -- the consulting fees there are listed at $35,100? 859 MR. AIKEN: Yes. 860 MR. MILLAR: And again, you've said that this study was about $4,000 from that figure? 861 MR. AIKEN: That's my -- 862 MR. MILLAR: Approximately? 863 MR. AIKEN: -- best guess, yes. 864 MR. MILLAR: Okay. Thank you. 865 So that would be the direct cost of the study. Were there any indirect costs of the study? For example, were any staff from NRG involved in creating this report? 866 MR. McCALLUM: They were very minimal. 867 MR. MILLAR: Okay. Thank you. 868 If we could go back to the increase in the depreciation expense. I'm not sure what the best way we should go about this is. I may require an undertaking here, or you may be able to do it relatively quickly. But my question is: When we look at the change in the depreciation expense from 2004 to 2005, how much of that change is due to changes in assets and how much is due to changes in the depreciation rates? 869 MR. AIKEN: The amount due to the change in the depreciation rates is $79,905. The remainder is due to the change in the level of assets. And that's found in the response to Board Staff Interrogatory No. 20, specifically, the 79,905, which is at Exhibit I, tab 1, page 21 of 29, updated. Also referenced in the actual depreciation study at D2, tab 1, schedule 1, page 2, updated. 870 MR. MILLAR: Thank you. So -- sorry. 871 If we look at the change in the depreciation rate, you said it's just over $79,000; is that right? 872 MR. AIKEN: That's right. 873 MR. MILLAR: And that's about 66 percent of the total? 874 MR. AIKEN: Yes. 875 MR. MILLAR: Okay. Thank you. 876 Now, I understand, in drafting the depreciation study, you would have used the findings of both Enbridge and Union's depreciation studies as -- I don't know if they were a guideline, but you would have made reference to them in creating your report? 877 MR. AIKEN: Yes. In a number of categories, their parameters are used as guidelines. 878 MR. MILLAR: Can you give some examples of what parameters? 879 MR. AIKEN: For example, the life of a plastic main, the salvage value of a plastic main, those are areas where, because of NRG's new age of its pipeline, it doesn't have a whole lot of experience, so we tend to use the average of what Union and Enbridge have had approved. 880 MR. MILLAR: Okay. And I understand from some of the questions earlier this morning that NRG has a relatively new physical plant; is that correct? And I think you've just said that now. 881 MR. AIKEN: Yes. 882 MR. MILLAR: And I'm guessing here, so correct me if I am wrong, but Enbridge and Union have comparably older facilities? 883 MR. AIKEN: I would suspect, on average, yes. 884 MR. MILLAR: Okay. Now, you've said you've used some of their -- as a guideline, some of their figures for life of mains and salvage values and whatnot. Do you see any problem with the comparable difference in ages of the facilities and perhaps the figures wouldn't match up? 885 MR. AIKEN: No, because the age is the age, whether it was, you know, put in 20 years ago or put in two years ago. 886 MR. MILLAR: Okay. 887 MR. AIKEN: Similarly, with the salvage value, that's the value or the cost of removing that main, in this case, you know, 50 years in the future, whenever that pipeline is replaced. 888 MR. MILLAR: Okay. So it's your opinion the age doesn't really matter? 889 MR. AIKEN: No. No. 890 MR. MILLAR: Do you know of any differences in the way that the physical plants are maintained between NRG and Enbridge, or Union? For example, that might affect the lifetime of the asset? 891 MR. AIKEN: Which assets are you speaking of, specifically? 892 MR. MILLAR: Plastic mains, for example, and services? 893 MR. BLAKE: I would think it's very similar. There's very little maintenance involved with the pipe after it's buried, and so forth, so it would be very little. 894 MR. MILLAR: Thank you. I think you've already partially answered this question, but can you tell me a little bit more about how your salvage costs were estimated? 895 MR. AIKEN: It depends on the account category. For the category where NRG has experience, their experience has been used. Where they don't have a lot of experience, on things like retirements of plastic mains, I've used the average of the values used by Union and Enbridge in their most recent depreciation studies. 896 MR. MILLAR: Okay. And do you know what the Enbridge and Union salvage cost estimates are based upon? 897 MR. AIKEN: Well, it's based upon their depreciation studies that have been done in the last number of years. I don't think I could comment on what's in those depreciation studies as to how they came up with those numbers. 898 MR. MILLAR: Okay. The new study proposes that three classes change from straight-line depreciation to declining-balance; is that correct? 899 MR. AIKEN: I believe that's correct; yes. 900 MR. MILLAR: And if I could just list them, I think they're franchises, computers and software? 901 MR. AIKEN: Yes. 902 MR. MILLAR: Can you tell me why? Why you propose this change? 903 MR. AIKEN: For the hardware and the software, using the straight-line approach, we had essentially written off those assets; they were fully depreciated. And so any time that NRG would add additional assets in those two categories, using a straight-line approach of 20 percent, I believe the old number was, or something in that neighbourhood, unless they added more than that 20 percent on to their capital assets, their full expense would be depreciated in the first year. And the declining balance spreads that out over a shorter period, but with less in the first year. 904 And it was more like -- follows more closely with the CCA approach, especially on assets of this type, which seem to be having a shorter and shorter life period. In the old days, computers may have lasted five years. Today they're lucky if they do last three. 905 On the franchises, we moved to the amortization approach because of the limited number of franchise agreements. And the value of each of those is known, historically, and they all have different time periods. So rather than grouping them as one asset, and recovering them over some sort of weighted average life, we basically looked at amortizing those costs over each individual franchise cost. And it worked out to, what is it? 1/11th, I believe, something in that neighbourhood. 906 MR. MILLAR: Okay. Thank you. 907 I have a relatively minor matter to deal with. If you would turn to Exhibit D2, tab 1, schedule 1, page 5 of 12. 908 MR. AIKEN: Update or original? 909 MR. MILLAR: Updated. Sorry. I note that at line 13 -- well, starting at line 12, the sentence reads: 910 "The dollar-weighted remaining life of the franchise agreements at the end of fiscal 2004 is approximately 11 years." 911 MR. AIKEN: Yes. 912 MR. MILLAR: I note that at Exhibit A, tab 4, schedule 1 -- 913 MR. AIKEN: -- yes, the average life there is 9.2. 914 MR. MILLAR: -- is 9.2. I'm wondering if you can reconcile those two numbers? 915 MR. AIKEN: In Exhibit A, tab 4, schedule 1, that 9.2 is a straight average. And in the updated D2, tab 1, schedule 1, page 5, it's a dollar-weighted average life. 916 MR. MILLAR: Thank you. If we look to Exhibit D2, tab 1, schedule 1, page 6 of 12, and this is updated -- I'm a looking at account 475, steel mains. You have the remaining life listed as five years. 917 MR. AIKEN: Yes. 918 MR. MILLAR: I have a copy before me of the previous depreciation study. And I don't think we have enough copies of this, actually, so I may have to show it to you. 919 But a question that arose is: In that study, account 475, steel mains, the same category, you also have a remaining life of five years. So I'm wondering if, since six years have passed since this study, if there shouldn't be some difference in the remaining life of the steel, of the steel mains. Are you able to reconcile that? And would it be helpful -- I mean, Ms. Litt can show you the previous study, and perhaps the Board as well. I apologize, we didn't have copies made. 920 And just to repeat the question, are you able to explain why the number is the same in both of the studies? 921 MR. McCALLUM: The initial study that was done, that was just circulated, was dealing with the steel mains that were buried in the ground. And that project has largely been completed. All those steel mains have been converted to plastic in the intervening years. What is left in this account is some steel that we found that was not included in that initial study. And this steel is largely attached to bridge crossings. And those are slated to be replaced over the next five years by boring underneath those rivers that the bridges are attached to, or that the steel is attached to. 922 MR. MILLAR: So actually it's just a coincidence that it's five years in both studies? 923 MR. McCALLUM: That's correct. 924 MR. MILLAR: Thank you. Looking again at Exhibit D2, tab 1, schedule 1, page 7 of 12, and this is updated. I think this is probably just a typo, but under account 478, meters, I see the total cost reads as $21,562,151? I assume that's supposed to be $1,562,151? 925 MR. AIKEN: I think that would be much closer to the real number, yes. 926 MR. MILLAR: Okay. Thank you. I just wanted to confirm that. And I think if you work through the calculations it works out that the number is, in fact, $1.562 million, so I just wanted -- just as a housekeeping matter. 927 If I could direct your attention to Exhibit D2, tab 1, schedule 1, page 9 of 12, and this is updated again, under account 484, automotive, the remaining life is listed as 3.24 years. Do you see that? 928 MR. AIKEN: Yes. 929 MR. MILLAR: If you turn, then, to Exhibit D5, tab 4, schedule 1, and that's updated, again, in the fixed assets column, you have "automotive", and the assets at cost is listed at $432,602. 930 MR. AIKEN: Yes. 931 MR. MILLAR: If you follow that line along all the way to accumulated depreciation, which is the second-last line entry, it reads as $56,529. 932 MR. AIKEN: Yes. 933 MR. MILLAR: Using the first figure I referred to, the 3.24 years, that assumes that the asset is approximately 50 percent depreciated; is that correct? 3.24 of seven years? 934 MR. AIKEN: Yes. That would be the case, yes. 935 MR. MILLAR: But if we look at the second exhibit to which I referred, it's only depreciated by approximately 13 percent? 936 MR. AIKEN: I will take that, subject to check, yes. 937 MR. MILLAR: Okay. 938 MR. AIKEN: Yes. 939 MR. MILLAR: Can you explain why these two figures don't -- I would think they should match up? 940 MR. AIKEN: No, they won't match up, because, back on page 9 of 12, you can see there that the service life of seven years, with an average remaining life of 3.24. So, as you indicated, that would indicate that that asset should be more than 50 percent depreciated. And yet, when you look at lines 5 and 6, you'll see a total cost of 414,000, and a remaining net book value of 306. So the actual depreciation has only been, roughly, 25 percent, as a starting point. I believe these are fiscal 2003 numbers, end of fiscal 2003. And that's one of the reasons that is driving that increase in that depreciation rate. The existing depreciation rate isn't depreciating that asset quickly enough to match what's actually happening. 941 MR. MILLAR: You may have to help me out a little bit here. Are you saying that the total service life is not, in fact, seven years, then? 942 MR. AIKEN: No, I'm saying that the total service life is seven years. The average age indicates that the vehicles should be 50 percent depreciated, or perhaps a little bit more, at the end of 2003, which is what page 9 of 12 on D2, tab 1, schedule 1, is based on. Those assets were only approximately 25 percent depreciated. And that's the result of a depreciation rate that is too low. And, as I indicated, that's one of the factors that's driving that increase in that depreciation rate for that category. 943 MR. MILLAR: Could I have you turn to Exhibit D3, tab 4, schedule 1. And these are the 2003 depreciation expenses, the actuals? 944 MR. AIKEN: Yes, I have that. 945 MR. MILLAR: And if we look under automotive again, the assets cost is 368,000, just over $368,000. And the accumulated depreciation is $102,689. So that's about, not quite a third. 946 MR. AIKEN: Yes. 947 MR. MILLAR: Shouldn't that reconcile to what you calculated in the depreciation study? 948 MR. AIKEN: What do you mean by reconcile? 949 MR. MILLAR: Well, shouldn't these figures be reflected in the new depreciation study? 950 MR. AIKEN: I believe you're right. I think we might have to take an undertaking to provide a reconciliation of those two sets of numbers. 951 MR. MILLAR: Okay. Thank you. So this would be Undertaking J.1.7. And it's an undertaking to reconcile the figures in Exhibit D5, tab 4, schedule 1, updated, with the figures in Exhibit D2, tab 1, schedule 9, page 9 of 12, updated. 952 MR. AIKEN: Schedule 1, page 9. 953 MR. MILLAR: Schedule 1. Pardon me. Schedule 1, page 9, updated. 954 UNDERTAKING NO. J.1.7: TO PREPARE AND PROVIDE A RECONCILIATION BETWEEN THE DEPRECIATION FIGURES CONTAINED IN EXHIBIT D5, TAB 4, SCHEDULE 1 (UPDATED) AND THOSE IN EXHIBIT D2, TAB 1, SCHEDULE 1, PAGE 9 OF 12 (UPDATED) 955 MR. MILLAR: Okay. Moving on. You've provided just this morning an updated version of Exhibit D4, tab 4, schedule 1. I'm going to be referring to that as well Exhibit D5, tab 4, schedule 1, and Exhibit D3, tab 4, schedule 1. 956 One of the things the Staff noticed when they were reviewing this application and the new depreciation study is, overall, the new depreciation study tends to increase the depreciation rate. However, if we look over the last three years, 2003, 2004, and 2005, I guess, starting at 2003, which is Exhibit D3, tab 4, schedule 1, assets were -- if you look under "disposals", I note that assets were disposed for $97,349 but the cost to write the asset out of the rate base was $81,195, for a difference of approximately $16,000. And, correct me if I am wrong, that means that the asset was over-depreciated over its life, because you ended up, on a whole, selling them for more than what their book value was, or disposing of them for more than what their book value was; is that correct? 957 MR. AIKEN: I don't believe so. What that indicates is, what's recorded in the disposal column is the original cost -- let's take an automobile, as an example: That's the original cost of the automobile that's being removed from gross cost. On the adjustment to accumulated depreciation, you're also removing that same amount, less the trade-in value. For some of the other categories, it's a little bit more complicated because you're adjusting accumulated depreciation for the original value and the trade-in value, or the salvage value, plus any removal costs, when you come to service lines or main additions. 958 Because this is a grouped asset approach, we don't track and basically write off a net book value of an individual asset when it's disposed of. 959 MR. MILLAR: So you're saying that those -- the disposals column and the adjusted accumulated depreciation column, those aren't meant to match up? Those shouldn't match up? 960 MR. AIKEN: No. They would only match up if there were no salvage value and/or -- sorry, and removal cost associated with those assets that are disposed of. 961 MR. MILLAR: Oh, I see. So the disposals is not the sale price. 962 MR. AIKEN: No. The disposals is the original purchase price. 963 MR. MILLAR: Oh, I see. I see. Is the sale price located anywhere within the filings? 964 MR. AIKEN: The sale price shows up in the adjustments to accumulated depreciation; in other words, it's the sale price or the salvage value. If you trade in a vehicle, and you trade it in and you get $4,000 for it, that 4,000 is part of the adjustments to accumulated depreciation on the disposal of that vehicle. 965 MR. MILLAR: If an asset is disposed of for a gain, are we able to discern that from any of the data in this table, or any other table that was part of the filings? 966 MR. AIKEN: Individual asset, no. No. 967 MR. MILLAR: Thank you. 968 MR. AIKEN: I can confirm for you that there are no gains in any of these disposals. 969 MR. MILLAR: Thank you. Okay. Those are my questions on depreciation. 970 Does the Board have any questions they'd like to ask on that before I move along? 971 MR. CARR: No. 972 MR. MILLAR: Okay. The next topic - this one should go a little more quickly, I think - is procurement from affiliates. 973 I understand that NRG has three affiliates; is that correct? Or maybe there's more. I have three listed here: NRG Corp., Cornerstone Properties Inc., and Ayerswood Development Corporation. 974 MR. McCALLUM: Those are the three affiliates that we have transactions with, yes. 975 MR. MILLAR: Okay. And could you tell me, just very briefly, what these three companies deal in? NRG Corp.? 976 MR. McCALLUM: NRG Corp. is an oil and gas exploration and development company. 977 MR. MILLAR: And do they sell gas to NRG Inc.? 978 MR. McCALLUM: NRG Limited? 979 MR. MILLAR: NRG Limited, sorry. 980 MR. McCALLUM: Yes, they do. 981 MR. MILLAR: And what is Cornerstone Properties? 982 MR. McCALLUM: They do property management. 983 MR. MILLAR: And Ayerswood Development? 984 MR. McCALLUM: Is a construction company. 985 MR. MILLAR: Okay. We spoke about this a little bit earlier, but I understand that NRG has received exemptions from certain provisions of the Affiliate Relationships Code. 986 MR. McCALLUM: That is correct, yes. 987 MR. MILLAR: And I have four listed here. Again, I don't have the -- oh, actually, I do have the Affiliate Relationships Code, but I'm just going list them and you can tell me if I'm wrong, I guess. I don't think we have to go into them. It's 2.1.3, 2.2.1, 2.2.2, and 2.2.3. Does that sound right? 988 MR. McCALLUM: I'd have to know what those -- 989 MR. MILLAR: Well, 2.1.3 is requiring that two-thirds of the board of directors be independent, and you've got an exemption from that? 990 MR. McCALLUM: Yes. 991 MR. MILLAR: And 2.2.1 is -- I'm sorry -- 2.1.3 is an exemption requirement from -- the requirement that two-thirds of the board of directors be independent. 992 2.1.1, you've received an exemption from the requirement that service agreements govern affiliate transactions? 993 MR. McCALLUM: Yes. 994 MR. MILLAR: 2.2.2, the requirement of a competitive review per section 5900 of the CICA handbook? 995 MR. McCALLUM: That's correct. 996 MR. MILLAR: Compliance, pardon me. And 2.2.3 is prohibiting the sharing of an employee with access to confidential utility information; you've received an exemption from that? 997 MR. McCALLUM: That's also correct. 998 MR. MILLAR: Did you receive exemptions from any other provisions? 999 MR. McCALLUM: Those were the only ones that I recall in the application. 1000 MR. MILLAR: Okay. 1001 Can you please confirm for me that you will, in fact, be dealing with the three affiliates we spoke of throughout the test year? 1002 MR. McCALLUM: We will be dealing with Cornerstone; we will be dealing with NRG Corp. I don't believe there's any intention to deal with Ayerswood as it was a one-time project. 1003 MR. MILLAR: I see. And you spoke generally of the services that those affiliates provide. Will you be receiving any additional goods or services from these affiliates that we didn't discuss just a few moments ago? 1004 MR. McCALLUM: These services that are provided by Cornerstone are included in the management fee, and they provide -- that management fee covers off my services; it covers off some other financial services that we receive from Cornerstone. And the list of services that we do receive is listed in section A. 1005 MR. MILLAR: And I understand you also provide services for NRG Corp., maintenance work; is that correct? 1006 MR. McCALLUM: That's correct. 1007 MR. MILLAR: Okay. And we just discussed the four provisions of the ARC that you're exempt from. I presume that means that you're bound by the rest of the Affiliate Relationships Code? 1008 MR. McCALLUM: We try to be, yes. 1009 MR. MILLAR: Well, can you tell me that you do follow the Affiliate Relationships Code outside of those four provisions? 1010 MR. McCALLUM: Yes. 1011 MR. MILLAR: Okay. Thank you. 1012 My next topic is going to be property taxes. I'm going to be looking at a number of exhibits, D3.5.1, D4.5.1, and D5.5.1. 1013 If we look at the first one, Exhibit D3.5.1, can you confirm for me that the actual amount spent on property taxes in that year was $267,083? 1014 MR. AIKEN: Yes. 1015 MR. MILLAR: And if we look to 2004, which I believe is Exhibit D4.5.1, the updated figure is $267,719? 1016 MR. AIKEN: That's correct. 1017 MR. MILLAR: And, correct me if I am wrong, that's nine months of actual and three months of budget, that figure? 1018 MR. AIKEN: Yes, it is. 1019 MR. MILLAR: And if we look to 2005, the updated forecast is for $287,639. 1020 MR. AIKEN: Yes. 1021 MR. MILLAR: So we're looking at an increase of approximately $20,000? 1022 MR. AIKEN: Yes. 1023 MR. MILLAR: Can you explain to me where the increase has come from, the $20,000 increase? 1024 MR. AIKEN: There are two drivers of that increase. One is the capital projects. If you remember back on the map that we were looking at earlier today, the property taxes are based on the metres of pipeline. And you'll recognize that in 2005, there were significant additions in terms of length compared to what, you know, the projects were in 2004. That's the one driver. 1025 The other driver is a projected increase in the tax rate that gets applied to those asset values. I believe we're forecasting a 2 percent increase in the tax rate. 1026 MR. MILLAR: Is that in each municipality? 1027 MR. AIKEN: Yes, we don't forecast each municipality separately. In aggregate, we're forecasting a 2 percent increase in the tax rates. 1028 MR. MILLAR: As of today's date, have any of the municipalities yet passed a by-law that would authorize that -- authorize a tax increase? 1029 MR. AIKEN: I don't believe so, because most of them don't start their budget process until later this year -- 1030 MR. MILLAR: Okay. 1031 MR. AIKEN: -- for 2005. 1032 MR. MILLAR: Okay. Talking about the first driver, you indicated that since you would only have more metres of pipeline in the ground, that will would attract an increase in property taxes, and you referred again to the map that we looked at this morning. 1033 When we're talking about the new pipeline, and just to make sure we're talking about the same thing, as of today, that pipe is not in the ground. Is that correct? Or is some of it already in the ground? 1034 MR. AIKEN: For 2005? 1035 MR. MILLAR: For 2005. 1036 MR. AIKEN: It's not in the ground yet. 1037 MR. MILLAR: Okay. So this $20,000 -- this $20,000 increase is assuming two things: The first is that all of the capital projects that you have scheduled for this year are completed, and those are the ones we talked about this morning -- 1038 MR. AIKEN: Yes. 1039 MR. MILLAR: -- the ten capital projects; and the second assumption is that, on aggregate, property taxes go up about 2 percent. 1040 MR. AIKEN: The tax rate, yes. 1041 MR. MILLAR: The tax rate. 1042 MR. MILLAR: Okay. Thank you. 1043 Moving right along, the next topic will be cost-allocation changes. Can you confirm for me that a comprehensive cost-allocation study was filed with the previous rates application? 1044 MR. AIKEN: Could you define "comprehensive?" What was filed at the previous -- 1045 MR. MILLAR: Maybe you can tell me what was filed. 1046 MR. AIKEN: Yeah. Basically, the same thing was filed at the previous rates hearing as is being filed here, which is the previous go-round of the cost-allocation model updated for, basically, I think there are three specific things; the zero-intercept study gets updated every time, and I'm at a loss for the other two. But I believe they're listed in here. 1047 MR. MILLAR: The coincident/non-coincident factors? 1048 MR. AIKEN: Yes. Those are the other things that are normally updated every time. And this time around, there was the functionalization of some regulatory costs for the gas-supply function. That was something that's new in this filing. 1049 MR. MILLAR: So this, then, used the first update to that study, though? 1050 MR. AIKEN: This is the first update from the previous filing. 1051 MR. MILLAR: From the previous filing. 1052 MR. AIKEN: Yes. 1053 MR. MILLAR: Okay. And you spoke about -- I thought you said -- did you say there were three proposed changes? 1054 MR. AIKEN: Yeah, there are two, what I call, updates, purely updates, and those are the update of the coincident and non-coincident peak-demand allocators to reflect the most recent historical data available to NRG. And the second one is the update of the zero-intercept study, which adds on to the information that was available at the last study. 1055 In addition, this year, with this filing, there were changes to the functionalization of some of the regulatory and insurance costs, and that change was related to allocating some of those costs to the gas-supply function -- 1056 MR. MILLAR: Thank you. 1057 MR. AIKEN: -- system-gas-supply function. 1058 MR. MILLAR: And as you say, the first two are simply updates, nothing more. 1059 MR. AIKEN: That's right. The methodology did not change. They were simply updates of the data. 1060 MR. MILLAR: Right. Thank you. 1061 As a function of running the model, which of the consumer classes would have, I guess, benefitted or suffered the most from the reestimation of the coincident/non-coincident factors? 1062 MR. AIKEN: I think I would have to undertake to separate out the impact of that from the impact of the other two adjustments. I do provide, in Exhibit G2, tab 1, schedule 1, on pages 3 and 4, the impact of the updates in aggregate. But I would have to go back to the model itself and try and break out the individual components. 1063 MR. MILLAR: Okay. So that would be Undertaking J.1.8, an undertaking to estimate the impact of the changes in the coincident/non-coincident factors. 1064 UNDERTAKING NO. J.1.8: TO ESTIMATE THE IMPACT OF THE CHANGES IN THE COINCIDENT/NON-COINCIDENT FACTORS 1065 MR. MILLAR: Moving along, can you tell me what the purpose is of updating these figures? My suspicion is it's to achieve a better matching of cost and responsibility for incurring the cost. Is that why the study is updated? 1066 MR. AIKEN: That's part of it. On the coincident/non-coincident allocators in particular, there's a -- I believe it's three-year average that's used to calculate those allocators. And that allows for changes in those allocators that are driven by different growth rates in the different rate classes. 1067 For example, if the residential class is growing faster than the seasonal class or the contract class, then that can allocate those costs to where that growth is and where that cost is being driven by. 1068 MR. MILLAR: Okay. I understand. Thank you. 1069 Is there any particular need for these changes to be implemented at this time, or is it just you like to do it on a year-to-year basis? 1070 MR. AIKEN: Well, you have to remember, the last time this would have been done would have been two years ago, because the last time we were in here was for two test years. So we'd be missing, you know, the changes that have occurred over those two years. And since we only use a three-year average, I think, you know, they're pretty significant. 1071 MR. MILLAR: Okay. 1072 MR. MILLAR: Would you agree with me that this is a relatively minor matter we're talking about here? There's not a lot of dollars involved one way or the other. 1073 MR. AIKEN: Yes, I would agree with that. 1074 MR. MILLAR: Okay. 1075 MR. AIKEN: On a year-to-year basis, the changes are relatively minor. And that's, again, one of the reasons we'd prefer to do it each time we're in. 1076 MR. MILLAR: Sure. So, if we weren't here today for a rate hearing, I wouldn't expect you would bring an independent application, or anything of that nature, to seek these kinds of changes, if we weren't already here for a rates hearing; is that correct? 1077 MR. AIKEN: I certainly would not recommend my client do that, no. 1078 MR. MILLAR: There's not enough money involved to -- 1079 MR. AIKEN: No. 1080 MR. MILLAR: Okay. Thank you. 1081 The next topic will be rate design changes. 1082 MR. CARR: Mr. Millar? 1083 MR. MILLAR: Yes? 1084 MR. CARR: Could I just ask where you're at and what you foresee in terms of potential breaks, in terms of how much you have in total? 1085 MR. MILLAR: Well, we're at 2:30 now. I have -- I have a fair number of topics left, actually, but many of them will be done very quickly. Would you like to take a break now? 1086 MR. CARR: We can go for another 15 minutes or so, if that -- 1087 MR. MILLAR: Why don't with do one more topic, perhaps, and then we'll take a break, if that's acceptable. Thank you. 1088 I understand that NRG proposes to change, I don't know if "balance" is the right word, but the split between fixed monthly charges and volumetric charges for some of its rate categories; is that correct? 1089 MR. AIKEN: That's correct. But the proposal is to increase the monthly customer charge across all rate classes. 1090 MR. MILLAR: Across all rate classes. 1091 MR. AIKEN: Yes. 1092 MR. MILLAR: Okay. And can you confirm for me that the increase in the residential customer charge from the new fixed charges you're proposing provides about $100,000? 1093 MR. AIKEN: Yes. That would be in the ballpark. 1094 MR. MILLAR: Approximately? 1095 MR. AIKEN: Yes. 1096 MR. MILLAR: Okay. And I understand that there's approximately 5,600 residential customers? 1097 MR. AIKEN: I believe that's correct; yes. 1098 MR. MILLAR: And we're talking -- so if you divide 100,000 by 5,600, you get about $18 each per year? 1099 MR. AIKEN: Yes. The increase for residential customers would be exactly $18 per year. 1100 MR. MILLAR: Okay. And can you confirm for me that this. This change would benefit NRG's cash flow, in that it makes it more regular, and less dependent upon the weather? 1101 MR. AIKEN: Yes, I would agree with that. 1102 MR. MILLAR: Now, in light of the revised revenue deficiency that you've provided us in your updated filings, are you proposing any other changes in the rate design? 1103 MR. AIKEN: No. It's -- the monthly customer charge increases across all rate classes. And there may also be changes in the variable delivery rate to take into account the higher revenue deficiency in the updated evidence. I believe, in my original evidence, rate 1, there was no change to the delivery commodity rate. But now there is, because there's, obviously, a higher deficiency that needs to be recovered. 1104 MR. MILLAR: That concludes my questions on rate design. 1105 Mr. Chair, would it be convenient to take a break now? 1106 MR. CARR: Why don't we do that. Just before we do, though, perhaps could we just revisit what you think you have left to cover, the time involved, and perhaps we could begin thinking about following events after this evidentiary portion. 1107 MR. MILLAR: Over the lunch break, we were certainly anticipating finishing the cross-examination today. It's actually taken me a little bit longer than I thought to get through the topics we've already addressed. However, I think things should move more quickly from here. I'm still fairly confident we will finish today with the cross-examination. And speaking with Staff, and I spoke with my friend and the witnesses a little bit over lunch, that would mean we'd be getting into submissions tomorrow. 1108 And I haven't discussed this with my friend yet, but Staff and I are wondering if it's possible to push back the start of the day tomorrow, in order to allow us to properly prepare for the submissions tomorrow, since we're not -- I'm not sure when we would get the transcripts today. And maybe this would be something we should discuss over the break with my friend, just to see if they're agreeable to that, or what we can work to ensure we have time to adequately prepare for our submissions. 1109 I don't think we'll have a lot of submissions, to be honest, but we just want to make sure we're properly prepared. So maybe it's best I discuss that over the break? 1110 MR. CARR: That would be fine, and I think what we have in mind, at sort of a higher level, is that we would receive your submission tomorrow, and then we would allow some time in the future for written submission from the applicant. And you might want to think about the timing of that over the break, too. And perhaps we can give you some certainty before we leave here today as to how this whole thing will come to a conclusion. 1111 MR. MILLAR: Thank you. 1112 MR. CARR: 15 minutes. So we're back at ten minutes to 3. 1113 MR. MILLAR: Okay. 1114 --- Recess taken at 2:39 p.m. 1115 --- On resuming at 3:02 p.m. 1116 MR. CARR: Please be seated. Very well. 1117 So, any preliminary matters? 1118 PRELIMINARY MATTERS: 1119 MR. STOLL: I guess I'll go first, then. 1120 MR. CARR: Okay. 1121 MR. STOLL: We had a brief discussion about timing, and we're fairly confident the cross-examination is going to conclude today, other than maybe a couple of questions that would arise out of responses to undertakings. We're going to try to respond to what undertakings we can tonight, provide the information to Board Staff by tomorrow at 9:00. Board Staff would like to sit for a few minutes at approximately 11:00 to respond formally on the record to the undertakings, and then they would make -- may have a couple of questions arising out of that, and then they would make their submissions. Yes, I think I've captured it. 1122 MR. MILLAR: That's right. 1123 MR. STOLL: If the Board has no issues with that. 1124 MR. CARR: We have no issues with that, as you describe it. We were anticipating there might be a submission from Board Staff of -- 1125 MR. MILLAR: There will be a submission, Mr. Chair, and I've spoken with Mr. Lyle as well. We don't think we'll be much more than half an hour or so with submissions, so if we were to start at around 11, we would still comfortably be finished before lunch. 1126 MR. CARR: Okay. Now, in terms of the availability of the witness panel, is it anticipated that they would be available tomorrow at 11 also? 1127 MR. STOLL: On that respect, Mr. Blake would like to be excused tonight, if possible. Mr. McCallum and Mr. Aiken are available tomorrow morning to answer questions, if that's acceptable to the Board. 1128 MR. CARR: It sounds very reasonable to me. 1129 MR. STOLL: That's fine. Okay. Thank you very much. 1130 MR. CARR: Then, finally, I guess while we're on procedural matters, maybe we might as well just look slightly ahead. 1131 MR. STOLL: That's fine. I think the responses to the remaining undertakings would be early next week, at the latest Wednesday of next week, they'd be responded to. 1132 MR. CARR: Wednesday, the 13th? No, that's this week, isn't it? That's a pity. The 20th. 1133 MR. STOLL: I believe that's correct. I don't have a calendar in front of me, but I believe the 20th would be when we'd respond to the undertakings. And then if we could have a few days to just finalize our submissions after that, I'm in your hands whether Tuesday or Wednesday of the following week. 1134 MR. CARR: So you're suggesting you complete all undertakings by the 20th, and perhaps the 27th, which is the following Wednesday? 1135 MR. STOLL: That's acceptable to us if it's ... 1136 MR. CARR: I mean, at this point, frankly, the schedule is -- you're holding yourself up. 1137 MR. STOLL: Exactly. 1138 MR. CARR: So you can choose the schedule, to a great extent, if you wish. 1139 MR. STOLL: I appreciate that. And we may be able to submit a day or two before the 27th, but I think, given other commitments that people have, the 27th is a realistic date. 1140 MR. CARR: Okay. So we're talking -- what's our normal -- is it 4 o'clock on the dates that we mention in terms of expected deadlines for courier, mailrooms to be open, and all that sort of thing? 1141 MR. STOLL: Yeah. Thank you. 1142 MR. CARR: Is that clear for the record, reporter? 1143 COURT REPORTER: Yes. 1144 MR. CARR: Good. 1145 MR. STOLL: Thank you. 1146 MR. CARR: Anything else preliminary? 1147 MR. STOLL: That's my business. 1148 MR. CARR: Okay. 1149 Carry on, Mr. Millar. 1150 NATURAL RESOURCE GAS LIMITED PANEL 1 - BLAKE, McCALLUM, AIKEN: 1151 B.BLAKE; Previously Sworn. 1152 S.McCALLUM; Previously Sworn. 1153 R.AIKEN; Previously Sworn. 1154 CROSS-EXAMINATION BY MR. MILLAR: 1155 MR. MILLAR: Okay. Moving right along, the next topic I have relates to risks of customers converting to competitive supply. 1156 Perhaps I'll start with a preliminary question. Can you please tell me the number of customers, at least approximately, the number of NRG's customers that are currently on competitive supply? 1157 MR. McCALLUM: Sorry, are you referring to customers on direct purchase? 1158 MR. MILLAR: Yes, that's right. 1159 MR. McCALLUM: Okay. I believe we have eight or nine at the present time. 1160 MR. MILLAR: And are you able to break that down between residential and the other rates, the rate classes? 1161 MR. McCALLUM: There would be three residential, one rate 3. There is two commercial, rate 1. And then an industrial, rate 1. 1162 MR. MILLAR: Thank you. 1163 MR. McCALLUM: We also have received a request from the Thames Valley School Board for a number of schools to start on direct purchase in November. 1164 MR. MILLAR: And is it your position that the potential switch from some of your customers to direct purchase poses a potential risk to the utility? 1165 MR. BLAKE: We don't perceive it to be a risk. 1166 MR. MILLAR: Okay. Well, that makes this much easier, and I can move on to the next topic. 1167 MR. BLAKE: It would be really nice if they all did it. 1168 MR. MILLAR: Okay. The next topic will be the deferral accounts. 1169 Can you confirm for me that NRG currently has three deferral accounts, and those are the REDA, or the regulatory expenses deferral account, the PGTVA, which is the purchased gas transportation variance account, and the PGCVA, which is the purchased gas commodity variance account; is that correct? 1170 MR. AIKEN: We also have a gas purchase rebalancing account. 1171 MR. MILLAR: Is there any information on that account in the filings before the Board? 1172 MR. AIKEN: I believe in the fiscal 2004 evidence, the calculation of the 2004 figures are provided. Other than that, I don't believe so, because it's tied in directly to the PGCVA and the QRAM process. 1173 MR. MILLAR: And correct me if I am wrong, but the PGCVA and this other account that you've just spoken about, the GPRA, if I could use the acronym, those are dealt with in the QRAM process? 1174 MR. AIKEN: That's correct. 1175 MR. MILLAR: And they're not the subject of this hearing? 1176 MR. AIKEN: That's correct. 1177 MR. MILLAR: But the other two deferral accounts, the REDA and the PGTVA, those are the subject of this hearing? 1178 MR. AIKEN: Yes. On the REDA, we're not proposing any disposition, but we are requesting the continuation of that account. The PGTVA, we're requesting that the Board approve a reference price, a change for that account. 1179 MR. MILLAR: Okay. 1180 MR. AIKEN: And then we're also requesting an additional variance account to be established. 1181 MR. MILLAR: And what was that for? 1182 MR. AIKEN: That's at Exhibit D1, tab 7, schedule 2. This would be a variance account around the recovery in fiscal 2005 that relates back to the $550,000 figure that was mentioned earlier this morning. That is being recovered over three years, so approximately $170,000. And it's based on a per-cubic-metre charge, and so any variance in the actual throughput versus the forecast throughput will impact the actual amount recovered. And so we're asking to have a variance account established around that 177, I think it is, thousand dollar amount for the year, so that the company does not collect more or less and the ratepayers do not pay less or more. And it would be trued up in the second year of the disposition of the recovery. 1183 MR. MILLAR: I'm looking at the original application that we received from NRG, and maybe you can help me, I don't actually see listed in here, and I may just have missed it, but I don't see anything about a new deferral account in the original application. Could you assist me? 1184 MR. AIKEN: Yeah, I don't think the original application got down to specific items being requested. 1185 MR. MILLAR: Okay, so that's not actually mentioned in the original -- 1186 MR. AIKEN: No. 1187 MR. MILLAR: -- in the application. 1188 MR. AIKEN: No. 1189 MR. MILLAR: Okay. Thank you. We were talking about the PGTVA a moment ago. Can you confirm for me that the amount of the PGTVA has been recorded using the same methodology that had been applied previously, and is consistent with the Board's order? 1190 MR. AIKEN: Yes, it has been. 1191 MR. MILLAR: Thank you. 1192 MR. VLAHOS: Sorry, Mr. Aiken, if I can just follow up, I'm looking at Exhibit D1, tab 7, schedule 2. There is that couple of pages of new variance account; that's the title of it? 1193 MR. AIKEN: Yes. 1194 MR. VLAHOS: Is that the one that you have changed with Mr. Millar a few minutes ago? 1195 MR. AIKEN: Yes, that's the account we're requesting around the recovery of $170-some thousand last year -- 1196 MR. VLAHOS: Sorry to interrupt you, but there's also white pages, so that means it was part of the original evidence. 1197 MR. AIKEN: Yes, it was part of the original evidence, as well. 1198 MR. VLAHOS: Okay. I'm just not sure whether that was the response to Mr. Millar, maybe I just -- I'm not sure that was your response, Mr. Aiken, to Mr. Millar, maybe I just missed it. 1199 MR. MILLAR: I just noted, Mr. Vlahos, that I think it was in the materials, but it wasn't in the document entitled "Application", which I believe is the overview of the entire -- of all the filings. 1200 MR. VLAHOS: I see, all right. 1201 MR. MILLAR: But it was in the materials, themselves. 1202 MR. VLAHOS: All right. Thank you. 1203 MR. MILLAR: Looking at the REDA, the regulatory expenses deferral account, I note that there's only $149 in that account; is that correct? 1204 MR. AIKEN: I believe that's correct; yes. 1205 MR. MILLAR: What would you say if I suggested that maybe it would be appropriate for this account to be wound up? Is it still necessary to keep this account considering the low amounts, the low amount of money that's in it? 1206 MR. AIKEN: I think it would be useful to keep it around because of the potential changes that might be coming down. We've had the Natural Gas Forum, and, you know, whatever comes out of that may affect NRG through some sort of generic proceeding, where they may have regulatory costs associated with that. 1207 MR. MILLAR: Are you aware of any specific hearings? 1208 MR. AIKEN: No. 1209 MR. MILLAR: And aside from the Natural Gas Forum, are there any other -- is there anything else that might give rise to any hearings over the next year or two years, or something like that? 1210 MR. AIKEN: I hesitate looking beyond tomorrow in terms of what's coming down the regulatory road. 1211 MR. MILLAR: Do you foresee a future need for this account? I guess you do, but ... 1212 MR. AIKEN: Yes, I would think that over the next year or two there may be a need for that account. Beyond that, it may not be required. 1213 MR. MILLAR: Just one moment. 1214 MR. AIKEN: I think it's probably more administratively simple to leave it in place, rather than close it out and then have something happen, six months or a year from now, and have NRG, you know, end in a separate application requesting another -- you know, basically to reestablish that deferral account, because of some proceeding that may be happening at that point in time. 1215 MR. MILLAR: Just one moment, please. 1216 Thank you. Okay, moving right along, I have a few questions about your ancillary programs. And I'm going to be referring to a few exhibits. These would be Exhibit C.3.3.1, C.4.3.1, and C.5.3.1. 1217 Now, looking over the last three years of your ancillary programs, and I'm just looking at the figures from these three exhibits, can you confirm for me that, on a whole, the assets have increased, the expenses have increased, but the revenues have been flat? 1218 MR. AIKEN: I guess, in general, that's true, yes. 1219 MR. MILLAR: I guess there's a little bit of a blip in 2004, but certainly from 2003 to 2005, you've got a decreased rate of return from 17.9 percent to 13.1 percent. The assets, however, have increased from 100 -- 1.3 -- 1,301,000, to 1,360,000 and change. And the costs have increased from 800 -- or the expenses have increased from 813,000 to just under $900,000 . 1220 MR. AIKEN: Yes. Subject to check on those numbers -- 1221 MR. MILLAR: Okay. 1222 MR. AIKEN: -- I would agree, yes. 1223 MR. MILLAR: So would you agree with me that, for every dollar you've been adding in assets and expenses -- I think overall the program remains profitable, but for the additional monies that you've spent since 2003, you're actually not getting a very good return on the additional money that's been added since that time? Would that be fair to say? 1224 MR. AIKEN: I would say no, because the rate of return is higher than the overall utility rate of return -- continues to be higher than the overall regulated-utility rate of return. 1225 MR. MILLAR: But by which you mean it's 13 percent instead of 9.2 percent, or whatever the figure is? 1226 MR. AIKEN: Yes. 1227 MR. MILLAR: Looking at the difference between the revenue from 2005 to 2003, it appears that the revenue has increased $32,000 from 2003 to 2005; however, the costs have increased $75,000 over that time. Is that correct? 1228 MR. AIKEN: Where are you getting the $75,000 difference? 1229 MR. MILLAR: $75,000, the expenses in 2003 were $813,822, whereas in 2005 they were $898,699, so that's a difference of approximately $75,000? 1230 MR. AIKEN: Okay. Yes, I'd agree with that. Yes. 1231 MR. MILLAR: So, in fact, again, I may have already stated this, but just to make sure I'm clear, your costs have increased $75,000, but your revenue has only increased $32,000 over that time? 1232 MR. AIKEN: Yes. 1233 MR. MILLAR: Thank you. 1234 Can you tell me a little bit more about how the expenses are determined for the ancillary program? And just by way of example, could you let me know how employee time is allocated to the ancillary programs? 1235 MR. McCALLUM: Included in the direct cost of sales are direct employee hours worked, so each employee will record on, depending on the type of work he's doing, an installation sheet that reports the hours that he has worked. And those hours get directly charged to that particular job. 1236 Same thing with service calls, water heater maintenance. All those hours are tracked individually and the employees hand in those times. And those hours are then tracked back to the various programs. 1237 In the fully allocated costing model that's used, there are other hours that are tracked back to those various programs. Largely those are based on the time studies that were previously done, and it's usually based on the number of hours each month that the employee spends on a particular function. 1238 MR. AIKEN: Just to follow up on that, then -- 1239 MR. MILLAR: Sure. 1240 MR. AIKEN: -- picking up on what Mr. McCallum said. If you look at the cost-allocation model, Exhibit G3, tab 2, schedule 1, updated, in those schedules, there is a column labelled "Ancillary Services" that shows the breakout, for example, of wages and benefits. And the fact -- 1241 MR. MILLAR: May I have the reference again, please. 1242 MR. AIKEN: G3, tab 2, schedule 1, updated. 1243 And if you go to schedule 1.3 within that package -- yeah, schedule 1.1, 1.2, and then 1.3, which is the -- shows the O&M expenses starting at line 21, in the far right-hand side, the second-last column is labelled "Ancillary Services," the column labelled "13," that shows the breakout of the $200,600 in O&M costs that show up in C5, tab 3, schedule 1, updated, under "Allocated Costs O&M." That shows the composition. The factors labelled beside that column are factors that are described in further detail further on in this package that show the percentages of those costs allocated to ancillary services in particular. And those are factors that are driven by what Mr. McCallum was indicating earlier. 1244 MR. MILLAR: Thank you. 1245 Are you planning on adding any new ancillary programs over the 2005 test year? 1246 MR. McCALLUM: No, there's no plan to add any new programs. 1247 MR. MILLAR: And are you anticipating making any changes in the ways that the current ancillary programs are managed? 1248 MR. McCALLUM: That's not anticipated at this time. 1249 MR. MILLAR: Does NRG ever decline customers who are interested in goods or services from the ancillary programs? 1250 MR. BLAKE: The only occasion would be if, for some reason, the customer can't meet the credit requirement. 1251 MR. MILLAR: Okay. 1252 MR. BLAKE: So if, after having processed a credit application, they were declined, that would be the only reason. 1253 MR. MILLAR: But that would be the only reason? 1254 MR. BLAKE: Yes. 1255 MR. MILLAR: And I think we've already discussed this, but you can confirm for me that NRG's ancillary programs overall are certainly profitable? 1256 MR. AIKEN: Yes, they are. 1257 MR. BLAKE: Yes, they, for a number of years, have contributed positively to the company's overall return. 1258 MR. MILLAR: Thank you. Regarding the profitability of the program, Ms. Litt is looking for a reference for me right now, but perhaps I'll ask if you recall. 1259 I believe in 2003 it was originally anticipated that your rate of return on the ancillary program would be about 13.6 percent. And while Ms. Litt is looking for that reference, do you recall that? In fact, I'll just -- I'll have her show you the document, and the Board as well. Again, I apologize, we don't have a copy of this. 1260 MR. STOLL: If I could just have a quick look at that, Ms. Litt. 1261 MR. MILLAR: So, in 2003, it was originally anticipated that the return on the ancillary services would be 13.6 percent, but, in fact, the actuals for that year, can you confirm that the rate of return was, in fact, 17.9 percent? 1262 MR. AIKEN: Yes, that's correct. 1263 MR. MILLAR: Thank you. Just a moment. 1264 Just a couple of quick questions on the change of control topic. I know we spoke about this a little bit this morning. 1265 Can you, first, verify for me that the company is now controlled on an in-trust basis? I'm referring specifically to Exhibit A, tab 6, schedule 2. 1266 MR. McCALLUM: Yes, all of the voting shares are as described on that particular exhibit. 1267 MR. MILLAR: Okay. Outside of this nominal change in control, have there been any other changes in corporate governance? 1268 MR. McCALLUM: No, there haven't. The management of the company has remained unchanged, has remained the same. 1269 MR. MILLAR: And does the change of control impact in any way the revenue requirement of the utility? 1270 MR. McCALLUM: No, it does not. There's been no change to the overall equity position of the company. 1271 MR. MILLAR: And I understand that's true now. Do you anticipate that will be true into the future as well? 1272 MR. McCALLUM: There's no plans, certainly within the test year, that that's going to change. 1273 MR. MILLAR: Thank you. 1274 I have a few questions about NRG's ability to prorate. I understand we've already established that the test year has actually already begun. It began a couple of weeks ago, on October 1st. And can you confirm for me that NRG is not able to prorate changes midway through a test year? 1275 MR. McCALLUM: Can you describe what you mean by "prorate midway through a test year?" 1276 MR. MILLAR: Well, what I mean is, imagine that you get what you're looking for at the hearing and you're able to change your rates. Obviously, the test year has already begun, and you're using the old rates now. A decision, an order, could, even though we'll probably finish tomorrow, by the time you actually get an order it could be several -- a couple of months away, anyways. So do you have any ability to -- if the rate changes, how do you make up for that period that we've lost, essentially since October 1st? 1277 MR. McCALLUM: What we have the ability to do is, if it's a volumetric change -- so, for instance, differences in rates, we have a program that will recalculate those bills, and give the customers a one-time adjustment that will appear on their bills the first month after the rate changes are approved. We don't have any ability to put in place, like, a rate-rider -- 1278 MR. MILLAR: Okay. 1279 MR. McCALLUM: -- if that's what you're asking for. Our system doesn't have that provision in it. 1280 MR. MILLAR: So to make sure I'm clear, essentially the consumer, the customer, pays a one-time charge to, sort of, cover that period? 1281 MR. McCALLUM: That's correct. 1282 MR. MILLAR: Okay. Have you explored the possibility - and again, you'll have to help me here, I don't know what would be required - but have you explored the possibility of creating a way to prorate the amount, rather than a one-time fixed charge? 1283 MR. McCALLUM: It's certainly doable, but I have not explored it in any detail to determine what the costs would be of making that sort of change. 1284 MR. MILLAR: Have you received any, for example, complaints from consumers or customers regarding this one-time charge? 1285 MR. McCALLUM: Generally, only if it's going up. If it's going down, generally, you hear nothing. 1286 MR. MILLAR: Right. Would you anticipate or would you think there would be a benefit to customers if it could be prorated, rather than charged a single time? 1287 MR. BLAKE: If you're suggesting doing it over ten months, for example, instead of 12? 1288 MR. MILLAR: Right. 1289 MR. BLAKE: The only problem with that is that you don't charge the correct group of customers. In other words, there may be some customers who have fall consumption, such as a grain dryer, who would miss out on that change. 1290 MR. MILLAR: To follow up on that point, I understand -- your seasonal consumers, do they use any gas at all outside of the September -- the August-September-October period? 1291 MR. McCALLUM: A number of them do, because they have greenhouses that they start the plants in in the springtime. So they will use a little bit of gas during that period. There's also a few of them that have gas-fired irrigation pumps. So they will be used periodically, and some of them have strip rooms and bunkhouses, also, attached to the tobacco lines. 1292 MR. MILLAR: So, while it would be fair to say some of them do use gas outside of that period, others do not. Is that fair? 1293 MR. McCALLUM: That's correct. 1294 MR. MILLAR: So for the seasonal users who don't use gas outside of that peak period for August to October, or whatever it is, let's imagine you get an order in December, or something like that. Will you bill them immediately for that amount even though -- and we're talking about the -- we're talking about October-November, at which time they're not actually using gas -- 1295 MR. AIKEN: Yeah, maybe I can clarify a little bit. It's not so much an issue with the rate 2 seasonal customers, because in October, November, December, they don't use very much gas. 1296 The issue arises with the rate 4 and the rate 5 customers, which also have a seasonal peak. Their seasonal peak happens to be October-November-December. These are essentially the grain dryers. And it would be those customers where a rate-rider type of approach or, you know, a rate going forward starting in December, or January 1st, would be hard to recover, because those customers aren't going to use gas until the following fiscal year. Very few of those customers have any consumption outside of October, November, and early December. And the amount they do have is like a fraction of their use in those months. 1297 MR. MILLAR: So you recognize there's something of a problem there. What do you intend to do about it? Or how do you deal with that problem? 1298 MR. AIKEN: Well, I think that goes to Mr. McCallum's statement that, once those rates are set and approved by the Board, and effective October 1st, then those customers would get that bill in December or January, based on their consumption for the previous two months. For the change in the rates. 1299 MR. MILLAR: Thank you. Okay. 1300 We're moving along nicely. We're now on to the final topic, and it's the only topic I knew anything about prior to a month ago, and it is legal fees. So I won't be asking Ms. Litt as many questions as I have been before. 1301 I'd like to talk about -- if we could turn to Exhibit D.5.3.1, and that's the updated version. And I'm looking down the expense category to the legal entry. And can you confirm for me it's listed as $190,000? 1302 MR. McCALLUM: Yes, we can. 1303 MR. MILLAR: And previously, before it was updated, I believe that amount was $15,000? Is that correct? 1304 MR. AIKEN: That's correct. 1305 MR. MILLAR: And the $175,000 difference comes from anticipated expenses that NRG will incur for the prosecution of an appeal of an OEB order; is that correct? 1306 MR. McCALLUM: That's correct. 1307 MR. MILLAR: Can you tell me how much, if any, of that amount has already been paid? 1308 MR. McCALLUM: There's approximately $50,000, so far. 1309 MR. MILLAR: Is that invoiced, or invoiced and paid? 1310 MR. McCALLUM: There's a portion -- all of it's been invoiced, and all but the last bill has been paid. 1311 MR. MILLAR: Do you know how much is outstanding? 1312 MR. McCALLUM: I believe it was just under 20,000. 1313 MR. MILLAR: And I understand that this appeal is being conducted by the law firm of Stikeman Elliot. 1314 MR. McCALLUM: Yes. For the Board, that's the Board's side. 1315 MR. MILLAR: Oh, I'm sorry. 1316 MR. McCALLUM: Ogilvy Renault. 1317 MR. MILLAR: Oh, I'm sorry, my mistake. And has Ogilvy's typically conducted your legal work in the past? 1318 MR. McCALLUM: They have not, no. One of the people who is involved in it has done work for us in the past, though. Just changed. 1319 MR. MILLAR: I see. And who is that? 1320 MR. McCALLUM: Richard King. 1321 MR. MILLAR: I'm sorry? 1322 MR. McCALLUM: Richard King. 1323 MR. BLAKE: It's been handled by Richard King and Alan Mark. 1324 MR. MILLAR: You've worked with these gentlemen in the past, or, at least, Mr. King? 1325 MR. BLAKE: We've worked with Mr. King for a number of years. 1326 MR. MILLAR: And he's recently switched law firms and that's why it's Ogilvy's now? 1327 MR. BLAKE: I'm not sure how long he's been at Ogilvy's. 1328 MR. McCALLUM: A year and a half. 1329 MR. BLAKE: Year and a half in total. 1330 MR. MILLAR: And when you came up with the figure of $175,000, is this an estimate that was provided by Mr. King? 1331 MR. BLAKE: To some extent, but it was, to a greater extent, an estimate that was determined by our own management. 1332 MR. MILLAR: But you did consult with Mr. King? 1333 MR. BLAKE: We have had estimates from him, yes. 1334 MR. MILLAR: Okay. And did those estimates accord with the figure of $175,000? 1335 MR. BLAKE: Well, they were -- they were ranges. In addition, we have also had legal advice from a couple of other sources as well. And in aggregate, we feel that it will be approaching 100 -- or it will be $175,000, give or take a little bit. 1336 MR. MILLAR: So that's not exclusively for Ogilvie's, $175,000; you consulted with some other people as well? 1337 MR. BLAKE: Yes. 1338 MR. MILLAR: And just to tidy something up, you said that $50,000 had already been invoiced. Was that in the 2005 test year, which began just a couple of weeks ago, or are some of these monies from 2004? 1339 MR. McCALLUM: It's split between the two. 1340 MR. MILLAR: Okay. Do you have an idea of what the split is? 1341 MR. McCALLUM: I believe the last invoice was in 2005. 1342 MR. MILLAR: And do you know how much that invoice was for? 1343 MR. McCALLUM: I think that's the 20,000 -- 1344 MR. CARR: Sorry, did we capture -- I can't hear you too well. Did we get the dates correct for the record? 1345 MR. BLAKE: I believe, just to sort of recap, I believe about $30,000 of the invoices were received in fiscal 2004; about 20 were received in 2005. 1346 MR. MILLAR: And in terms of paying these invoices, I understand there's still some money outstanding. Has any been paid in 2005? 1347 MR. McCALLUM: Not to this date, no. 1348 MR. MILLAR: Okay. 1349 What, currently, is the status of the appeal? How far along in the process have things gone? 1350 MR. BLAKE: I believe they're anticipating it will be argued in either December or January, I believe, was the latest I'd heard. 1351 MR. MILLAR: Okay. And do you know how many days are going to be set aside for the appeal? 1352 MR. BLAKE: I don't believe they're anticipating they will be long at the Appeal Court. 1353 MR. MILLAR: So, one day? 1354 MR. BLAKE: I couldn't say one day, but ... 1355 MR. STOLL: I think one, maybe two days. 1356 MR. MILLAR: One or two days, okay. And forgive me, this is before the Divisional Court? If you don't know, that's -- 1357 MR. STOLL: I believe so, subject to check. 1358 MR. MILLAR: My understanding is that appeals go to the Divisional Court, so I just wanted to clarify that. 1359 So you're certainly anticipating that this will be all wrapped up in fiscal 2005 -- 1360 MR. BLAKE: Yes. 1361 MR. MILLAR: -- unless a further appeal or something like that happens. But that is not anticipated in the $175,000 that's been set aside? 1362 MR. BLAKE: That's correct. 1363 MR. MILLAR: Thank you. 1364 Considering that we're having -- it's probably going to be a one- or a two-day appeal, and obviously a lot of work goes in before the appeal is actually heard, but what do you think about the reasonableness of $175,000 fee for a one- or two-day appeal? Do those strike you as reasonable legal costs for that amount of work? 1365 MR. STOLL: Just before we go too much further, I'm not sure, really, this is a place we'd want to go too far down, as to the reasonableness of the costs and the proposed billing for the lawyers. I'm a little unclear -- 1366 MR. CARR: Could you speak up, please. 1367 MR. STOLL: Sorry. I'm just a little uncomfortable of going down the path of -- the bills and the estimates are what they are, and they're based on the rates that would normally be charged. So I'm a little unclear where we're heading here. 1368 MR. MILLAR: Okay. Well, I guess maybe I'm asking a question that's too obvious. Obviously, if a number has been entered on your accounts, you think it's reasonable or you wouldn't put it in there; is that fair to say? 1369 MR. BLAKE: We feel that the $175,000 forecast is reasonable. 1370 MR. MILLAR: And that's what it will cost. Okay, that's all I was hoping to get at. One moment. 1371 And as I understand it, the subject of this appeal is whether or not NRG can collect interest on a balance of approximately $531,000; is that the gist of the appeal? 1372 MR. BLAKE: I think that is -- that's one of the items under appeal. We've provided a copy of the factum and everything to the Board, and if you -- I would suggest that that be reviewed rather than going through it here -- 1373 MR. MILLAR: Okay, that's fair. 1374 MR. BLAKE: -- would be my suggestion. 1375 MR. MILLAR: Thank you. 1376 I think we recognize that this is something of a difficult issue because we're talking about an appeal of an OEB order, and in order for the Board to include this amount in the cost of service, pardon me, they have to find that it's reasonably incurred; and if you really look at it, that's sort of -- the Board is sort of saying it's reasonable, you have appealed their decision reasonably. And I don't want to get into all the -- any potential conflict of interest or anything like that. But I think we've recognized that this is a little bit difficult for the Board to look at. 1377 So, let me ask you this: Do you think it's appropriate for the Board to allow the $175,000 now for the prosecution of this appeal without knowing if the appeal will be successful or not? In other words, would it be more appropriate to wait to see if the appeal is successful? Would that be helpful in determining if this expense was reasonable? 1378 MR. BLAKE: I guess that would have to be a decision of the Board's. You know, obviously, I have -- I'm of the opinion that there should be a cost component in the cost of service; you know, the Board or you may be of another opinion. But obviously, from management's viewpoint, we feel that it's a cost that should be included, and I agree with you, it needs to be addressed. 1379 MR. MILLAR: Thank you. 1380 What would you think of the idea of the Board establishing a deferral account for the money used in the prosecution of this appeal? Would NRG be harmed by this or would NRG object to that? 1381 MR. BLAKE: I guess it's not something that we've given a lot of -- that we've had a lot of discussion about. But I'm told that if the Board were to consider that, it may want to consider either a deferral account or a variance account. 1382 MR. MILLAR: Okay. I think that concludes all of my questions, and subject to anything the Board may have, that concludes the cross-examination. 1383 MR. CARR: Thank you, Mr. Millar. 1384 We do have some questions. Mr. Vlahos? 1385 QUESTIONS FROM THE BOARD: 1386 MR. VLAHOS: Thank you, Mr. Carr. 1387 Mr. Blake, if I can just start with the last point, just to clarify. You said either a deferral account or a variance account. Can you just help me understand as to what you have in mind? What's the distinction in your mind? 1388 MR. AIKEN: The distinction, Mr. Vlahos, would be -- if a deferral account is used, $175,000 would be removed in its total from the cost of service, and would accumulate in the deferral account to be dealt with in the future. A variance account would be a variance around the $175,000 forecast. That amount would be recovered through the cost of service in 2005 rates, and any over- or underspending would be for review by the Board in the future period. 1389 MR. VLAHOS: Thank you for that. That's what I thought I understood, Mr. Blake. I'm just -- I'm, I guess I'm pleasantly -- I have the pleasant observation that Mr. Blake has become a rate expert over the years. A lot of people don't know the distinction between a variance account and a deferral account. 1390 And again, can you just help me understand, the $175,000 request for relief in the cost of service is to recover what amount? I know that it's a public record, Mr. Blake, but we as a Panel here don't have that information. This is to recover what amount? What relief are you asking the Court, in dollar terms? 1391 MR. BLAKE: I'm not certain that it's being quantified in dollar terms to the Court. 1392 MR. BUDD: I don't know that offhand either, Mr. Vlahos, what the dollar amount is and whether you've done that, but that is a number we could provide, if the Board wanted it. 1393 MR. VLAHOS: I'd like to understand what is the relief that's being sought from the Court, in terms of the quantum of it. 1394 MR. BLAKE: I think there are -- at the risk of sort of getting into the case, I think there are a couple of issues. One is, obviously, the quantum. And the other is the precedent. And I'm not sure how you put a value on the precedent. 1395 MR. VLAHOS: How can you assist this Panel in terms of the quantum? Is your recommendation that we simply get hold of the factum that has been filed, or the application before the Court? 1396 MR. BUDD: I do think the Board has that by way of administrative notice, and your counsel, your external counsel at Stikemans, I'm confident has probably provided that to the Board. It is a matter of public record, and so you would be able to obtain that to determine it. I could undertake to have a look at that with Mr. Stoll overnight, as well. 1397 MR. VLAHOS: We'll be quite happy with that. If it's a matter of public record, if it's before the Board -- 1398 MR. BUDD: It is. 1399 MR. VLAHOS: -- then we'll make a copy available to ourselves. 1400 MR. MILLAR: Would that be Undertaking J.1.9? 1401 MR. VLAHOS: I'm not sure we need an undertaking, Mr. Millar. It's here, somewhere, in the Board. 1402 And again, just before I leave this area, Mr. Millar was asking you about what we call out-of-period costs, some of the costs were incurred in a previous fiscal year. Anybody who could comment on this? Would this be appropriate -- Mr. Aiken, may I start with you? 1403 MR. AIKEN: I was afraid you were going to say that. 1404 MR. VLAHOS: I know you're hiding there. 1405 MR. AIKEN: I look at this as a special circumstance. Normally, I would agree that out-of-period expenses would not be carried forward. However, in this case, because it's part of an ongoing cost, it may be appropriate to deal with the entire cost of the appeal, not just the cost of appeal after a certain date. 1406 MR. VLAHOS: Okay, Mr. Aiken, are you aware of any other precedents, with other gas utilities, where there's an appeal before the courts that may be asking for special relief? Are you aware, can you assist the Board with that? 1407 MR. AIKEN: Not specifically related to an appeal, but maybe a similarity with some of the late payment penalty deferral accounts, and legal costs that Union and Enbridge are incurring, and the repayment that may be coming for both of those utilities. Those would be costs that -- or revenues that were incurred in the past that might have to be refunded in the future. 1408 MR. VLAHOS: Nothing specific in terms of appeals or ... 1409 MR. AIKEN: No. 1410 MR. VLAHOS: You don't recall any line items in the regulatory expenses account -- regulatory expenses statements, I guess, in the prefiled evidence of those companies that would deal with those things? 1411 MR. AIKEN: I don't think I would have ever looked in that level of detail at the other companies, no. 1412 MR. VLAHOS: No. Okay. I do have a number of questions, and they're not -- they try to follow the -- I'll try to follow the order as they appear in today's proceeding. 1413 First of all, I want to confirm a couple of things on the updated revenue deficiency. We did speak about whether it's delivery-related or gas-supply related and we sorted that out earlier on today. I also want to confirm that this amount is net of the one third of the relief that the company sought and received, the one third of the $530,000? 1414 MR. AIKEN: That's correct. That one third is not part of the distribution deficiency. 1415 MR. VLAHOS: And the existing rates do reflect the one third of that amount as well as the QRAM October 1st, 2004? 1416 MR. AIKEN: The existing distribution rates do not reflect the, I think, .8 cent charge, because the costs in here also do not reflect that. 1417 MR. VLAHOS: Okay, let me -- 1418 MR. AIKEN: That is treated like a variance account. 1419 MR. VLAHOS: Right. The rate schedule -- I guess that I should be more specific. The rate schedules that are currently approved by the Board with an effective date of October 1st, do reflect the October 1st QRAM as well as the one third of that amount? 1420 MR. AIKEN: That's correct; yes. 1421 MR. VLAHOS: Right. 1422 MR. AIKEN: Yes. 1423 MR. VLAHOS: Okay. And those schedules are part of this filing, or they're a part of the order that was issued just a short two weeks ago, and were not included in this filing? 1424 MR. AIKEN: I believe I did update the rate schedules to reflect the October 1 QRAM changes. 1425 MR. VLAHOS: All right. Thank you. 1426 Moving on to another area. I think it was Mr. Blake who said that they were late coming into the Board for this application because of tobacco industry uncertainty, and the rate filing, in fact, was ready, perhaps, in December of 2003? Was that you, Mr. Blake? 1427 MR. BLAKE: I may have misspoken myself a little bit, because it wasn't entirely complete. But components of it, substantial components of it, I guess, were done at that time. 1428 MR. VLAHOS: Okay. But I guess the outcome of delaying the process is that it is possible we may be faced, or the customers may be faced, with retroactivity. 1429 MR. BLAKE: I understand that. And that's something that -- we regret that we couldn't come in earlier, and I think it's something that we are going to have to alter, the process in future times, for future proceedings. 1430 MR. VLAHOS: But do you think you should be entitled to any retroactivity, to the extent that there is any revenue deficiency found by the Board? 1431 MR. BLAKE: Pardon me? 1432 MR. VLAHOS: Are you entitled -- is the company entitled to any retroactivity? 1433 MR. BLAKE: I think so. 1434 MR. VLAHOS: Why? 1435 MR. BLAKE: Again, that's a period cost, and I believe -- I repeat myself. I believe that is a period cost, a fiscal 2005 period cost. And although it's regrettable that we have this situation, I don't think that it would warrant denying the company the recovery of those revenues for that period. 1436 MR. VLAHOS: Okay. The company indicated that some 23 or 25 percent of the volume of sales is due to the -- is associated with tobacco drying and processing. Did I get that right? 1437 MR. BLAKE: Yes, that's correct. 1438 MR. VLAHOS: Okay. 1439 MR. BLAKE: I'm not sure of the exact number, but in that ballpark. 1440 MR. VLAHOS: Nothing turns on it, on the exact number. But I guess we can all agree that the margin that's associated with those sales to those classes of customers, it's a lot lower than it would be, say, for a residential or other customer classes? 1441 MR. BLAKE: The margins on the Imperial Tobacco portion, the manufacturing and processing portion, is definitely lower, but the margin on the rate 2 is actually -- is actually much closer to residential. 1442 MR. VLAHOS: Right. But overall, directionally, I guess, if we look at the combined margin of those two, the rate 2 as well as the industrial rate 1, they would be below the average of margins for the total customer profile for the company. 1443 MR. BLAKE: Yes, I would agree that directionally they are lower. The Imperial Tobacco is actually a rate 3 contract, so not rate 1. But ... 1444 MR. VLAHOS: Okay. And do you have any indication of what the number of 23 or 20 percent would drop if we were to rank them by margin? 1445 MR. BLAKE: That would be something we would have to calculate. Some of the grain dryers are fairly low margin as well. 1446 MR. VLAHOS: Would it be half, more than half, less than half? 1447 MR. BLAKE: I really don't know. 1448 MR. AIKEN: If you're looking for the relative margin, in Exhibit C5, tab 1, schedule 3, updated, there's a gross margin analysis by sales classes, and I can just read these numbers in for the record. And this is margin only, so there's no gas commodity cost in here; it's purely on a distribution margin. 1449 MR. VLAHOS: Mr. Aiken, let me just turn it up. It's C5? 1450 MR. AIKEN: Yes, C5, tab 1, schedule 3, updated. 1451 MR. VLAHOS: Just give me a second. Okay, I have that. 1452 MR. AIKEN: And on the far left-hand column, you can see that the residential margin is 21.72 cents, the commercial rate 1 is 13.83; rate 1 industrial, 9.82; rate 2 seasonal, 9.16; rate 3 contract, where Imperial Tobacco resides, is 5.82; and then rate 4 and rate 5, which are the grain dryer accounts, are 10.75 and 6.67. That's the average forecasted margin for each of those rate classes and components of rate classes. 1453 MR. VLAHOS: Okay. I thank you for that, Mr. Aiken. 1454 Mr. Blake, you had given an undertaking to Mr. Lyle about providing the sale price to Banco of the loans, the former Junsen loans and debenture? 1455 MR. BLAKE: Yes, I've undertaken to request that information. I'm not certain that it will be made available to me, but I will request it. 1456 MR. VLAHOS: Can you think of any reasons why this cannot be made available to the Board, in your view? 1457 MR. BLAKE: I'm not certain if, you know, either party would want that information placed in the public record. It's their -- it's their loan to sell and the other party's loan to purchase, and I'm not certain that that's something that -- I'm not certain that someone would tell me, or to tell me so that I could tell the Board. But I will make the request for the information. 1458 MR. VLAHOS: But do you think it's relevant for the purpose of this proceeding? 1459 MR. BLAKE: Frankly, I don't. 1460 MR. VLAHOS: Can you expand on that, please. 1461 MR. BLAKE: The loan is -- the loan obligation by the company is what it is, and regardless of -- regardless of the value that that loan may have been bought or sold for really doesn't have an impact on our costs. 1462 MR. VLAHOS: Okay. Thank you for that. 1463 Moving on. Is there a credit rating for NRG? 1464 MR. BLAKE: Not that I'm aware of. 1465 MR. VLAHOS: No. Again, anyone to respond to this: Any reasons why this Panel should not be considering lowering the thickness of the common equity this time around? 1466 MR. BLAKE: Lowering, I'm sorry? 1467 MR. VLAHOS: Lowering the thickness of the common equity. Let me rephrase that. 1468 Are there any reasons that this Panel should not consider whether it should lower the thickness of the common equity? You have now 50 percent equity and 50 percent debt of all kinds. Is there any reason, in your mind, that the Board should -- that this Panel should not be considering reviewing or altering that common equity ratio? 1469 MR. BLAKE: From my perspective, the rate has been set at 50 percent for many years, and it's been my understanding and, I think, in general, NRG's management, other management's understanding, that that has been a figure that the Board has set, and is traditionally used. I would be very surprised to see an adjustment to that rate at this point in time. If there was to be an adjustment to the rate, I would prefer that the Board advise us that we should bring forth evidence, and so forth, at the next rate meeting, rates case, so that that matter could be dealt with in a comprehensive way. 1470 I understand that that's the Board's obligation, in reviewing our rate case, to determine that, but I don't think that we were -- we have been operating under the assumption that that was a matter that would be reviewed at this hearing. 1471 MR. VLAHOS: Okay. I hear you, Mr. Blake. But there's nothing in this contemplation of refinancing for the pending control -- pending application regarding control - and I must admit I don't know much about this - there's nothing there that would, I guess, prohibit the Board in making that an issue the next time around? 1472 MR. BLAKE: No. And I would welcome the Board to make that suggestion so that we could be prepared to address it with the Board, whether it's by having a study prepared or proper witnesses to examine that. 1473 Something else that would be helpful is some indication from the Board on that topic with respect to the debt-equity ratio. We'd been operating under the assumption that the Board, for a number of years, has been suggesting and setting the equity component at 50 percent. And it's our goal to move toward that 50 percent, not -- it wasn't -- it hasn't been our understanding that the Board may be moving the actual toward -- or moving the hypothetical capital structure to the actual. But it's been more our goal to move our actual to your hypothetical, because we thought that was an objective of the Ontario Energy Board. 1474 So, if that's not the case, then if the Board could give us some guidance on that, that would be helpful in our exercise in seeking new financing over the next period. 1475 MR. VLAHOS: Okay. Moving on to another area. 1476 There was some discussion today about some of the metering costs. I believe it was metering maintenance costs that were previously capitalized and now have been expensed. Well, I guess since 2003, but this is the first time it has come before the Board. I guess it's happening now. It has started in 2003, has it? 1477 MR. BLAKE: We did adjust our accounting in 2003 to the new methodology. It came to our attention, I think, early in 2003, and so we adjusted our accounting methodology during that period. And obviously, it's carried forward in 2004, and in our forecast in 2005. 1478 And in review of the generally-accepted accounting principles and the uniform system of accounts, it appeared that we were capitalizing costs that would normally be expensed in the period. And I think that, sort of, the history behind that was, in our early years, when the utility was purchasing new meters, we were doing very few repairs. And so, basically, everything we did went to the capital account. So if we bought meters, or some small meter parts like swivels and gaskets, and all that sort of thing, they all went on to new meters. They were parts that were appended or attached to new meters. So it became a practice simply to capitalize everything that way. 1479 And when we started reviewing it, now that our meter populations are getting older, and we started reviewing what our actual repair expenses were, we were -- we found that, you know, they were significantly higher than they had been in the past. And we have, in reviewing sort of the item-by-item costs, we found that we were spending money on these meters, but we weren't really extending their life, we were -- you know, sort of -- you wouldn't capitalize an oil change on a car. But you may capitalize it if you, you know, did a complete body job and changed the motor or the transmission, and extended the life of that piece of equipment, or an automobile, or a trencher, or whatever. 1480 And what we're doing with these meters is we're not doing that sort of total overhaul on most of them. We're doing -- we're grinding the valves, or putting in a new diaphragm or an index or some swivels, and that sort of thing, and they're going right back out on to a similar account. So, if the meter gets what we would call a major overhaul, then that would be a capital item, but we often -- if it's going to be, you know, 50 percent or more of the cost of a new meter to overhaul an old meter, we'll then scrap that meter and by a new one, because we can get a better economic value out of a new meter. 1481 MR. VLAHOS: So what I hear you saying, Mr. Blake, is that this is totally out of accounting considerations, of appropriate accounting, nothing to do with rate-making or revenue requirement or -- 1482 MR. BLAKE: You're correct. And in my view, it's something that we probably should have been doing prior to 2003, or prior to now. And we probably should have been phasing it in as our meter populations became older and older. But it wasn't until the last few years that we realized what we were spending. And we sent several hundred meters away at a time and have them inspected, and some need a new index, and some need a new gasket, and some need various pieces. 1483 MR. VLAHOS: Well, my question was going exactly to the phasing in. According to what we heard a today, the impact of this on the test year is about $52,000; and is any consideration -- was any consideration for phasing that in? Because that is pretty discretionary, you must agree, as to when you start including that for rate-making purposes. 1484 MR. BLAKE: Yeah, I understand. I understand your point. And on the other hand, it's $50,000 that doesn't go into rate base, so it's $50,000 that we don't earn on. So there is an offset to it, although, in the near term it definitely causes an increase in rates. I think in the long term it should even out, and in the longer term it will even out, and one should, in general, offset the other. 1485 MR. VLAHOS: No, I understand that. And my question wasn't going to whether the company will over-earn in the long run - it is a worsened long run - but was the short term impact a consideration when you decided to file the evidence the way you did? 1486 MR. BLAKE: I understand that $50,000 is a material amount, but I think from our perspective, we didn't think that it was probably worth, you know, setting up some sort of a special account or some sort of tracking mechanism, but ... 1487 MR. VLAHOS: And if the Board were not inclined to accept this for the test year, then Mr. Aiken, can you tell me how the accounting would change? 1488 MR. AIKEN: Well, I guess it goes back to when NRG would have started this. And they started it in 2003. So they expensed roughly $50,000 in 2003 that, for rate-making purposes, in 2003, had been capitalized. So, if this were to be phased-in, that hit that, essentially, NRG's shareholder took in 2003, would be reversed, and you would be capitalizing part of that $50,000 that was expensed. That would carry forward into rate base into the test year. So you would have a higher rate base than what they're coming forward with, for 2003 and 2004. 1489 I think what NRG has done is that, for both 2003 and 2004, when all those costs were capitalized and built into rate base, and then with their decision to expense that amount, in those two years the shareholder took the hit. Because that was after rates were in place. And then now they're just continuing on with the practice that they put in place in 2003, and continued with in 2004. 1490 MR. VLAHOS: Okay. Thank you for that. 1491 Moving on, on the capital expenses, there were some questions today from Board Staff, and the suggestion that the utility is underspending its capital expenditure dollars approved. And that has become a trend. And just anticipating what both counsel may have to say tomorrow. But, in the event this Panel is inclined to make an adjustment to the capital budget proposed, I guess I, for one, always have difficulty -- how do I adjust the rating requirement? Because there is -- you know, capital expenditures employ, or encompass, so many things. They have such different impacts on depreciation, et cetera, you know, there's in-service dates we've been talking about, about new projects. So is there an easy way, Mr. Aiken, to approach this? 1492 MR. AIKEN: Yes. If the Board were to determine that capital expenditures should be reduced by 10 percent, I would suggest that the simplest way to do it is just do a 10 percent across-the-board reduction in all the categories. That way you end up with an average depreciation rate. I know the Board doesn't want to get into, you know, specific projects or, you know, Don't buy those automobiles. I think you would just spread the impact across the total expenditures, and deal with it that way. 1493 MR. VLAHOS: And I would be able to find the evidence by, say, a reduction for every 10 percentage points, would be able to find the appropriate reduction in, say, depreciation expense, and -- 1494 MR. AIKEN: Yes, all that information is there. And I know what happened in the last case, is that once the Board's decision came out, rather than Board Staff doing the impact statements, they asked NRG and myself to do those impact statements. They would go back to Board Staff to verify them. And so I would actually be the one who would do that across-the-board reduction, and flow it through the model, and then explain it to Board Staff. 1495 MR. VLAHOS: Which may work in the case of NRG when you have about 24 different intervenors, it's just -- it's not easily done that way because the other parties have to receive the same information, and have a say. 1496 MR. AIKEN: That's right. 1497 MR. VLAHOS: That's fair. Thank you. 1498 Depreciation study. Again, talking about discretionary items in terms of implementation, this is the first time that we have to change depreciation rates in the last five years. So my question to the company is that -- why can't we wait another year? 1499 MR. AIKEN: You could, but it would make the problem worse for the accounts that are out of alignment. We touched upon the automobile account in particular. The other big one is the plastic mains. That's driving, probably, three-quarters of the overall increase. And it was that account -- in our last depreciation study, we had requested an increase in that depreciation rate. And, as part of the ADR agreement with Board Staff, back five, six years ago, that was the one account that they didn't want to see increased. 1500 And the company agreed to that. And Board Staff accepted all the other changes. And now we've come here, five, six years later, and that's the account that has gone -- has grown further out of alignment. And so I think the problem is, if you would put it off another year, you would make the increase the following year that much bigger. 1501 MR. VLAHOS: That's a balancing thing, I guess, that we have to worry about. 1502 MR. AIKEN: That's correct; yes. 1503 MR. VLAHOS: Okay. Moving on to the rate design. 1504 Now, one other issue that always comes up in terms of implementing a decision, to the extent the Board finds a different revenue requirement than the company proposes, there's always the issue as to how do we take that adjusted revenue requirement and translate that into the rate design proposals of the company, okay? Do you prorate, for example? Or, you know, if it's only so much, you just, you know, take it all on the fixed charge and leave the variable charge aside? 1505 I did notice an exchange today that the fixed charges changed amounts to about $100,000, I heard? 1506 MR. AIKEN: That's correct; yes. 1507 MR. VLAHOS: So if the revenue requirement -- if the deficiency is found to be smaller than it is proposed, then is there a suggestion by the company of how do we go about implementing a smaller deficiency into the rate schedules? 1508 MR. AIKEN: Yes. The proposal would be to continue with the fixed charge change, and the smaller deficiency would be reflected in a reduced variable rate. How you would spread that reduction in the deficiency across rate classes, you could do a flat -- you know, the same rate change applicable to everybody, or you could look at the revenue-to-cost ratios, keeping revenue-to-cost ratios for each rate class within a range. So, for example, the residential rate might go down more than the seasonal rate to reflect a lower deficiency, but at the same time, keeping those revenue-to-cost ratios that result from that within a specified range, for example. 1509 MR. VLAHOS: All right. Mr. Aiken, typically, when the Board issues a decision and the revenue requirement is different than proposed - and that may come from, say, you know, a lower cost of equity, a lower cost of debt; there may be lower operating or maintenance expenses - but typically, would the company run the whole thing through the fully allocated cost model, or -- 1510 MR. AIKEN: Yes. 1511 MR. VLAHOS: You would do that before you actually deal with the rate design of it? 1512 MR. AIKEN: Yes. In doing the impact statements, I run all the Board-approved changes through the model, then I transfer all those figures into the cost-allocation model and see what comes out of it, and then go on to the rate design side. 1513 MR. VLAHOS: All right. And in that case, whatever you file with the Board, you know, would Staff, for example, be able to see the revenue-to-cost ratios, the new ones that might come up? 1514 MR. AIKEN: Yes. 1515 MR. VLAHOS: There was some discussion about the billing system and the ability to prorate or not the ability to prorate, and the issue about rate riders. I guess the question that I had is: If there are new rates to be implemented on the next date, let's call it the 1st of October, okay, then that would happen with the first billing for every customer from that point on; is that correct? Is this how the company implements the Board's orders? 1516 MR. McCALLUM: That's correct. They're issued for all bills rendered after the date of approval. 1517 MR. VLAHOS: Okay. So, unlike in the case, say, of Union and Enbridge, when we say "effective date October 1st" is for gas taken or considered to be taken after that date, that's not how NRG does it. 1518 MR. McCALLUM: No. Those -- 1519 MR. VLAHOS: Because you are not able to? 1520 MR. McCALLUM: That's right. Our billing system has never been designed for that. They're able to split their consumption patterns for each customer based on, presumably, the number of days from the end of the last billing cycle to the date the order is implemented at the old rate, and then from the implementation date to the date of the bill being rendered at the new rate. And our billing system has never been able to accommodate that. 1521 MR. VLAHOS: All right. So, theoretically, in a world where you have constant rate increases on the delivery side, and it may not be the case with the commodity side because eventually it will be captured in the deferral account; right? But in the case of delivery charges, in a world where you have constant increases on the delivery side of the business, then, in effect, the company is overearning with that account alone? 1522 MR. McCALLUM: In the world of continuing increases, yes, there would be that. 1523 MR. VLAHOS: And any idea what it would cost to build that capacity into your billing system? 1524 MR. McCALLUM: I do not know what that cost would be. It's certainly something that could be done, but -- 1525 MR. VLAHOS: Or it can be looked at? 1526 MR. McCALLUM: Yes. 1527 MR. VLAHOS: Okay. And three or four areas left. 1528 The company wants a variance account on a variance account; did I put that right? The account is on whether you're collecting from the customers one-third of the $530,000? 1529 MR. AIKEN: That's correct. But that, technically, is not a variance account, it's a recovery -- 1530 MR. VLAHOS: Okay. 1531 MR. AIKEN: -- of an amount. There's no variance or not even, I guess, a deferral account associated with that. 1532 MR. VLAHOS: So I was wrong in my characterization, then. It's not a variance account, it's a -- what is it? 1533 MR. AIKEN: But I like the concept. 1534 MR. VLAHOS: A variance account on a variance account, and where do you stop? But do you anticipate there would be a substantial or a material variation in terms of the collection from customers? 1535 MR. AIKEN: There could be, because, as we've mentioned, you know, 25 percent of the volume is related to seasonal; another large component is related to grain dryers. The residential volumes can vary significantly whether we have a warm winter or a cold winter. So when you're charging, you know, .8 cents per cubic metre based on the forecast, as a forecaster, I know the forecasts are going to be wrong. And I would think there would be potential, you know, if you have a poor grain drying season and a warm winter, that, you know, the company would underrecover; at the same time, if it's a cold winter, that the company could overrecover. 1536 MR. VLAHOS: So it's symmetrical, is it? 1537 MR. AIKEN: Yes. 1538 MR. VLAHOS: Okay. Actually, one last area. 1539 You were taken through the evidence on the ancillary programs and their performance, profitability over the next -- over the last several years, and there was an observation that the revenue has not changed very much but, you know, the expenses had. 1540 My question is a bit different. Are there any price increases that are being implemented after the Board's decision is issued? Let me be more specific. Any price increases on the ancillary services that are contemplated in the 2005 fiscal year? 1541 MR. McCALLUM: There is an increase contemplated and built into the forecast for the water heater rental rates. 1542 MR. VLAHOS: And that's in the forecast already? 1543 MR. McCALLUM: Yes, it is. 1544 MR. VLAHOS: Okay. If it isn't in the forecast, would the company still go ahead and increase prices or rates for certain services? And if so, would the company let the Board know? 1545 MR. BLAKE: Sure, we would let you know if we changed any of the prices on that. 1546 MR. VLAHOS: Have you done that, though? Have you changed the prices in the fiscal year which was a test year without those increases being reflected in the revenues for those ancillary programs? 1547 MR. BLAKE: I honestly don't know. Typically, we try and change the prices of -- for service work, that sort of thing, at the beginning of our fiscal period. So I would say, I can't say definitively, in the past, whether there have been changes or not. 1548 But our typical process is, we try and change as many things as we can coincident with the beginning of the fiscal year. But if you would like, we can advise you of any changes that we may make to the program that weren't anticipated in this. 1549 MR. VLAHOS: I was just wondering about the practice, whether it's sort of in the back of your mind that, you know, If we change this rate, it wasn't part of the filing and, therefore, we are to advise the Board on this. 1550 MR. BLAKE: The only thing we have right now that we're contemplating is the change in the water heater rentals. And that comes out of the -- there are some new regulations that are requiring what we call spark-arrester units. So the new water heaters, there's some new legislation requiring spark arresters to be installed on new water heaters, and the conventional water heaters have already come out with those. And it's increased the prices of those substantially. And we think that the same program's going to happen with power-vented water heaters -- and, as well, with the increases in steel, we've just received a new pricing, new pricing from the water heater manufacturer. So that's what's, you know, leading us to change our prices sort of mid-year on the water heater rentals. 1551 MR. VLAHOS: Okay. Thank you very much, Panel. 1552 And Mr. Chair, those are my questions. 1553 MR. CARR: Thank you. 1554 I have a few also. And I guess I'm going to test our collective memories here, because I'm going to be going back almost to the beginning of today's proceedings here. 1555 There was fairly extensive discussion around the point of the difficulty -- well, two things, one, reducing regulatory costs, and one component of that was the issue of one single test year versus three test years, and the difficulty of forecasting, et cetera, et cetera. And, as I listened to it, it occurred to me, perhaps, that, I mean -- is your rate year the right rate year? I mean, beginning October the 1st seems to me to be about the worst possible date to pick for changing rates, given that it's the end of the tobacco-drying season, as I understand, or near the end of it, so that you've got maximum uncertainty in projecting the coming year's -- that element, at least, of your revenue and your load, and so on. This forces consideration: Maybe we should be using a historic test year rather than a forward test year? 1556 MR. BLAKE: I'm not certain -- I haven't -- I'm told that the electric side is looking at something like that. It's not a consideration that we've made, but we'd be happy to discuss it with staff. 1557 MR. CARR: Perhaps -- do you know why your rate year starts on October the 1st? 1558 MR. BLAKE: Our rate year starts on October 1st because that's when our fiscal year starts. And our fiscal year starts on that date because, as a collective group of companies, that has always been the date, for whatever reason, I can't tell you. It pre-dates my 25 years with the company. But I know some of the utilities have gone to a calendar year. And I'm a little reluctant to go to a calendar year because you're in the middle of a winter period, and I would prefer that the fiscal year end during a lull period, or, I guess -- if you were asking me when would I really like to have the fiscal year, I would like to have it on July 1st or something like that because that's when you're at zero consumption. You get the best possible matching of year over year, you know. No adjustments and, you know, all that sort of thing. But we've had it on September 30th, year-end, for 25 years, so I guess we've become accustomed to it, and maybe haven't made that consideration. So that may be something that might be helpful. 1559 MR. CARR: Well, I guess, really, the fiscal year-end is usually driven by corporate things - and you've indicated that that is, indeed, the case in your thing - but that doesn't necessarily mean to say that the rate currency year, or the test year, needs to comply with the fiscal, financial year. It does -- it's conceptually simpler if it does, for a lot of obvious reasons, but it's not a -- they're not locked together, in fact. 1560 MR. BLAKE: No, I understand. 1561 MR. CARR: And the difficulty we seem to be collectively facing is a considerable proportion of your activities are very difficult to forecast, due to the whole process by which the tobacco industry works, in terms of their negotiations and the time-tabling, uncertainty, and so on and so forth. And perhaps we need to unlock the -- reflect that in a more practical selection of a rate year, of a test year or go to a historic test year, rather than trying to estimate, just look backwards at what actually happened, if it's that difficult to forecast. If it is that difficult to forecast, look backwards and use actual numbers, rather than forwards using the forecast, with a corresponding reduction in rate of return, of course, as there'd be much less risk. 1562 MR. BLAKE: I hadn't made that consideration, but, you know, I'll take that back and discuss it with our management group. 1563 MR. CARR: You did mention, as well - and I think we have a collective interest in reducing regulatory costs - and this is really where this discussion got started from, was the potential for reducing costs. And you indicated that you had some ideas, and certainly some of those, I think, came out during cross-examination discussion, but I wondered if you completed putting all your ideas out, or if you had others that you wanted to suggest, make known to us, we'd be very interested. 1564 MR. BLAKE: One of the -- we've had, you know, several discussions as a group here about regulatory costs, obviously. And we're interested in reducing the costs, not just, obviously, the dollar costs, but also the time costs. And, you know, one equates to the other one, eventually. But some of the things that have sort of come out of our discussions are -- one of the things that I suggested was, maybe we can make our, you know, three-binder filing into something smaller. And really, that, you know, the level of detail that we provide, the extra cost of that, is really not, you know -- there wouldn't be a huge saving on reducing the quantity that we provide. And that probably helps the Board, assists the Board and the Staff, in seeing exactly what we're doing. 1565 I think if we could move to more of a paper hearing, to some extent - and I'm not suggesting that we don't have any oral hearing at all - but move to maybe more comprehensive review of the evidence, and maybe go through, maybe, even a two-interrogatory -- two-phase interrogatory or something. 1566 Another thing that we think would be very helpful: If we could move the process along quickly enough, that we don't have to do an update. We've always done an update. We try and time the update so that it's a week or two before the hearing, so that we've got the freshest possible information. But, if we could get the information in, and have the process move along quickly enough that we didn't have to provide an update, that would probably save us, I don't know, $4,000 or $5,000 right there, which is, you know, pretty significant on our side. Plus that would be something Staff and Board would not have to look at, and, you know, look at the multi-coloured pages. 1567 So if there were some way that we could, you know, move that process along quickly, and have, sort of, some dates certain in the process, such as, you know, filing needs to be done by a certain date. You know, these sort -- this sort of schedule set out, so that we could move that along. We've been fortunate not to have had intervenors, to the extent that intervenors would tend to add more to the length of the process. And, if we did have intervenors come forward, we may have to adjust that. 1568 But that would be, you know, from our standpoint, how we think we could save some money, and maybe some hearing time as well by, you know, having Staff, you know, have a full review, lots of interrogatories, back and forth, and get the evidence and the clarification on the record through that process. And then go to maybe a -- possibly a shortened oral hearing, or maybe even, if there aren't any major issues, maybe it could be done with -- and there aren't rate design issues and so forth, maybe it could be done all on paper, I don't know. 1569 MR. CARR: That's very helpful. Thanks. I think, you know, from our perspective, essentially, what tends to lengthen the process is being surprised. We have to basically respond as and when we're required to, so the greater degree of advance notice, the better able we're able to plan the workload, and give you date certainty. So maybe this all speaks to a more timely addressing of when you're going to apply, and a dialogue with us at that point in time, in terms of setting a mutually-beneficial schedule, to reduce costs overall. 1570 MR. BLAKE: Yes. 1571 MR. CARR: So any further thoughts you have on that would be very welcome. 1572 I wanted to cover, get a little bit into this issue that I basically characterize as being the cost of capital. It's a combination of factors. It's the issues that Mr. Vlahos brought out about the debt-equity ratio. It's the issues of the cost of debt, and the deeming that goes on, and so on and so forth. 1573 If you wrap that all together, that comes down as a thing called the cost of capital, and really, that's the important thing. All the other things are simply proxies to get you to the point of saying, This is a reasonable cost of capital allowance for the owner. 1574 And I think you do have an undertaking related to attempting to find out what the cost of the sale of the loans were. My understanding is that those debts were sold partly at the suggestion at the Board's last hearing to move the debt into, basically, an arm's-length type of arrangement. Is that a fair characterization? 1575 MR. BLAKE: I think -- I think that's a fair characterization, but I think that more so it was a part of the estate planning by the owner. And, you know, I'm not trying to -- I'm speculating here, and I shouldn't probably be doing that, but through some changes he's made in his own personal -- personal estate, I guess. 1576 MR. CARR: Okay. All right. That's fine. It may be not the only thing. But clearly the transactions you have completed with regard to your debt have not resulted in any change in cost, according to your filing. 1577 MR. BLAKE: That's correct. 1578 MR. CARR: So, therefore, they haven't achieved the objective that I think the Board would like to see. And it seems, therefore, that your response to Mr. Vlahos's question about, Is the sale price of those debt instrument of interest to this hearing, since the sale price resulted in no change in your revenue requirements, then we have to wonder why the transfer took place and, in fact, is there a benefit that should be going to the customers? 1579 The bottom line of all this is that, without transparency in determining what the cost of the component -- the components of the cost of capital are, the Board is in a very difficult position to say that it's a reasonable cost of capital. 1580 So one of the questions I had to ask you, again, retreating all that to a high level, is, What would your reaction be to the Board saying, I don't really care what your debt-equity ratio is, I don't really care what your cost of debt is, I don't really care what your cost of equity is; what I'm worried about is this is the allowable cost of capital. You arrange the capital structure however you wish; borrow from whoever you wish, sell equity to whomever you wish. All we want to see is a reasonable cost of capital overall. 1581 MR. BLAKE: I'm not -- I would have to think about your inquiry. I don't think that's been in keeping with the way it's been done in the past. But on the other hand, I'm not saying that we would not agree with some changes in the process. 1582 MR. CARR: I think we're interested in looking at improving things, and this is clearly over a number of -- a couple of years now, to my understanding. I'm very new to this, as you know. But from what I understand, this has been a difficult point at least in two applications now. So I'm saying, really, the end goal point here is to get a reasonable cost of capital. Is there a better way of doing that from your perspective? 1583 MR. BLAKE: I think it's -- you know, as I alluded to before, I think it's been somewhat difficult for the company to understand directionally where the Board thinks the company should go. And I'm not -- I'm not sure as to how we go about asking you, as the Board, which way you want -- which way you think we should go. I guess, on the other hand, I understand that the obligation is on the company to provide the evidence, and so forth. 1584 But it is our intent to refinance the company over the next period, hopefully, prepare a longer-term capital project plan that will have the funding requirements attached to it, and so forth. 1585 And if the Board sees fit, we could also incorporate in the next process, the next proceeding, a review of the overall equity component and costs of equity, and so forth, and maybe propose some alternate methodologies to the one that we've been using for six or seven or eight years, however long it's been. 1586 MR. CARR: A hundred? 1587 MR. BLAKE: The formula approach, as we call it. So ... 1588 MR. VLAHOS: As long as you don't bring back Dr. Sherwin. 1589 MR. BLAKE: Dr. Sherwin. I'm not sure we had him. I think we've only had Ms. McShane. 1590 MR. CARR: Well, directionally the Board has two broad options here. I mean, we either have to satisfy ourselves through a building-block process, component by component, the cost of capital is reasonable, and that does get you into what is the appropriate debt-equity, what is the free open-market price, et cetera, et cetera, and the risk profile of your particular company and all that. 1591 The other option is to simply say, Well, look, that is something that could be left to the company's discretion. The result we're looking for is this cost of capital, which, frankly, is less intrusive in terms of a regulatory thing, and speaking to our previous conversation about reducing regulatory costs. But it probably incurs a greater degree of risk on your part as well. 1592 So this isn't something that I think we can order you to do, but it is -- and, therefore, we've got two almost diametrically opposed directions. We, I guess, could entertain that as a Board. Your input to that would be welcome. 1593 MR. BLAKE: I appreciate that, and we will take your thoughts away and consider them. I think that they are very valid. 1594 MR. CARR: I just wanted to go to the -- we don't need to turn the exact evidence up, but there was a fair discussion this morning, led by Mr. Millar, related to the capital projects, and the fact that there were eight new ones in the updated evidence that didn't exist in the original filing. 1595 Just a couple of questions there. First of all, the miscellaneous projects, is that -- when is a project no longer miscellaneous but a designated project? Is there a dollar number, or is it just kind of like, It surprised me so it must be miscellaneous? 1596 MR. BLAKE: They're typically, you know, I would say, up to $5,000, I would think -- 1597 MR. McCALLUM: Yeah. 1598 MR. BLAKE: -- where we would put that in that miscellaneous category. And they're typically short main extensions to, you know, one or a few customers. But that's not to say that we don't get longer main extensions, where someone decides they're going to build a grain dryer and we have no knowledge of it until a few weeks before the bin actually is installed or something. So we can get, you know, those sorts of projects as well. And they would show up the next year, not in the miscellaneous category but as a previously unidentified project that the Board may not have seen. So we get those as well. But typically the miscellaneous ones are small main extensions or something -- something relatively minor. 1599 MR. McCALLUM: Just as an example, that project on Nova Scotia line, if we had done our updates in June, that project would have fallen into miscellaneous, because at that point in time we didn't know anything about it. That's a line that just goes along the lake down to a large pig farm that we didn't even know existed, and he just called us up and said, you know, that he wanted gas service. And we didn't even know he was there. He was down a road we didn't think there was anything on. 1600 MR. CARR: So this is sort of a variance account, really? 1601 MR. BLAKE: Sort of a variance account, yes. 1602 MR. McCALLUM: You know, we know we're going to get those jobs that are going to come up. We do our best to try to anticipate the major ones, based on the information that we get from the customers at the time. But we know that, as Mr. Blake has said, people are going to build a factory or build a grain dryer and we've not anticipated it, but it's too good to turn down, because if you don't get it at the start, it's hard to get it after. 1603 MR. CARR: No, I appreciate that the projects that are actually prosecuted under it may, you know, I guess, are worthwhile doing. That wasn't my concern. It was the amount of money that is there, and how would you estimate those? I mean, $25,000 doesn't seem out of line, to my way of thinking, but then it wasn't that last year. It was a different number - I forget the exact number - it was -- 1604 MR. BLAKE: I think we actually overspent, and, you know, we'd have to do some research to see whether we typically overspend or underspend, but I think the 25 is sort of what our expectations have been. But there may be -- even though that group of miscellaneous projects may be forecast at 25, and may come in at 23 or 28 or 40, or whatever it might be, there may be other projects, as well, that are done during the year, that, you know, come along, that are larger than just those miscellaneous ones. So there's likely to be variances, whether they're in that account or whether they're somewhere else. 1605 MR. CARR: Now, one of the projects that was discussed this morning was one -- it was the Springwater from -- I'm reading my own handwriting here. I think it's Jaffa -- 1606 MR. BLAKE: Yes. 1607 MR. CARR: -- which was deferred from 2004. Now, just generically, could you explain to me what -- I guess what I'm worried about is, is there any possibility of double-counting that project? It's in the 2004 revenue requirements, and it's now appearing again because it never got prosecuted in 2004, so the ratepayers are paying for it twice: That would be my concern. Can you satisfy me that's not happening? 1608 MR. BLAKE: It wouldn't have been included in rate base in 2004, although we had it as originally intended to be built in 2004, and in our original forecast as a 2004 project. It wasn't built, so when we did our updated evidence, we removed that from rate base in our updated evidence, and 2000 year-end rate base, and moved it into our forecast test-year rate base for that project. 1609 Just to give you a little information on that one. It's on a road where there are very few houses, and there's a factory on the road that builds steel buildings, something like a Butler building, only they're called Steelway buildings. And they're similar to a Butler steel building, which, you know, a factory would use -- in fact, our new building in Aylmer is a Steelway building. And it's owned by one gentleman. And we've approached him on several occasions to convert his system over from propane to natural gas. And he keeps telling us that, Yes, I'm going to do it. Yes, I want it. And, Build the line, and so forth. And we're saying, Well, let's get all the paperwork here signed first, and then we'll build the line and change you over. 1610 And for whatever reason, he is being very slow at getting the job done of converting. And so we're not going to build the line until we have written assurance that he's going to connect, obviously, because there's no other -- there are no other customers on that line, other than maybe one or two houses. 1611 So we were convinced that he was going to convert. And he didn't. And so we've sent our sales fellow back over to see him again. And his son is now, sort of, the plant manager, and his son assures us that they're going to do it. But they just need a little -- couple more weeks, and you know how it goes, so we moved it into 2005. So it's -- our best estimate is that it will be done. 1612 But of all the projects in the entire package, it has the greatest degree of uncertainty, I guess. The other ones are largely to residential accounts, and so forth, and we know they're going, but this one has been a little difficult. 1613 MR. CARR: Yeah. I wasn't too concerned, actually, with the specific project. It's just the generic concept of what happens when something is, essentially, factored into the rates for a given year, doesn't happen, then is applied for to be part of the rates the next year. And it seems to me that the rates, for, in this case, 2004, included, were based on a rate base which included that project, but it never happened. So now you're saying you backed it out of rate base, but you're not retroactively changing the rates for 2004. 1614 MR. BLAKE: You're correct. And conversely, the other thing that could happen, you know, recognizing the Board's -- the Board highlighting the trend as being for underspending, but the opposite can happen, in that unforecasted projects can occur. And we would hope, over time, that the two sort of average out. 1615 MR. CARR: So is that the mechanism for not double-dipping, basically? 1616 MR. BLAKE: Well, and the double-dipping, well, you know, I guess there's sort of dipping and double-dipping, but double-dipping would be the case that -- where you're suggesting -- where you -- projects included, and then deferred, would go into the next year. And I think that the mechanism that we have prevents that. 1617 MR. CARR: Okay. That's what I'm looking for comfort on. So could you run me through it; why does it prevent it? Or, how does it prevent it? 1618 MR. BLAKE: In this case, the project, although it was in the 2004 budget, it, you know, it was -- the rate base was established having that project in there. 1619 MR. CARR: Yes. 1620 MR. BLAKE: But when we come to 2005, that project has been taken out and put in 2005. So it's, again, just -- we're just recovering in 2005. I understand your point that, you know, maybe we earned on it in 2004, but on the other hand there may be projects that we didn't earn on. And the only way to really safeguard against that would be to go to a variance account or something, something like that, to track the capital expenditures. So if there was overspending or underspending, that would be tracked in that method. 1621 MR. CARR: Okay. Thank you. 1622 I think I just had one more question. Let me revisit this, these litigation costs of $175,000. And you did say that you thought it was reasonable, in response, I believe, to Mr. Vlahos. Somebody questioned you, and you thought it was reasonable that customers should pay for it. That being the case, why was it not in the original application? It appeared, you know, in the updated evidence, only. 1623 MR. BLAKE: I think it was an oversight on our part. We had not really contemplated that as being a cost. We hadn't really contemplated, early on, when the original evidence package was put together, as to what the costs would be, and so forth. And, in reviewing the matter with, you know, our legal counsel and our consultants and our management team, and so forth, it came to light that that was a cost that had not been included in the package, and it then became part of the updated evidence. 1624 MR. CARR: And then I just have one final question. And this was really a clarification. And it related to the discussion around the ability to, you know -- no, what is it? It's the inability to prorate. And let me just understand what this means. This means that -- this is my understanding of what you've said. Correct me if I am wrong. It means that, if we issue an order that is effective on a certain date, and let's say the date is in the future, you can make that rate effective as of that date for all bills sent out from that date -- or, to be more correct, all meter reads that take place after that, on or after that, date; is that correct? But you cannot prorate usage, you know, between -- within a meter-read period? Is that correct? 1625 MR. McCALLUM: That's correct. We have no provision in our billing system to bill out a customer for two distribution rates within the same period. 1626 MR. CARR: Okay. Very good. Very simple explanation. Thank you. Those are my questions. Thank you very much. 1627 And with that -- sorry? 1628 [The Board confers] 1629 MR. CARR: Yes. Oh, sorry. 1630 MR. STOLL: Thank you. I have no question. 1631 MR. CARR: No redirect? 1632 MR. STOLL: No. 1633 MR. CARR: Thank you. Sorry. 1634 With that, the evidentiary portion of this proceeding is complete, and the Panel is dismissed with our thanks. Thank you very much indeed. We may wish, as I understand it, to swear in two of the Panel members again tomorrow. We'll see exactly the necessity of that, but again, thank you very much. Very helpful. 1635 MR. BUDD: Mr. Chairman, I'm just wondering, as well, because I haven't had a chance with Mr. Stoll to caucus, now that we've completed the evidentiary portion, as to whether or not these witnesses would actually prefer to go home tonight, and file, by way of undertaking, those matters in writing? 1636 MR. CARR: My understanding was that they would be here for tomorrow's 11 o'clock thing. Is that a change of heart? 1637 MR. BUDD: It may well be. I just would like to ask them, if I could, for a moment. Could I just have a moment of indulgence, please? 1638 MR. CARR: Absolutely. 1639 MR. BUDD: As you indicated, sir. Tomorrow morning, at 11 o'clock. 1640 MR. CARR: Is that okay? 1641 MR. BUDD: Yeah. 1642 MR. CARR: Very good. Well, thank you very much. Again, thank you. And we'll reconvene at 11 o'clock tomorrow. 1643 --- Whereupon the hearing adjourned at 5:04 p.m.