FILE NO.: EB-2005-0551
VOLUME: Technical Conference
DATE: May 18, 2006
BEFORE: Kristi Sebalj Board Counsel
Ron Man Board Staff
Rudra Mukherji Board Staff
THE ONTARIO ENERGY BOARD
IN THE MATTER OF the Ontario Energy Board Act, 1998,
S.O.1998, c.15, Schedule B;
AND IN THE MATTER OF a proceeding initiated by the
Ontario Energy Board to determine whether it should
order new rates for the provision of natural gas,
transmission, distribution and storage services to
gas-fired generators (and other qualified customers)
and whether the Board should refrain from regulating
the rates for storage of gas;
Hearing held at 130 Dundas Street West,
3rd Floor, Toronto, Ontario,
on Thursday, May 18, 2006,
commencing at 8:30 a.m.
B E F O R E:
KRISTI SEBALJ BOARD COUNSEL
RON MAN BOARD STAFF
RUDRA MUKHERJI BOARD STAFF
A P P E A R A N C E S
DONNA CAMPBELL Board Hearing Team
GORDON CAMERON Union Gas Limited
PAT MORAN APPrO
DAVID BROWN Sithe Global Power,
TransCanada Energy, Portland
DAVID STEVENS Enbridge Gas Distribution
RANDY AIKEN London Property Management
Association and Wholesale
Gas Purchasers Group
JAMES WIGHTMAN Vulnerable Energy Consumers
NOLA RUZYCKI Ontario Energy Savings
GREG OLSEN Ontario Power Generation
BRIAN TROICUK BP Canada
PAT KEYS TransCanada PipeLines
PETER THOMPSON IGUA and AMPCO
GIA DEJULIO Ontario Power Authority
A P P E A R A N C E S (Cont’d)
JIM GRUENBAUER City of Kitchener
CHRIS CAMIRAND Nexen Marketing
GEORGE KATSURAS IESO
DAVID MacINTOSH Energy Probe
LOUIS-ANDRE LECLERC Gaz Métro
ROBERT HOWE Enbridge Inc.
LAURIE SMITH Market Hub Partners Canada
JOHN DeVELLIS School Energy Coalition
I N D E X O F P R O C E E D I N G S
Description Page No.
--- Upon commencing at 8:28 a.m. 1
Market Hub Partners – Panel 1; Resumed 2
J. Redford, J. Reed;
Cross-examination by Ms. Campbell 2
Re-examination by Mr. Smith 28
Cross-examination by Mr. Thompson 30
Cross-examination by Mr. Quinn 52
Cross-examination by Ms. Sebalj 55
Cross-examination by Mr. Man 71
--- Recess taken at 10:36 a.m. 73
--- On resuming at 10:57 a.m. 73
Gaz Métro – Panel 1: 74
S. Brochu, F. Morel, P. Belisle;
Opening Statement by Ms. Brochu 75
Cross-examination by Mr. Smith 77
Cross-examination by Mr. Moran 78
Cross-examination by Ms. Sebalj 83
Enbridge Inc. – Panel 1: 88
Opening Statement by Mr. Craig 88
Cross-examination by Mr. Smith 90
Cross-examination by Mr. Moran 90
Cross-examination by Mr. Thompson 96
City of Kitchener – Panel 1: 101
D. Quinn, J. Gruenbauer;
Cross-examination by Ms. Campbell 102
Cross-examination by Mr. Leslie 104
Cross-examination by Mr. Smith 109
--- Luncheon recess taken at 12:04 p.m. 112
--- On resuming at 1:17 p.m. 112
IGUA and AMPCO – Panel 2: 112
J. Butler, M. Stauft;
Opening Statement by Mr. Thompson 112
Cross-examination by Mr. Leslie 115
Cross-examination by Mr. Smith 120
Cross-examination by Mr. Brown 126
I N D E X O F P R O C E E D I N G S (Cont’d)
Cross-examination by Ms. Campbell 135
Cross-examination by Mr. Leslie 145
--- Recess taken at 3:19 p.m. 180
--- On resuming at 3:35 p.m. 180
Cross-examination by Mr. Smith 180
Cross-examination by Mr. Cass 192
Cross-examination by Mr. Brown 208
Cross-examination by Ms. Sebalj 211
Enbridge Inc. – Panel 2: 216
D. McKeown, J. Grant, R. Smead;
Cross-examination by Ms. Campbell 219
Cross-examination by Mr. Moran 238
Procedural Matters 243
--- Whereupon the hearing adjourned at 5:38 p.m. 246
E X H I B I T S
Description Page No.
NO EXHIBITS ENTERD DURING THIS HEARING
U N D E R T A K I N G S
Description Page No.
MHP UNDERTAKING NO. 3: TO PROVIDE MASTER SERVICE 13
AGREEMENT AND SERVICE AGREEMENT
MHP UNDERTAKING NO. 4: TO PROVIDE A COPY OF 16
MR. BISHOP’S CV
MHP UNDERTAKING NO. 5: TO PRODUCE RETAINER LETTER 35
FOR MR. REED
MHP UNDERTAKING NO. 6: OF ALL THE LEASE RIGHTS MHP 53
CURRENTLY HOLDS, PROVIDE A LIST OF THOSE RIGHTS THAT
WERE ONCE HELD BY UNION GAS LIMITED, IF ANY
MHP UNDERTAKING NO. 7: TO CONFIRM ORIGIN OF DATA 54
AND PROVIDE DETAILS; PROVIDE DETAILS OF COMMERCIAL
ARRANGEMENTS IN EFFECT
MHP UNDERTAKING NO. 8: TO VERIFY LOCAL PRODUCTION 64
EI UNDERTAKING NO. 1: TO PROVIDE NAMES OF THE 96
DIRECTORS AND OFFICERS OF THE AFFILIATE COMPANIES
THAT ARE INVOLVED IN GAS BUSINESSES IN THE ENBRIDGE
CK UNDERTAKING NO. 1: TO PROVIDE A DEFINITION OF 108
THE RATE CLASSES
CK UNDERTAKING NO. 2: TO PROVIDE DETERMINATION OF 109
HOW MUCH OF THE LOAD WAS INTERRUPTIBLE ON PEAK DAYS
IGUA UNDERTAKING NO. 4: TO PROVIDE NUMBERS USED IN 118
IGUA UNDERTAKING NO. 5: TO PROVIDE EXPLANATION OF 132
HOW SECONDARY MARKET MITIGATES MARKET POWER IN
PRIMAIRY MARKET/SPECIFIC CASE OF STORAGE IN ONTARIO
CONSUMERS UNDERTAKING NO. 1: TO DEMONSTRATE HOW 153
CAPACITY CONSTRAINTS EVIDENCE MARKET POWER
U N D E R T A K I N G S (Cont’d)
CONSUMERS UNDERTAKING NO. 2: TO ADVISE WHETHER OR 158
NOT THE PIPELINES IN QUESTION UNDER FERC HAVE
INCREMENTAL RATES OR ROLLED-IN RATES
CONSUMERS UNDERTAKING NO. 3: TO PRODUCE 177
EXPLANATION OF CALCUALTION/ASSUMPTIONS
CONSUMERS UNDERTAKING NO. 4: TO PROVIDE THE 201
INFORMATION AS TO WHAT THOSE DECISIONS ARE THAT
YOU’RE REFERRING TO THAT YOU SAY YOU HAVE AND YOU
WOULD LOOK AT WITHOUT DOING ANY FURTHER RESEARCH
CONSUMERS UNDERTAKING NO. 5: TO PROVIDE COMPLETE 202
COPY OF FERC POLICY STATEMENT
EGD UNDERTAKING NO. 46: TO PROVIDE RANGE OF THE 221
TERMS AND STORAGE VOLUMES FOR OFF-PEAK TYPE OF
SERVICES, PARKINGS AND LOANS
EGD UNDERTAKING NO. 47: TO ADVISE WHETHER ENBRIDG 235
INC. HAVE ANY OPERATION CONTROL OVER VECTOR
1 Thursday, May 18, 2006
2 --- Upon commencing at 8:30 a.m.
3 MS. SEBALJ: Good morning, everyone.
4 Good morning, everyone. And welcome to day 3 of the
5 second Technical Conference in the Natural Gas Electricity
6 Interface Review Technical Conference. It is docket number
8 My name is Kristi Sebalj, and I am counsel to the
9 Board Panel on the Board support team. Today I have with
10 me Mr. Ronald Man -- I keep switching my people just to
11 keep you all on your toes. To my right will be, in ten
12 seconds or less, David Brown, who is also with the --
13 different David Brown, who is also with the Ontario Energy
15 I don't have much in the way of introductory remarks
16 today. I will indicate that we do have copies, physical
17 hard copies of both -- all three days' transcripts -- or,
18 sorry, both days transcripts prior to this.
19 I know you have them electronically, but to the extent
20 that anyone needs refer to them throughout the day, they
21 are here.
22 And unless there are -- is there anyone new in the
23 room that would like to register an appearance? And are
24 there any preliminary issues or questions that anyone has
25 before we start?
26 Hearing none, I'll turn it over to Mr. Smith.
27 MR. SMITH: And we have nothing. We thought we might
28 be able to answer one of the undertakings overnight but we
1 weren't able to and will provide it in writing as we're
3 MS. SEBALJ: Great. Thank you.
4 So I believe the panel is up for questioning,
5 Ms. Campbell.
6 MS. CAMPELL: Thank you.
7 MARKET HUB PARTNERS - PANEL 1; RESUMED
8 JIM REDFORD;
9 JOHN REED;
10 CROSS-EXAMINATION BY MS. CAMPBELL:
11 MS. CAMPELL: The first question that I'd like to deal
12 with is a general question, and it's simply, does Market
13 Hub own any storage fields that Union owned and operated?
14 MR. REDFORD: Do we own any storage fields that Union
15 owned and operated?
16 MS. CAMPELL: That Union owned and operated.
17 MR. REDFORD: No.
18 MS. CAMPELL: Thank you. And my next question is
19 going to take us to page 3, line 16.
20 MR. REDFORD: Of the MHP evidence?
21 MS. CAMPELL: Of the MHP evidence. And what I
22 simply would like from you is a definition of the reference
23 to “non-discriminatory access to transportation and storage
24 services at just and reasonable rates.”
25 Can you define what you mean by that? And that's the
26 fifth bullet point on that page.
27 MR. REDFORD: Yeah, I think by "non-discriminatory
28 access at just and reasonable rates," we're really looking
1 to be treated like similar customers, people in similar
2 situations. That's really what we're looking for there.
3 MS. CAMPELL: In your definition of "non-
4 discriminatory," does that include the posting of
5 information on web sites, things that were discussed by Ms.
6 McConihe yesterday?
7 MR. REDFORD: Not necessarily.
8 MS. CAMPELL: Then how would MHP structure
9 non-discriminatory service?
10 MR. REDFORD: Our own service?
11 MS. CAMPELL: You're talking about non-discriminatory
12 access. How would MHP suggest that than structured?
13 MR. REDFORD: Well, in our opinion, what's out there
14 now works for us. We're prepared to go forward with the
15 St. Claire pool on those terms. We're looking to be an M16
16 transportation customer. And insofar as we're treated
17 similar to other M16 customers, that's what we're looking
19 MS. CAMPELL: So when you say “support and
20 non-discriminatory access to transportation and storage
21 services,” you're talking about the continuation of the
22 status quo?
23 MR. REDFORD: Yeah. We have no concerns right now
24 with the access that we have. We would like to see it
25 continue to be, in so far as the Board regulates those
26 services that Union provides to us, that they're at just
27 and reasonable rates and that they're fair.
28 MS. CAMPELL: Moving on. Page 8, lines 18 to 21. And
1 again, there are some bullet points. And my first question
2 addresses the first bullet point. And there's a statement
3 in that bullet point -- well, first of all, an overall
5 You state, a stable and efficient regulatory framework
6 can be established through effective monitoring of the
7 market. And that's a paraphrase, actually, of that bullet
9 Do you have a process in mind when you make a
10 reference to "stable and effective regulatory framework"?
11 And "effective monitoring"?
12 MR. REDFORD: What would constitute effective
14 MS. CAMPELL: Yeah, what are you talking about?
15 MR. REDFORD: I think part of that is this process, to
16 understand the competitive nature of the market. I think
17 the second piece would be to have an effective component --
18 complaint process, pardon me, in place.
19 MS. CAMPELL: So the effective monitoring that you are
20 making reference to is a complaint process?
21 MR. REDFORD: Yeah, our feeling would be that in a
22 competitive market, that as long as the market continues to
23 be competitive, and to the extent that somebody feels that
24 market power is being abused, that there should be a
25 complaint process to provide -- to make that noticed.
26 MS. CAMPELL: And would the complaint process be
27 overseen by the Board?
28 MR. REDFORD: Yeah, I think in that case that company
1 and Board, sure.
2 MR. REED: If I could add, it's important to recognize
3 that Market Hub Partners also doesn't oppose, for example,
4 the filing of contracts after the fact on a confidential
5 basis with the Board. That's another way in which the
6 monitoring can take place. As well as through, obviously
7 the affiliate conduct of any transactions it might involve,
8 a ratepayer affiliate such as Union, which are always
9 subject to the Board's oversight.
10 MS. CAMPELL: Thank you.
11 MR. REDFORD: We would look to file those
12 confidentially as well. If we filed contracts after the
13 fact, after they were signed, we would want to do that
14 confidentially, in confidence.
15 MS. CAMPELL: What's MHP's position on the Board
16 monitoring for preferential treatment or cross subsidies
17 among affiliates?
18 MR. REDFORD: Well, I think the Board does that now
19 through the regulation of Union Gas, to the extent. That
20 -- to the extent that service we receive from Union Gas
21 would be seen in that light, I would expect them to be
22 monitored through interactions with Union.
23 MS. CAMPELL: Staying on the same page but the third
24 bullet point. There's a reference to "future review of
25 market-based rate authorization. Should be limited to a
26 review of mitigation measures necessary to protect the
27 public rather than a repeal of market-based rate
1 What kind of mitigation measures does MHP consider
2 appropriate to correct the exercise of market power?
3 MR. REDFORD: Well, I think it depends on what the
4 situation is. Really what we were looking at and getting
5 to in that bullet point was that once market-based rate
6 authorization is approved, that if there is an issue of
7 market power, then it can be dealt with through mitigation
8 measures around that party, versus repealing market-based
9 rates, so that we don't go through a trial of market-based
10 rates every time.
11 So the market's going to want confidence that market-
12 based rates are here to stay. And what we're getting at in
13 there is that market-based rate authority shouldn't
14 necessarily be re-examined every time there is an issue
15 come up.
16 MS. CAMPBELL: I’m just trying to understand what sort
17 of reporting requirements you would consider necessary to
18 detect market abuses.
19 MR. REDFORD: Well, again I think it goes back to a
20 complaint process that that if somebody feels there's
21 market power being exercised, that they should have an
22 ability to voice that.
23 MS. CAMPELL: And so have you told me all of the
24 mitigation measures that you think would be necessary, that
25 are referenced in that bullet point?
26 MR. REDFORD: Well, again, I think it depends on what
27 the situation is, who the party is, what the nature is.
28 MR. REED: Let me just add a little bit, since you
1 asked all of them. I think the mitigation measures
2 include, first of all, the complaint process; second, the
3 filing of contracts for review on a confidential basis;
4 third, the review of affiliate activities where the
5 affiliate is regulated; and then, traditional mitigation
6 measures for market power would also include encouraging
7 new entry. And I think that certainly has to be part of
8 the Board's mission as well, is to promote new entry as a
9 form of mitigating any market power.
10 I also realize that in the United States it’s been
11 proposed that a new market power analysis be submitted
12 every five years by holders of market-based rate authority.
13 That's to identify change to circumstances, if, for
14 example, one party's market share increased dramatically.
15 It's not meant to change the rules of the road. And
16 certainly that's important to not undercut that certainty
17 for the financial market.
18 But I think it could include some type of review like
19 that for changed circumstances as well.
20 MS. CAMPBELL: Thank you. If I could ask you to turn
21 to page 10, please, and I'm concentrating on the first four
22 lines on page 10. There's reference to the "imminent
23 introduction of additional LNG supplies to the northeastern
24 market" and then "new gas supply from the US Rockies and
25 northwest frontier."
26 I was wondering if you were able to provide me with a
27 time line for the availability of the additional LNG
28 supplies from the northeastern market and the new gas
1 supplies that are referenced coming from the US Rockies and
3 MR. REDFORD: When those projects are going to be in
5 MS. CAMPBELL: Well, the reference to LNG is "the
6 imminent introduction," and I want to know what "imminent”
7 means and if you can give me a time line.
8 MR. REDFORD: Well, imminent would mean we would
9 expect that within the next three to four years we'd see
10 changes in the supply. New addition.
11 MR. REED: And specifically LNG, looks like the first
12 increment from a new project would be 2010, and perhaps
13 additional volumes at existing facilities into the
14 northeast as early as 2009. For Rockies gas, beyond 2010
15 is the best guess right now, based upon the construction of
16 new pipelines.
17 MS. CAMPBELL: All right. So imminent is three to
18 four years, and gas supply is over five?
19 MR. REED: Imminent is three to four years for the
21 MS. CAMPBELL: Yes.
22 MR. REED: And more than four for Rockies, is my
23 current guess.
24 MS. CAMPBELL: Thank you. Is it your belief that the
25 new supply sources would be a cost-effective substitute for
26 Ontario storage?
27 MR. REED: It certainly could be. LNG, as it's being
28 contemplated at the new facilities, really serves more of a
1 base-load role than a peaking or seasonal role. But it
2 does cause existing gas supply sources within the region to
3 sort of move down the dispatch queue, down the merit order
4 and move into more of a seasonal and peaking role. So, for
5 example, you might see some of the existing LNG facilities
6 move more into a seasonal and peaking role if the new
7 facilities, a Bcf a day, especially, end up being
9 MS. CAMPBELL: Are the LNG supplies from the northeast
10 a viable alternative to Ontario storage on a cost and
11 transportation basis?
12 MR. REED: I would say it's too soon to say. Until we
13 know the economics of the pipeline expansions and the new
14 facilities, as well as the contract terms for the LNG, it's
15 too soon to say whether they would be cost-effective as a
16 substitute for Ontario storage.
17 I would also add that perhaps the more likely
18 substitute for Ontario storage would be the Quebec LNG
19 projects, which are not necessarily destined for the
20 northeastern US markets, but certainly for markets across
21 the eastern Canada and the northeastern US That's also in
22 the 2010, 2011 time frame, for Rebaska and Cocuna, and I
23 think that is more likely to be an economic substitute for
24 Ontario storage.
25 MS. CAMPBELL: What's the availability of transmission
26 to move the gas from the US Rockies and the frontier to
28 MR. REED: I'm sorry, I didn't hear the end of that
2 MS. CAMPBELL: What's the availability of transmission
3 to move gas from the US Rockies and frontier to Ontario?
4 MR. REED: To move Rockies gas into Ontario or into
5 the northeast is going to require the expansion of some
6 pipelines from Chicago to Dawn and beyond, and the
7 construction of new pipelines from the Rockies to Chicago.
8 Those are in proposal right now. Some of them are
9 before FERC in applications. But we're not yet at the
10 point of commencing construction, and there are not yet
11 adequate commitments to begin construction.
12 MS. CAMPBELL: What about the availability of
13 transmission to move the gas from the LNG projects in
14 Quebec that you talked about.
15 MR. REED: It's very fact-specific. For both Rebaska
16 and Cocuna there would be upgrades necessary to the TQM
17 system, as well as laterals built to the receiving
18 terminals themselves. It's expected that we'll see an
19 application by TransCanada next year for the interconnect
20 and expansion facilities.
21 So there are substantial upgrades needed in the
22 hundreds of millions of dollars, but if you're talking
23 about a Bcf a day or more, it looks like those projects can
24 afford the level of upgrades that are needed.
25 MS. CAMPBELL: I'm sorry, did you attach a time line
26 to that?
27 MR. REED: Yes. I said that we expect that a
28 TransCanada facilities application would probably be filed
1 next year for that, and we're looking for an on-line date
2 in 2010 for the first.
3 MS. CAMPBELL: Thank you. My next question arises out
4 of lines 15 and 16 on page 10, in which you refer to a
5 merchant storage operator accepting the development,
6 operation and marketing risks, and you talk about a return
7 on capital.
8 My question is, has MHP calculated the minimum rate of
9 return necessary to development of new storage?
10 MR. REDFORD: We have a rate of return that we would
11 like to meet. There's a hurdle rate that we'd like to
13 MS. CAMPBELL: Can you tell me what it is?
14 MR. REDFORD: I think that's proprietary.
15 MS. CAMPBELL: Oh, so there is a number that will
16 prompt MHP to build new storage but you're not able to tell
17 me that?
18 MR. REDFORD: Well, certainly there's a rate of return
19 at which we are interested in developing storage. And to
20 the extent that -- I think that's a proprietary number.
21 MS. CAMPBELL: Yesterday there was a discussion of the
22 FERC 20 percent. Can you give me a range without
23 committing yourself to a number?
24 MR. REDFORD: Pardon me? Could you repeat that?
26 MS. CAMPBELL: Yesterday, there was a discussion of 20
27 percent FERC. You remember there was a discussion about
28 the FERC paper and the 20 percent. And you indicated
1 you're not comfortable giving me a number. Can you give me
2 a range?
3 MR. REDFORD: Well, again, I think that's -- I think
4 it's proprietary. I think it's fair to say that we'd be
5 looking for a rate of return higher than the utility cost-
6 of-service return.
7 MS. CAMPBELL: I think we already knew that.
8 MR. REDFORD: Yes.
9 MS. CAMPBELL: If I can move to page 11. The
10 paragraph that I'm actually looking at right now starts at
11 line 9, and it sort of arises out of lines 9 to 16. And my
12 question is -- and this is a discussion of C1, okay.
13 If MHP was to realize the maximum C1 rate, what would
14 MHP's rate of return be?
15 MR. REDFORD: I have not calculated that.
16 MS. CAMPBELL: Could you undertake to do so?
17 MR. REDFORD: Just specifically, what are we talking
18 about in terms of a rate of return? Which projects? Under
19 St. Claire pool?
20 MS. CAMPBELL: Sure.
21 MR. SMITH: Could I have a capital structure?
22 MS. CAMPBELL: I'm sorry, I didn't hear you.
23 MR. SMITH: Was there a capital structure you wanted
24 us to assume for this purpose?
25 MS. CAMPBELL: I'm told you have free rein.
26 MR. REDFORD: Well, my issue is that I'm not prepared
27 to release capital costs publicly. Again, I see that as
1 MS. CAMPBELL: Is the range rate adequate?
2 MR. REDFORD: The C1 range rate?
3 MS. CAMPBELL: Yes.
4 MR. REDFORD: As it currently sits or as applied for
5 in the -- I think Union Gas applied for a different range
6 rate in the 2007 rate case?
7 MS. CAMPBELL: You can tell me about both.
8 MR. REDFORD: About both? Considering that --
9 considering that high deliverability -- well, your
10 deliverability is included in that range rate, I would say
11 that the existing range rate is probably low, and we would
12 be comfortable accepting the range rate that's been applied
13 for under the 2007 Union Gas rate case.
14 MS. CAMPBELL: I'm going to ask you to turn to page
15 12. And what this is is the request for a production of a
16 document. There's reference, lines 14 to 17, to a master
17 services agreement, so service agreements with Union
18 Gas and other affiliated companies. And what I would like
19 is production of a copy of that master service agreement.
20 MR. REDFORD: Of the master service agreement?
21 MS. CAMPBELL: The service agreement referred to.
22 MR. REDFORD: Yeah. Certainly we could file that. I
23 believe it was filed in the 2007 Union Gas rate case as
25 MS. CAMPBELL: Thank you.
26 MS. SEBALJ: That's MHP Undertaking No. 3.
27 MHP UNDERTAKING NO. 3: TO PROVIDE MASTER SERVICE
28 AGREEMENT AND SERVICE AGREEMENT
1 MS. CAMPBELL: Page 16. And this might be faster to
2 answer by undertaking also.
3 Page 16, lines 7 to 9, there is a statement, MHP's
4 conclusion as to the Board's position concerning market-
5 based rates and a statement that they believe that:
6 “The Board has concluded that market-based rates
7 for a large portion of Ontario storage market are
8 sufficient to protect the public interest from
9 the exercise of market power.”
10 And we would simply like to know the source of the
11 conclusion that the Board has stated that market-based
12 rates are sufficient to protect the public interest from
13 the exercise of market power. We'd like to know the
14 sources of that.
15 MR. REDFORD: Yeah. I don't know if the Board has
16 stated that. That's our observation, that the Board
17 appears to have concluded that market-based rates are
18 sufficient to protect the public interest for a large
19 portion of the Ontario storage market. There's a
20 large portion of the market that's available at
21 market-based rates now. It's available to independent
22 storage operators, and our belief would be that if the
23 Board felt that it wasn't sufficient to protect the public
24 interest, then they wouldn't have allowed it.
25 MS. CAMPBELL: So it's your interpretation.
26 MR. REDFORD: That's correct.
27 MS. CAMPBELL: Thank you. Now I'd like to turn to the
28 report that was filed by CEA. Am I correct, Mr. Reed, that
1 you are the author of the report?
2 MR. REED: I had the overall responsibility for the
3 report. It was actually authored by me and at least one
4 staff member, Mr. Bishop.
5 MS. CAMPBELL: Thank you. Could I have the CVs that
6 both of you produced, please?
7 MR. REED: Mine has been produced. We can do that for
8 Mr. Bishop as well.
9 MS. CAMPBELL: You know, I haven't seen your CV.
10 Perhaps -- there are many pieces of paper in this
11 proceeding, and it's quite possible it's in a --
12 MR. REDFORD: It was electronically sent on May 12th,
13 on Friday. It went out with our update, the page 2 update
14 to the MHP evidence, and it went out with the attachments D
15 and E update to the Concentric evidence. If you don't
16 have it, we'd certainly -- we'd certainly supply it.
17 MS. CAMPBELL: You provided Mr. Reed's CV. I'd also
18 like to have Mr. Bishop's, please. Thank you.
19 MR. REDFORD: That's fine.
20 MR. SMITH: We just want to be clear. We're not
21 proposing to call Mr. Bishop as a witness. We're happy to
22 provide the CV but ...
23 MS. CAMPBELL: Thank you for that clarification,
24 Mr. Smith.
25 MS. SEBALJ: Would you like that as an undertaking,
26 Ms. Campbell?
27 MS. CAMPBELL: Yes, please.
28 MS. SEBALJ: Is that acceptable as an undertaking?
1 MHP number 4, Mr. Bishop's CV.
2 MHP UNDERTAKING NO. 4: TO PROVIDE A COPY OF
3 MR. BISHOP’S CV
4 MS. CAMPBELL: Now, moving to the report, Mr. Reed. A
5 couple of clarifications to begin with. I think I might
6 already know the answer to some of these questions, but I'd
7 like them clarified.
8 The CEA study states that the market -- that “the
9 Board should establish clear standards for approval of
10 market- based rates and specify a comprehensive list of
11 other mitigating factors to be considered.”
12 And when I look at page 3, at the very bottom, the
13 first number says: "Establish clear standards for approval
14 of market-based rates."
15 And then if I go to page 53 of your report, there's
16 another number 1, and it says:
17 "Establish clear standards for approval of
18 market-based rates."
19 And there are two things listed there. “1, specify
20 the parameters of the market power.” And then it says:
21 "Specify a comprehensive list of other mitigating factors."
22 Are those the only two standards? Could you tell me
23 what the standards are?
24 MR. REED: I think that was a compound question. The
25 first answer is as to whether these are all of the
26 standards, yes, I think, just so we're clear, within the
27 first one, meeting the parameters for the market power
28 test, it's also important to understand whether that will
1 be applied differently to affiliates or non-affiliates,
2 independent companies.
3 Your second part was, are these -- what are the
4 components, I think, of the standards? And I mean, that is
5 a pretty long answer. Do you want me to go through the
6 components of the market power test, for example, that we
7 would --
8 MS. CAMPBELL: No, what I'm trying to find out is to
9 get a succinct answer of what the standards are. So if you
10 could just list them. Are you telling me it's the market
11 power rules? I'm trying to get a handle on what you mean
12 by standards.
13 MR. REED: Okay. The standard would be the framework
14 of analysis that the Board would undertake with regard to
15 the termination of whether market-based rates are
16 appropriate for the applicant. And, as we've outlined
17 here, it would consist of two parts, first, a market power
18 test, broadly defined. And secondly, for those applicants
19 that may have an indication of market concentration or
20 potential market power above a threshold, what are the
21 mitigating factors that would be considered such as new
22 entries, such as affiliate codes of conduct and so forth.
23 That would indicate that market-based rates are
24 appropriate notwithstanding some level of concentration in
25 the market.
26 MS. CAMPBELL: Thank you. The reference to mitigating
27 factors, if I look at page 33 of your report, there is a
28 list of mitigating factors taken from the FERC policies.
1 That appears to be the source. There are a number of them
2 listed there.
3 Am I correct that when you make reference to
4 mitigating factors, those are the mitigating factors that
5 you're referring to?
6 MR. REED: Yes.
7 MS. CAMPBELL: Okay. If I could ask you to turn to
8 page 24 of your report.
9 MR. REED: I have that.
10 MS. CAMPBELL: I'm looking at the paragraph that's in
11 the middle of the page. And it's actually the fourth
12 sentence. It begins "MHP Canada" and it says:
13 "MHP and other new storage providers
14 will be able to offer unbundled storage service,
15 including balancing, park and loan service, and
16 other unbundled storage services that have a
17 proven market demand."
18 And my question to you is, what are the other
19 unbundled storage services? You've talked about balancing,
20 park and loan services. What are the other unbundled
21 services referred to?
22 MR. REED: The other components, really, are the point
23 I made yesterday with regard to components of different
24 deliverability services that's been discussed here. A 1
25 percent deliverability service, a 10 percent deliverability
26 service. There's a whole range of alternatives that span
27 the spectrum from seasonal service to, essentially, daily
28 service that can be provided out of the same facility as
1 long as in aggregate they meet the facility's capabilities.
2 MS. CAMPBELL: So that's the definition of unbundled
3 services that's referred to in there?
4 MR. REED: That's right.
5 MS. CAMPBELL: In that paragraph?
6 MR. REED: That's how I'm using it, yes.
7 MS. CAMPBELL: If I could get you to turn the page
8 now, page 25, under "Affiliate Relationships," there's the
10 "The final essential element in creating a level
11 playing field for the provision of storage and
12 other potentially competitive services is
13 affiliate rules that provide assurance to all
14 market participants that competition will be
16 And then there's a discussion of affiliate rules.
17 There was discussion yesterday of the FERC code for
18 affiliate rules, which, again, that's a market -- that's a
19 Board -- I apologize, that's a code that has Board
20 oversight attached to it. And I'm wondering if MHP
21 considers the FERC standards of conduct to provide
22 sufficient affiliate protection to create a level playing
24 MR. REDFORD: Well, to be honest, we really haven't
25 looked at the FERC code of conduct. We have one here in
26 Ontario, the Affiliate Relationships Code, which we
27 would expect to follow. We haven't -- you know, we're not
28 operating in the US, so we're not that familiar with the
1 FERC code of conduct.
2 MS. CAMPBELL: Well, the difference, I believe,
3 between the codes is simply that one permits -- currently
4 we do not, under our Code, have a process whereby market
5 abuses, market power abuses, are investigated. A formal
6 market abuse complaints program, reporting requirements, et
7 cetera. And earlier in your evidence you indicated that
8 having such a process would be appropriate. And that
9 actually is what sparked my question.
10 MR. REDFORD: Yes, I mean, to that extent, there
11 should be a process where people that have complaints, if
12 it's a competitive market. If people have complaints about
13 market abuse, they should have a spot to go and voice those
14 concerns. But a kind of a piece-by-piece look through the
15 FERC code, we've not done that.
16 MS. CAMPBELL: I'm sorry. Could you say that again?
17 MR. REDFORD: A piece-by-piece look through the FERC
18 code, we haven't done that.
19 MS. CAMPBELL: Okay. Thank you.
20 Returning to the report, Mr. Reed, you probably will
21 be able to answer this for me. Starting at the bottom of
22 page 40.
23 MR. REED: I'm sorry, the bottom of page?
24 MS. CAMPBELL: 40?
25 MR. REED: 40. There.
26 MS. CAMPBELL: There's a statement at the very bottom,
27 and it says:
28 "Recent evidence from both storage suppliers and
1 customers clearly indicate that the relevant
2 geographic storage market for Ontario includes
3 the broader storage market encompassing the
4 northeastern and Upper Great Lakes regions of the
5 United States."
6 Then if I turn over to page 41, I have five bullet
7 points. And it's information taken from Tribute Resources'
8 website from Avenue Energy, Dawn, storage open season
9 package. Then there's another website. And you list a
10 number of sources there.
11 Are the sources for the statement of the recent
12 evidence for both storage suppliers and customers those
13 five sources? So, in other words, is the sentence at the
14 bottom of page 40 referring to these five sources? Are
15 those the storage suppliers and customers that are
16 referenced in the sentence at the bottom of page 40?
17 MR. REED: Those five bullets support that sentence.
18 There's substantial additional evidence that I'm aware of
19 from my work in the market.
20 MS. CAMPBELL: And could you tell me about that?
21 MR. REED: Yes. I think it would be relevant to look
22 at recent FERC decisions for other storage market-based
23 rate applications in the United States.
24 MS. CAMPBELL: Mm-hm.
25 MR. REED: Where the FERC has determined the relevant
26 market for those analyses, and included a very broad range
27 of states.
28 It's also relevant to look at the contracting
1 activities of purchasers of storage services in the United
2 States. And if one looks at, for example, the recent A&E
3 recontracting decisions to contract for Dawn service as
4 opposed to Empress Supplies, and include storage in
5 that, that's a good example. We have others in here, I
6 think, as well that talk about -- well, in fact, a third
7 bullet talks about other northeast consumers making
8 decisions to buy storage in Michigan on the ANR system.
9 So I guess I would certainly include the FERC
10 decisions and the general pattern of purchasing activities
11 in the States.
12 MS. CAMPBELL: Are there any specific FERC decisions
13 that you were thinking of?
14 MR. REED: The one that comes to mind most readily is
15 the Wisconsin public service decision for the Michigan
16 storage. That's the WPS Energy. But I think the
17 others that reflect the market definitions for applicants
18 in New York State and Pennsylvania are also relevant.
19 MS. CAMPBELL: With regard to the information that
20 appears in the five bullets on page 41, I am correct that
21 you are citing those as information sources but that you
22 didn't go and test the statements that they posted on their
23 website, et cetera?
24 MR. REED: I suppose I would say I tested it only in
25 my own framework of experience. It's consistent with the
26 experience that I've seen in the marketplace, working with
27 LDCs and power generators who make these types of
28 contracting decisions.
1 I didn't investigate, if that's a better word, the
2 statements that these parties have made.
3 MS. CAMPBELL: Thank you. On page 42 there's a
4 paragraph in the middle of the page that has a summary of
5 the EEA/Schwindt study that indicates that there's –-
6 synopsising -- I guess it's in the middle, actually.
7 There's a sentence that says:
8 “The EEA/Schwindt study also indicated that
9 there is adequate pipeline capacity upstream of
10 to Dawn on all but a few days each year, and as
11 such pipeline constraints do not act as a barrier
12 to competition among storage providers across
13 this region."
14 And am I correct that MHP didn't make an independent
15 assessment of that statement, that you accepted what the
16 EEA/Schwindt study said?
17 MR. REED: Again, two parts. We did not make an
18 independent assessment of capacity constraints upstream or
19 downstream of Dawn. What we're doing in this paragraph,
20 really, is simply reporting that study's findings. And
21 again, the issue of the role of pipeline capacity in
22 determining market-based rate authority for storage
23 projects is one that certainly Ms. McConihe raises, and
24 it's something, in light of the issues or concerns that
25 she's raised, that I'm certainly thinking about and
26 possibly will address in rebuttal.
27 But as to what's in our report here; that's correct.
28 We did not conduct an independent capacity analysis, either
1 upstream or downstream of Dawn, as to the effect of
2 constraints on that market.
3 MS. CAMPBELL: Thank you. Page 50. Sorry. I'm
4 trying to find page 50. I found page 49 and couldn't
5 understand how suddenly most of the text appeared to have
6 disappeared. It's amazing what a lack of caffeine will do
7 to you.
8 So we're here. I'm actually on page 50 along with
9 everybody else now. And my question actually has to do --
10 it arises out of some of the general statements on this
11 page. And is paragraph -- the full paragraph number 2 but
12 the first thing that arises is some discussion that
13 took place yesterday.
14 And what I'd appreciate is your definition of "a
15 secondary market," Mr. Reed.
16 MR. REED: Do you want me repeat the one I gave
18 MS. CAMPBELL: Yeah, actually, I'd like to explore it
19 a bit with you, so if you could...
20 MR. REED: It's a market in which the offeror of the
21 service is not the producer of the service but a contract
22 holder for that service. So it’s someone who holds
23 capacity on a pipeline or storage service and resells it in
24 the marketplace.
25 MS. CAMPBELL: Could that also be called a bilateral
27 MR. REED: In that case it is a bilateral transaction.
28 In most secondary markets it's based around bilateral
1 transactions as opposed to trilateral.
2 MS. CAMPBELL: Okay. And in your secondary market,
3 you said there was no need for transparency.
4 MR. REED: No, I didn't say that. The question asked
5 of me was: Is the existence of price transparency
6 necessary for something to be considered a secondary
7 market? And certainly it is not.
8 MS. CAMPBELL: Okay. What would you feel is adequate
9 transparency in a secondary market?
10 MR. REED: Adequate for what purpose?
11 MS. CAMPBELL: Adequate for the participants in the
12 secondary market.
13 MR. REED: Well, I guess I'm struggling with the
14 question. Different participants will have different
15 interests in transparency existing or not existing.
16 MS. CAMPBELL: Mm-hm.
17 MR. REED: Perhaps if the question is what level of
18 transparency is needed for a market to be determined, a
19 secondary market to be determined, workably competitive,
20 if that's the question we're driving towards?
21 In my opinion, there does not need to be a high level
22 of price transparency in order for that to occur. There,
23 in fact, is very little price transparency in the US in
24 capacity release markets when one broadly considers what is
25 the capacity release market.
26 Capacity can be released through the bulletin board
27 process, the actual formal FERC capacity release process.
28 It's also more often used on a bundled basis through
1 bundling supply and capacity and reselling that into
2 the bundled energy market for which there is virtually no
3 transparency for individual transactions; there may be
4 published indices which reflect the market in general.
5 So in my view, price transparency, the actual posting
6 of price, is not a necessary element for that market to be
7 workably competitive. It can be workably competitive if
8 there are a sufficient number of sellers and buyers and the
9 market structurally meets the other definitions for a
10 workably competitive market.
11 MS. CAMPBELL: And can you explore the last clause a
12 bit for me?
13 MR. REED: Structurally?
14 MS. CAMPBELL: “Meets the other elements of a
15 competitive market,” I'm sorry, “workably competitive
17 MR. REED: At the level of supply and sellers in the
18 market, and the level -- if the level of demand and buyers
19 in the market is sufficient for competitive forces to work,
20 whether there are few barriers to entry, where there are a
21 few barriers to exit, where there is sufficient
22 availability of information for both buyers and sellers to
23 make an informed decision about their consumption and
24 production decisions, those are the structural elements I'm
25 talking about.
26 MS. CAMPBELL: Okay. Thank you.
27 One of the issues that arises from what you just said,
28 a question that arises, is how the buyers and sellers can
1 make an informed decision if there's no transparency --
2 MR. REED: No --
3 MS. CAMPBELL: -- concerning all of the different
4 aspects that would cause them to either wish to become, in
5 all likelihood, more or less the buyers that would wish to
6 participate in that market.
7 MR. REED: And that's a fair question. And perhaps
8 we're using “transparency” differently.
9 Transparency, as it's used most often in the States
10 with regard to secondary markets, is the posting of pricing
11 so that it's out there for everyone to see.
12 There is sufficiency of information in these markets
13 without posting of all of the relevant prices for
14 transactions, through a sufficiency of offers. If a buyer
15 wants to go to the market and secure pipeline capacity, for
16 example, or bundled sales service or storage service, if
17 they have a sufficiency of offers, they gain transparency
18 on prices that are being offered in the marketplace.
19 You don't need to have a publication or an electronic
20 bulletin board to be able to achieve transparency.
21 MS. CAMPBELL: Thank you. I think we might have
22 covered this, and I'm sure you're going to tell me if I
23 have -- if you have.
24 This is probably -- Mr. Redford, we had a discussion
25 about affiliates, and on page 52, in section B there
26 is a reference to "sufficient" -- no, I'm sorry. Big B,
27 not little B. Under "recommended policy actions," there is
28 a sentence that -- in accordance with section 29 you talk
1 about refraining and then at the end you say:
2 "When sufficient affiliate protections exist to
3 prevent market abuse."
4 And I think we've discussed sufficient affiliate
5 protection, and if I remember correctly, what you were
6 talking about was a complaints process. Is that what you
7 consider to be sufficient affiliate protection?
8 MR. REDFORD: No, as well as the Affiliate
9 Relationships Code as well. That's in place also.
10 Also the fact that affiliate transactions and dealings are
11 dealt with through existing Board processes.
12 MS. CAMPBELL: Thank you very much. Those are my
14 MR. SMITH: If I might just interject, while my friend
15 is still at the microphone. I believe we may have one
16 piece of inaccurate information, if I could just do a
17 little redirect while she's still here so she can follow up
18 as appropriate.
19 MS. CAMPBELL: Certainly.
20 RE-EXAMINATION BY MR. SMITH:
21 MR. SMITH: Mr. Reed, earlier in the questioning, my
22 friend had made reference to page 10 of your report, and it
23 referred to the imminent introduction of an additional LNG
25 MS. CAMPBELL: Yes.
26 MR. SMITH: To northeastern markets. You recall that?
27 MR. REED: Yes.
28 MR. SMITH: And you recall your answer was that the
1 date that those additional LNG supplies would commence
2 service was approximately 2010?
3 MR. REED: Yes.
4 MR. SMITH: Mr. Reed, are you familiar with the
5 Canaport LNG project?
6 MR. REED: Yes.
7 MR. SMITH: And are you aware of what its in-service
8 date is to be?
9 MR. REED: If it's different than 2010, then I don't
10 have knowledge of that.
11 MR. SMITH: And are you aware of whether or not the
12 regulatory applications for that LNG plant and the related
13 transportation capacity have been filed?
14 MR. REED: Yes. And I think, flashing back to that,
15 as I recall it, calls for at least the in-service date of
16 the pipeline, the Brunswick pipeline, I think
17 you're speaking of, I believe, in 2008.
18 MR. SMITH: Thank you. We just wanted to make sure
19 the record was clear. There have been recent filings and I
20 wouldn't want this room to be detached from the reality
21 occurring outside.
22 MS. CAMPBELL: Oh, I don't think you can rescue this
23 room by simply correcting a date. I think it's a bigger
24 problem than that. But thank you for your effort.
25 MS. SEBALJ: Thank you.
26 Mr. Wightman, did you have any questions for this
28 MR. WIGHTMAN: No questions.
1 MS. SEBALJ: And can I just get on the record once
2 again who the representative is for OES? If they're in the
4 MS. RUZYCKI: Nola Ruzycki.
5 MS. SEBALJ: Thank you, sorry. And did you have any
6 questions for this panel?
7 MS. RUZYCKI: No.
8 MS. SEBALJ: Mr. Olsen?
9 MR. OLSEN: No questions.
10 MS. SEBALJ: Mr. Keys? I don't know that TCPL's here.
11 MR. ROSS: Murray Ross is here. We have no questions.
12 MS. SEBALJ: Mr. Thompson.
13 MR. THOMPSON: Yes.
14 CROSS-EXAMINATION BY MR. THOMPSON:
15 MR. THOMPSON: Yes. Thank you, good morning, panel.
16 I represent the Industrial Gas Users Association and AMPCO.
17 And I have a few questions of each of you.
18 First of all, with respect to Market Hub, Mr. Redford,
19 I think you've indicated that this is a company wholly
20 owned indirectly by Duke?
21 MR. REDFORD: Yes, it's a Duke Energy Corporation
23 MR. THOMPSON: And in that context it's the same as
24 Union Gas? A company indirectly wholly owned by Duke?
25 MR. REDFORD: Union Gas would be wholly owned by Duke.
26 MR. THOMPSON: Right. And so you and Union are
28 MR. REDFORD: That's correct.
1 MR. THOMPSON: Thank you. Now, in your evidence at
2 page 1 you indicate that Market Hub's target is wholesale
3 customers, and you add a little bit of flesh to that at
4 page 10. Could you just tell us how you define "wholesale
6 MR. REDFORD: Yes. I would define wholesale customers
7 as those participating in the wholesale market. And we
8 believe that Dawn is a wholesale market. It's liquid.
9 There are large book transactions. So that's how we would
10 define the wholesale market.
11 MR. THOMPSON: Right. And in terms of the clients
12 that I represent and other gas consumers in Ontario who
13 bring their gas down on the Union -- well, bring their gas
14 down to the Union and/or Enbridge systems and use the
15 storage services as a load-balancing tool, do they fall
16 within the ambit of your definition of wholesale customers?
17 MR. REDFORD: Yes, I think some do. I think large
18 industrials would likely fall within that definition.
19 MR. THOMPSON: Well, a wholesale customer to me is
20 somebody who's buying to sell services to somebody else
21 rather than use them themselves.
22 MR. REDFORD: Well, we would -- like I said, we define
23 it as somebody that's participating in a wholesale market,
24 and that we would look at Dawn as being that market.
25 MR. THOMPSON: All right. Well, how do you define
26 "retail customers"?
27 MR. REDFORD: Well, retail customers, to me, would be
28 homeowners, small businesses, things like that, that don't
1 have the ability to -- really wouldn't have the ability to
2 purchase storage.
3 MR. THOMPSON: There is some evidence, and you've
4 discussed with others the pending application that Market
5 Hub has before the Board -- that's Market Hub Canada -- and
6 this is discussed in your testimony at -- was that the
7 first application Market Hub made to the Board? Market Hub
9 MR. REDFORD: The St. Clair pool was applied for in
10 2005. It was also applied for in, I believe 2002 was the
12 MR. THOMPSON: Were you around then?
13 MR. REDFORD: I was with -- the Duke family was not
14 with Market Hub.
15 MR. THOMPSON: Were you aware of the basis on which
16 the application was made in 2002?
17 MR. REDFORD: Yes, I am.
18 MR. THOMPSON: So you are aware it was based on a
19 20-year contract with Union?
20 MR. REDFORD: Subject to check, it was with a
21 contract -- I think the concept was --
22 MR. THOMPSON: A long-term contract.
23 MR. REDFORD: Yes. The concept was to lease it to
25 MR. THOMPSON: And it was to provide the service to
26 Union under the auspices of market-based rates? Do you
27 recall that?
28 MR. REDFORD: I believe so.
1 MR. THOMPSON: And what happened to that application?
2 MR. REDFORD: It was... I don't know if it was
3 adjourned and then it was withdrawn, but I would --
4 ultimately it was withdrawn.
5 MR. THOMPSON: So selling this service, selling the
6 capacity you're going to develop to Union was an element of
7 the plans back then. Is it an element of the plans right
9 MR. REDFORD: It is not an element of to plan. Is it
10 a possibility? I would say that is a possibility. Our
11 intention is to market that space to the entire market and
12 seek the best value for our business, Market Hub Canada's
14 MR. THOMPSON: And does Market Hub Canada have its own
15 marketing department or will that be another Duke company
16 that does that service?
17 MR. REDFORD: No, Market Hub Partners Canada will
18 independently market those facilities. At this time, that
19 that will be myself. As we grow we may add people to
20 perform that function, but it will be done by Market Hub
21 Partners Canada LP.
22 MR. THOMPSON: And when you say you intend to market
23 it, what does that mean? Do you intend to offer it for
24 sale to the highest bidder?
25 MR. REDFORD: That's correct. I think our vision for
26 for St. Clair pool is to go to an open-season process.
27 MR. THOMPSON: Okay.
28 MR. REDFORD: We would also, over time, look to
1 negotiate rates but I think, to begin with, we'd look to
2 open open-season that storage.
3 MR. THOMPSON: All right. And Union would be one of
4 the possible bidders; is that what you're suggesting?
5 MR. REDFORD: Yes, I don't think we'd exclude anybody
6 from the market.
7 MR. THOMPSON: Okay. And if -- well, let me just --
8 in terms of Union's capacity to outbid anybody, given
9 that they've got rolled-in tolling treatment, do you
10 foresee them as having that capacity to outbid the market?
11 MR. REDFORD: Not necessarily. I think people value
12 storage differently. That's one of the reasons why we'd
13 want to go to the entire market.
14 MR. THOMPSON: Okay. And if Union does turn out to be
15 a purchaser, you, I think, have indicated that transaction
16 should be subject to the affiliates code in Ontario?
17 MR. REDFORD: If Union...
18 MR. THOMPSON: Acquires.
19 MR. REDFORD: Contracts the space.
20 MR. THOMPSON: From Market Hub.
21 MR. REDFORD: Yes, that's correct.
22 MR. THOMPSON: And you were asked some questions about
23 the costs involved in developing and returns involved in
24 your plans. If they become relevant in that process --
25 i.e., the Board testing the appropriateness of the
26 affiliate transaction -- will you make the information
27 available then?
28 MR. REDFORD: I don't think we -- we would not make
1 that information public. The reason that we don't want to
2 get our capital costs out there, and we don't want to get
3 our return out there is that as storage assets become
4 available in Ontario we're going need to -- we're going to
5 need to compete with others to purchase those assets, and
6 to the extent that people know what my rate of return is,
7 it makes it a problem, because they can undercut, underbid
9 MR. THOMPSON: All right. Well, I was confining it,
10 though, to the affiliate evaluation process that the Board
11 conducts, and I guess we'll deal with that if and when it
13 Let's move to the market power analysis, if I might,
14 Mr. Reed, this is your work. But Mr. Redford, you, Market
15 Hub, retained Mr. Reed to do this work?
16 MR. REDFORD: That's correct.
17 MR. THOMPSON: And are there documents providing the
18 directions that Mr. Reed was given with respect to the
20 MR. REDFORD: Yeah, there is a retainer letter.
21 MR. THOMPSON: Any other documents pertaining to the
22 directions he received?
23 MR. REDFORD: No. It was in the retainer letter.
24 MR. THOMPSON: Could we have an undertaking to produce
26 MR. REDFORD: To produce it, yeah.
27 MS. SEBALJ: That's MHP number 5.
28 MHP UNDERTAKING NO. 5: TO PRODUCE RETAINER LETTER FOR
1 MR. REED
2 MR. THOMPSON: And, Mr. Reed, now I've read this and
3 it's very well presented so I don't have a lot of questions
4 about it. But am I correct it's not confined in scope to
5 the evaluation of market power of Market Hub against those
6 who currently pay cost-based rates? It's broader than
7 that? Is that fair?
8 MR. REED: As I understood your question, is it
9 confined in scope to just the Market Hub Partners' rate
10 treatment? No, it goes beyond that.
11 MR. THOMPSON: All right. And it looks at market
12 power of Ontario storage providers like the other studies
13 that have been filed in this case?
14 MR. REED: Yes.
15 MR. THOMPSON: Right. And am I correct that the
16 evidence is consistent with -- your view appears to be
17 consistent with the evidence that the advisors to Union
18 have presented. And I think you mentioned it in your
20 MR. REED: It's largely consistent with their
22 MR. THOMPSON: And Enbridge Gas Distribution retained
23 somebody to look at what Union's advisors did, and that was
24 Navigant Canada. Have you read their stuff?
25 MR. REED: Briefly.
26 MR. THOMPSON: And you were formerly at Navigant
27 Canada; is that right?
28 MR. REED: I guess, yes. I was CEO of all of
1 Navigant, which would include Navigant Canada.
2 MR. THOMPSON: And did you have any input in directing
3 Enbridge Gas Distribution to Navigant Canada?
4 MR. REED: No.
5 MR. THOMPSON: Now, just before I look at some of the
6 aspects of your study, how do you define "market power"?
7 MR. REED: I think the definition I use is consistent
8 with others in this case, which is the ability to extract
9 from the market a price that is above that which would be
10 produced through the interaction of competition. So a
11 price increase that is not trivial, for a period of time
12 that is significant, and that is, in fact, profitable.
13 MR. THOMPSON: All right. Now, the product that is
14 being evaluated here is the cost-based storage service
15 product -- well, is the product being evaluated here, in
16 your view, the cost-based storage service product currently
17 being provided to gas consumers served by Union Gas and
18 Enbridge Gas Distribution?
19 MR. REED: Without the modifier of cost-based, we are
20 considering a service, and then considering whether that
21 service should be market-based or regulated.
22 MR. THOMPSON: And why do you remove the elimination
23 of the cost-based?
24 MR. REED: Well, technically because what we're
25 considering is the service and the market, not whether it
26 is cost-based or not.
27 MR. THOMPSON: The current price of the service, would
28 that be better than the phrase "cost based"? Would you
1 accept that? Is the current price of the service is
2 relevant to the discussion?
3 MR. REED: I would say the current pricing regime is
4 relevant, yes.
5 MR. THOMPSON: All right.
6 MR. REED: The fact that it's regulated.
7 MR. THOMPSON: Now, and so we, from this perspective
8 of the market, are we to look at this from the perspective
9 of the consumers of that product.
10 MR. REED: Not exclusively. I mean, the market power
11 analysis looks at it from the perspective of the market as
12 a whole. Consumers and producers. And whether there is,
13 in fact, workable competition.
14 MR. THOMPSON: So, well, describe for me the consumer
15 base that your study addresses.
16 MR. REED: The consumer base for the storage services
17 in the relevant market as we define it include power
18 generators, wholesale marketers, local distribution
19 companies, occasionally other pipeline companies, major
20 industrials that contract in the wholesale market,
21 producers. I think that generally sums up the consumer
23 MR. THOMPSON: So you did not confine your analysis to
24 the consumer base that is currently being served under the
25 auspices of cost-based storage rates?
26 MR. REED: No, I think any analysis of the relevant
27 market needs to include all of the consumers, not just a
1 MR. THOMPSON: Right. Now, in terms of the service --
2 sorry, in terms of the product, I guess, that we're
3 evaluating, I think my clients approach it from the
4 perspective that what we're evaluating is the storage
5 space, deliverability, injection/withdrawal, and
6 transportation to the burner tip. Is that the product you
8 MR. REED: No.
9 MR. THOMPSON: And what did you evaluate?
10 MR. REED: We did not include transportation as a
11 component of storage, and, in fact, that's important to
12 understand, that we are looking at storage in an unbundled
13 market, where transportation is procured and priced
15 With regard to storage capacity, yes. With regard --
16 we did include that. With regard to storage
17 deliverability, yes, we did include that.
18 We did not differentiate the market by injection rates
19 or withdrawal rates. That's very difficult to do when, in
20 fact, the same facilities can provide a heterogeneous set
21 of services from the same facility. And, in fact, they can
22 flex the services they're providing one month or one season
23 to the next.
24 MR. THOMPSON: Okay. Let's move on, then.
25 In your testimony, I think it's at page 28, you
26 mention what I call the price threshold consideration. And
27 you mention it in the context, I think of the Competition
28 Bureau of Canada having a price threshold of 5 percent.
1 You see that?
2 MR. REED: Yes.
3 MR. THOMPSON: Could you just describe for us what you
4 understand the price threshold consideration to be?
5 MR. REED: Whether a participant in the market, a
6 producer, a seller, can extract a price that's
7 more than 5 percent above the level that the competitive
8 market would otherwise determine.
9 MR. THOMPSON: Well, you didn't mention in your
10 testimony the price threshold test that the FERC applies
11 when it considers whether or not to move to market-based
12 rates, did you?
13 MR. REED: No.
14 MR. THOMPSON: I didn't find it. And why didn't you
15 mention that?
16 MR. REED: There's not any particular reason.
17 MR. THOMPSON: And do you know what that price
18 threshold is?
19 MR. REED: And again, not to mince words, I would not
20 describe it as a threshold. The FERC uses a 10 percent
21 test for evaluating the appropriateness of market-based
22 rates, and that 10 percent test is applied in, again, a
23 similar fashion to what I just described. It's 10 percent
24 above the level that the competitive market would
26 MR. THOMPSON: Well, do you know how a supply by FERC,
27 when it is testing -- whether it will allow market-based
28 rates versus test-based rates?
1 MR. REED: I'm sorry, how it's applied?
2 MR. THOMPSON: How it's applied. Does the FERC look
3 at the price of the cost-based service as the point of
4 departure from which to apply the price threshold test?
5 MR. REED: I think the answer is it's somewhat
6 inconsistent, and again, that's an issue, since it was
7 raised by your expert, by your witness, that I expect to
8 address in rebuttal.
9 In my opinion, the appropriate standard is that which
10 stems from economics and stems from the other regulation
11 here, which is -- the appropriate standard is the ability
12 to achieve a price greater than that which would be
13 determined in the competitive marketplace.
14 FERC at times has tried to use different cost-based
15 rates as a proxy for that, and that is a somewhat imperfect
16 approach, because cost-based rates can be very widely
17 different, depending on the vintage of the facilities, the
18 level of depreciation, and so forth.
19 MR. THOMPSON: Well, I'd just like to draw your
20 attention to some evidence in this case about -- which
21 appears to us to be relevant to this price threshold
22 question. And I don't know if you're aware of this or not,
23 but in Union's interrogatory responses -- sorry,
24 undertaking responses in these proceedings -- perhaps you
25 could take this subject to check. But in their undertaking
26 response -- appears I put the sticky on the wrong page.
27 Excuse me one moment. Where am I?
28 At undertaking response 16, they develop what they
1 call the market value - and I'm using a paraphrase - of the
2 theoretical intrinsic value of storage at about 92 cents US
3 per mmbtu. Are you aware of that?
4 MR. REED: Am I aware of that response?
5 MR. THOMPSON: Yes, or that value that Union places on
6 market-based storage.
7 MR. REED: I'm not familiar with that response. I'd
8 like to view it in its entirety before I comment on the
9 appropriateness of what the 92 cents is.
10 MR. THOMPSON: And in another response that they had
11 provided, which I have to find here -- you'll have to take
12 this subject to check. They provide in their response to
13 Mr. Brown - I think it's at undertaking 15 - that the
14 cost-based rate for their storage basis is about 31 cents
15 per gigaJoule. Would you take that subject to check?
16 MR. REED: I can accept that subject to check.
17 MR. THOMPSON: And, so, just looking at those two
18 numbers, looks like the value of storage, as far as Union
19 is concerned, on a market-based approach, is 92 cents US
20 per mmbtu, which I round to about a dollar, versus 31
21 cents, about over three times.
22 Does that evidence have relevance, in your view, to
23 the price threshold test?
24 MR. REED: No.
25 MR. THOMPSON: And why not?
26 MR. REED: Because 31 cents is not a reasonable proxy
27 for the cost that would be determined in a competitive
1 MR. THOMPSON: Okay. There's also evidence from
2 Enbridge that they were on market-based rates from Union,
3 and then recently they decided to pay cost-based rates.
4 And Mr. Grant gave evidence in this Technical Conference
5 process that that increased their price by about 50 cents
6 per gigaJoule. So I just add the 50 to 31 and say that's
7 81 over 31, and ask myself, isn't that pretty strong
8 evidence of market power. What's your answer to that?
9 MR. REED: Well, Mr. Thompson, I think you may have
10 misspoken. You said they moved from cost-based rates to
11 cost-based rates. Did you mean market-based rates?
12 MR. THOMPSON: Yes, excuse me. Market-based rates.
13 MR. REED: No, that's not evidence of market power at
14 all. It's evidence of inflation as much as anything.
15 MR. THOMPSON: Inflation?
16 MR. REED: Inflation.
17 MR. THOMPSON: All right.
18 Now, in terms of the availability of substitutes
19 identified in your study, and there are many charts on
20 this, you identified a number of service providers offering
21 both firm and interruptible storage services in many
22 geographic locations; is that fair?
23 MR. REED: Yes.
24 MR. THOMPSON: All right. And was the criteria you
25 applied just whether they were connected to Ontario?
26 MR. REED: No. We looked at the relevant market from
27 the perspective of how other regulatory agencies, really,
28 FERC and Michigan, have defined the relevant market.
1 We looked at the actual marketing practices of storage
2 service providers, and we looked at the actual contracting
3 practices of consumers of storage services, and from that
4 assembled both a narrower and a broader
5 definition of the relevant geographic market.
6 MR. THOMPSON: Did you consider the actual
7 availability of services from those locations?
8 MR. REED: We considered it. The actual availability
9 is not typically something that's measured in a market
10 power analysis because the belief is that storage service
11 can be competed away from one holder to another.
12 So it's the general availability. I think by
13 "availability" you may mean uncontracted storage service.
14 We've looked it from an aggregate availability perspective.
15 MR. THOMPSON: All right. So you didn't apply an
16 actual availability criterion to your analysis? Do I
17 understand that correctly?
18 MR. REED: If we use "availability" the same way. All
19 of these services are available. The question is are they
20 uncontracted. And, no, we've not tried to ascertain what
21 portion of them are uncontracted.
22 MR. THOMPSON: Can I get them today? You didn't look
23 at them. And to what degree can I get them today, if you
24 didn't look at?
25 MR. REED: In general I would say that's correct. We
26 looked at, are they available in the marketplace today to
27 someone, whether any individual player can have them today,
28 as opposed to tomorrow, no.
1 MR. THOMPSON: And did you look at the costs of using
2 those services. And you may have answered this before,
3 and I apologize if you have, from the point of view of the
4 space costs, of the deliverability costs, of the injection
5 in and out, and getting it to Ontario.
6 MR. REED: Have we --
7 MR. THOMPSON: Compared to the prices being paid by
8 those currently served under the auspices of cost-based
10 MR. REED: We looked at it. We did not go into the
11 level of detail you've specified, of adding up the
12 components of storage service and the related
14 What we instead looked at is how, in fact, people are
15 contracting for storage, and verified that, in fact,
16 consumers in the northeast or in Ontario and other places,
17 are contracting for remote storage.
18 MR. THOMPSON: Thank you. Now, I just want to
19 understand, if I could, your recommendations.
20 In a scenario where the Board finds that Union and
21 EGD have market power, and -- so I think you frame the
22 questions at page -- you repeat the questions the Board has
23 asked at pages 5 and 6 of your testimony. And the second
24 question is:
25 “If gas utilities and/or their affiliates do have
26 market power in storage,"
27 And I'll ask you this. There are two parts to this
28 question, really. One related to transactional, and one
1 related to long-term services. Let me ask the first one:
2 "Is it appropriate for them to charge market
3 rates for long-term storage services?"
4 Do you have a recommendation in that scenario?
5 MR. REED: Let me have -- let me make sure I
6 understand all the components of your question.
7 First, we are assuming that the gas utilities have
8 market power. Is that the premise of your question?
9 MR. THOMPSON: That's right. We're assuming that the
10 first phrase of this question is yes, gas utilities and
11 their affiliates do have market power in storage.
12 MR. REED: And the question, then, is, let's assume
13 that they have market power in all of the relevant markets
14 so we're not distinguishing between infranchise or
15 exfranchise, between transactional and long-term. In all
16 components and subsequent components of the market, they
17 have market power.
18 And I think your question to me is, if that's the
19 case, do I believe that it would be appropriate to use
20 market-based rates? Is that the question?
21 MR. THOMPSON: Well, take that one for starters.
22 MR. REED: Absent a compelling public policy reason,
23 such as the need to promote new storage, I would say the
24 answer is no. If they have market power in all of the
25 components and subcomponents of the market, I would say
26 market-based rates are not appropriate.
27 MR. THOMPSON: All right. Let's -- and I'm glad you
28 introduced that qualification. You're a very careful and
1 skilful man.
2 Let's assume they have market power as against
3 Ontario gas consumers, end-use gas consumers, but maybe
4 not against some of the wholesalers and marketers and the
5 other classes you mentioned. What's your recommendation
7 MR. REED: I think you're limiting the question to
8 infranchise customers.
9 MR. THOMPSON: I'm limiting it to Ontario consumers.
10 MR. REED: Okay.
11 MR. THOMPSON: That's end-use consumers.
12 MR. REED: Right. If the presumption is that they
13 have market power with regard to that segment of the
14 market, Ontario gas end-use customers, should they be
15 allowed to charge market-based rates to that segment of the
16 market? The answer would be no, with the same caveat that
17 I had before, which is, absent some compelling public
18 policy reason to, for example, promote new entry or
19 something else.
20 MR. THOMPSON: Thank you.
21 Now, looking at it from the other -- from the
22 transactional storage services perspective of looking at
23 long-term storage services, how do you define transactional
24 services? I can tell you how I define them, and maybe we
25 better have your definition.
26 MR. REED: The way the term seems to have been used by
27 the Board is short-term, meaning less than a year,
28 typically seasonal, involving storage and storage
1 derivatives, such as park and loan, balancing, other
2 services like that that are essentially priced and consumed
3 on a daily, monthly, or something less than a season.
4 MR. THOMPSON: Right.
5 MR. THOMPSON: And I understand, but this may not be
6 accurate that the assets that are used to provide those
7 services are temporarily unutilized assets that Union,
8 anyway, dedicates to its utility or requires for its
9 utility customers. Is that your understanding?
10 MR. REED: I would probably say underutilized as
11 opposed to unutilized.
12 MR. THOMPSON: Yes. Underutilized. Right.
13 MR. REED: Yes. That's correct.
14 MR. THOMPSON: Okay. And we see a distinction between
15 that activity and the other and we see the allowing of the
16 pricing of those at so-called market-based rates and the
17 flowback of premium as an asset optimization technique. Do
18 you see that? Is that your perception of the transactional
20 MR. REED: Oh, I'd certainly think it's an element of
21 asset optimization. I'm not sure that's determinative or
22 that market-based rates are appropriate, but, yes, it's an
23 element of asset optimization.
24 MR. THOMPSON: So, if the question is they have market
25 power, and whether it's in only a segment of the market or
26 all of the market, is it appropriate, then, for them to
27 charge market-based rates for transactional services?
28 What's your answer to that question?
1 MR. REED: Same answer. If they have market power,
2 and again, that would mean that there are no -- there are
3 not sufficient alternatives available to the end-users or
4 customers here, including the alternative of just walking
5 away and taking no transactional service, then they should
6 not be allowed to charge market-based rates absent some
7 compelling public policy reason.
8 MR. THOMPSON: And if they don't have market power in
9 the transactional services segment, they should be allowed;
10 is that your recommendation?
11 MR. REED: Yes.
12 MR. THOMPSON: Thank you. Just a couple of other
13 questions, then.
14 In the -- you were discussing mitigation with
15 Ms. Campbell. And at the end of your testimony there's a
16 chart at page 54, sorry, and what I was interested in is
17 what you've said at item 4. You have a proposed
18 recommendation, potential short-term price increases offset
19 by longer-term efficiency gains and potential flowback of
20 economic rents.
21 And I wondered what you had in mind when you used
22 that phrase "potential flowback of economic rent."
23 MR. REED: It is the economic rent derived from the
24 movement from cost-based rates to market-based rates, so
25 that increment, in your example, of going from 31 cents to
26 to 92 cents without the adjustments?
27 MR. THOMPSON: All right. So that's what we call the
28 premium over cost-based rates?
1 MR. REED: Yeah. Yes.
2 MR. THOMPSON: And that's what I call it anyway.
3 And are you suggesting that if the Board...
4 Well, what are you suggesting here in terms of the
5 current practice of flowing back these premiums where
6 market-based rates are permitted?
7 MR. REED: I didn't mean to suggest anything with
8 regard to the current practice. I simply recognized that,
9 from a economic perspective, the flowback of those economic
10 rents or differentials to customers to have regulated
11 utility is a possibility. I really am not commenting on
12 the legality or policy-appropriateness of it.
13 MR. THOMPSON: Okay. And is that a possibility,
14 whether there is or is not market power? In other words,
15 that's always something the regulator can do?
16 MR. REED: It's always something the regulator could
17 do. I would not think they would exist if there was market
18 power because I would not think they would go to
19 market-based rates if there was market power.
20 MR. THOMPSON: Okay. Okay. Finally, storage
21 development. In your testimony you talk about ease of
22 entry. And that's discussed at -- I think you start
23 discussing it around page 46.
24 MR. REED: I have that page.
25 MR. THOMPSON: And you say in the middle:
26 "There are numerous examples of the ease of entry
27 into the storage market in and around Ontario."
28 And you cite the examples. And I take it you're
1 relying on that ease of entry as an evidentiary element in
2 determining whether market power is present or absent?
3 MR. REED: It is a mitigating factor that we cite,
5 MR. THOMPSON: Okay. Is that ease of entry evidence
6 that you've provided an indicator that no special measures
7 are needed to stimulate storage development?
8 MR. REED: That goes to two things. One is what you
9 consider to be special measures. And secondly, what is the
10 appropriate level of new entry.
11 I would not consider market-based rates to be special
12 measures where there is no market power.
13 Secondly, I think there is good evidence of demand
14 above and beyond that that's currently under development,
15 in terms of new storage quantities or services. So I would
16 say the market is showing signs that it needs supply of
17 storage above and beyond what's currently on the books, or
18 currently on the planning boards.
19 MR. THOMPSON: Is that in your testimony somewhere?
20 Or is that just --
21 MR. REED: Yes, the discussion of others' views of the
22 incremental storage needed in Ontario and the northeast is
23 in my evidence.
24 MR. THOMPSON: Thank you very much, gentlemen. Those
25 are my questions.
26 MS. SEBALJ: Thank you, Mr. Thompson.
27 Is the IESO in the room?
28 Mr. Quinn, did you have any questions?
1 CROSS-EXAMINATION BY MR. QUINN:
2 MR. QUINN: Good morning, Mr. Redford, Mr. Reed. I'm
3 Dwayne Quinn, Kitchener Utilities.
4 MR. REED: Good morning.
5 MR. QUINN: I just wanted to touch on a few items that
6 you explored yesterday and this morning with previous
8 Yesterday, Mr. Redford, you were referring to rights,
9 Lambton County rights owned by MHP.
10 MR. REDFORD: Yes.
11 MR. QUINN: Do you carry lease rights for the St.
12 Clair pool and the Sarnia Airport pool also?
13 MR. REDFORD: Yes, we carry the lease rights, both the
14 petroleum and natural gas leases and the natural gas
15 storage leases for the St. Clair pool, for the Sarnia
16 Airport pool. We own a 50 percent interest in those.
17 MR. QUINN: How are lease rights evidenced in the
18 Province of Ontario?
19 MR. REDFORD: How are lease rights…?
20 MR. QUINN: Evidenced.
21 MR. REDFORD: Where you can access where that
22 information is?
23 MR. QUINN: Yes.
24 MR. REDFORD: We register ours on title.
25 MR. QUINN: With what registry?
26 MR. REDFORD: Yes, with the Registry Office, yeah.
27 MR. QUINN: So of the asset or lease rights you
28 currently hold, can you provide a list of those rights that
1 were once held by Union Gas Limited?
2 MR. REDFORD: Yeah, I can check. Are we talking
3 the St. Clair pool and the Sarnia Airport pool?
4 MR. QUINN: Of all the lease rights MHP currently
5 hold. And if I can add to that, if I may, under the same
6 undertaking, how was the transfer effected? What
7 commercial terms were put in place for the transfer of
8 those rights?
9 MR. REDFORD: Yes, I can undertake to do that.
10 MS. SEBALJ: That's MHP number 6.
11 MHP UNDERTAKING NO. 6: OF ALL THE LEASE RIGHTS MHP
12 CURRENTLY HOLDS, PROVIDE A LIST OF THOSE RIGHTS THAT
13 WERE ONCE HELD BY UNION GAS LIMITED, IF ANY
14 MR. QUINN: Thank you.
15 MR. REDFORD: And that's an "if any."
16 MR. QUINN: Thank you. Yesterday you alluded to
17 seismic data that you hold as the basis for your
18 developments. Of the seismic data that you rely on, was
19 any of this data originally determined by Union Gas
21 MR. REDFORD: I would have to check. My notes say
22 that it was purchased by St. Clair Pipelines 1996 Limited,
23 but I would have to check to see if any of those came from
24 Union Gas.
25 MR. QUINN: Okay. Thank you for the clarification.
26 If it came from St. Clair, where did it St. Clair acquire
27 them, and how?
28 MR. REDFORD: Yes, I can look into that.
1 MR. QUINN: Okay. And a similar condition, the
2 commercial arrangements that were in effect.
3 MS. SEBALJ: That's MHP number 7.
4 MHP UNDERTAKING NO. 7: TO CONFIRM ORIGIN OF DATA AND
5 PROVIDE DETAILS; PROVIDE DETAILS OF COMMERCIAL
6 ARRANGEMENTS IN EFFECT
7 MR. QUINN: Just one further point of clarification.
8 If you could turn up page 9 and 10. This was the inquiry
9 of Board Staff team that talked about gas coming from the
10 Rockies and into the northeast US.
11 MR. REED: This is page 9 of my evidence?
12 MR. QUINN: No, it's actually the evidence of MHP.
13 MR. REED: Oh, of MHP.
14 MR. QUINN: It starts at line 23 of page 9 and moves
15 on to the top of page 10, but in context of you were
16 answering some questions to the Board staff team in regard
17 to the impact of developments in the North American market.
18 And you were asked to qualify the term "imminent
19 introduction of LNG supplies." Later you clarified for
20 Mr. Smith that the Canaport development may have a time
21 frame that is shorter than the other Quebec developments.
22 Can you tell me where the pipeline capacity from
23 Canaport heads?
24 MR. REDFORD: Where it's planned to go?
25 MR. QUINN: Yes.
26 MR. REDFORD: It's planned to go to the US border,
27 the New Brunswick main border into the Maritimes and
28 northeast pipeline system.
1 MR. QUINN: And are there any interconnections between
2 those pipelines and Quebec or Ontario?
3 MR. REDFORD: There are.
4 MR. QUINN: Okay. Specifically, then, what would your
5 assessment be? What percentage of the gas that would come
6 through Canaport would actually reach Ontario?
7 MR. REED: I would say that it's very difficult to
8 track molecules because a lot of the gas will flow through
9 displacement. But there are interconnections on the PNG TS
10 system into Quebec, for example. There are interconnects
11 on Iroquois and Tennessee into Ontario. It's too soon to
12 say what portion of incremental supplies may end up
13 effectively moving into Canada. It really depends on the
14 marketing profile and economics of different projects, and
15 whether it's one project or two or four.
16 So I really think that's something that can't be
17 answered right now.
18 MR. QUINN: I accept that as an answer. Thank you.
19 Those are my questions.
20 MS. SEBALJ: Thank you, Mr. Quinn.
21 Mr. Hemming or Mr. Howe, did you have any questions?
22 MR. HOWE: No questions, thank you.
23 MS. SEBALJ: And Gaz Métro?
24 MR. LECLERC: No questions, thank you.
25 CROSS-EXAMINATION BY MS. SEBALJ:
26 MS. SEBALJ: We do have a few questions for you. Is
27 there anyone in the room -- I always like to check -- is my
28 list complete?
1 I wanted to follow up on one of Ms. Campbell's
2 questions with reference sort of generally to page 25 of
3 your evidence, which relates to the -- sorry, it's page 25
4 of the report, I believe, which makes reference to the
5 OEB's Affiliate Relationships Code.
6 If we suppose that there is some form of forbearance in
7 gas storage in Ontario, in your view is general competition
8 oversight provided by the Competition Act enough for this
9 or is additional competition oversight by the sector
10 regulator needed?
11 MR. REED: From my perspective in terms of the
12 efficacy of competition in the markets, I think the level
13 of oversight that we've discussed previously in terms of
14 the complaint process, in terms of after the fact filing of
15 contracts under confidentiality, is appropriate. I think
16 that continuing to monitor new entry and market shares is
18 Certainly, as well, any contractual relationships
19 between a regulated affiliate of a market-based rate
20 storage provider is also appropriate, in terms of review of
21 the costs and reasonableness of those contractual
22 commitments, in terms of what gets included in rates.
23 So, with those additions, although the last one really
24 isn't an addition, I think that level of scrutiny is
25 appropriate by the regulator.
26 MS. SEBALJ: And by that you mean the Ontario Energy
28 MR. REED: Yes.
1 MS. SEBALJ: Thank you.
2 Would you agree that generally antitrust authorities
3 regard affiliated companies as one company for the purpose
4 of competition analysis?
5 MR. REED: For purposes of market concentration
6 analyses, they typically do include the affiliates in terms
7 of calculation of market shares and levels of competition.
8 They then look to other forms of mitigation such as
9 legal requirements or restrictions on the conduct of those
10 affiliates as to whether that implied level of
11 concentration in the marketplace is actually likely to lead
12 to an abuse of market power.
13 MS. SEBALJ: And is it -- and this can be for either,
14 it's probably more appropriately directed to Mr. Redford.
15 But I just wanted you to provide some sort of an
16 explanation as to how MHP is able to operate independently
17 of its affiliate.
18 MR. REDFORD: Yes, I'd be happy to provide that.
19 First off, we'll start with -- and I'll walk through
20 the Affiliate Relationships Code, and some of the elements
22 Degree of separation is the first element. While
23 we're not formally bound, we're not a storage operator yet,
24 by the Affiliate Relationship Code, Union Gas is bound by
25 the Affiliate Relationship Code and, to that extent, we
26 they'd to support their compliance with that Code.
27 So degree of separation would be the first measure.
28 Both financial records, books of account, is one.
1 Physical separation. I rent space in a Union Gas
2 building, but not in the main offices. I'm down a back
3 hall in the education centre, away from Union's competitive
5 Accounting and finance is held separately for MHP
7 And then -- well, and most importantly, I think,
8 marketing activities will be completely separate. We plan
9 to independently market our storage space, and we are
10 responsible for that. Union Gas has their own
11 responsibility for marketing their assets. And those will
12 remain separated.
13 At the same time, there's sharing of services and
14 resources. The computer information that we have is
15 isolated, and password-protected. I don't have access to
16 Union's computer information; they don't have access to
17 mine, with the exception of the people that provide me
18 services that are in a non-competitive position.
19 Confidentiality is addressed through the master
20 services agreement, and that's something that is part of
21 our contractual arrangement for any services that we do get
22 from Union. And of course there are service agreements
23 with each individual group providing scope and terms of
24 those services, things like engineering, things like
26 Finally, confidentiality of information. Any
27 consumer, marketer, utility information. Again, I don't
28 have access to any marketing information that MHP generates
1 on its own, Union will not have access to and those
2 functions are separate.
3 MS. SEBALJ: Thanks.
4 MR. REED: If I could just add one point --
5 MS. SEBALJ: Sure.
6 MR. REED: -- which really isn't a derivative of the
7 Affiliate Relations Code but also goes to policing of
8 affiliate conduct.
9 It is the fact that Union operates under an
10 open-access tariff. It was suggested yesterday that one
11 form of potential abuse might be preferential terms for
12 interconnection of the storage project to Union's
13 facilities, and the interconnection is, to the extent they
14 interconnect with Union as opposed to Vector, is going to
15 be undertaken pursuant to the open-access tariff in an
16 established, filed set of rules that are equally applicable
17 to all market participants. There is no preference there
18 in any way, shape, or form for Market Hub Partners.
19 MS. SEBALJ: And so I guess, just to conclude this
20 thought, we started, Mr. Reed, with you saying that
21 generally you agreed that affiliated companies are, or an
22 antitrust authority, are considered as one for competitive
24 And so are we suggesting, then, that the Board's
25 affiliate relationship rules are sufficient to allow
26 those -- to say that that premise doesn't hold here?
27 MR. REED: I actually learned something this morning
28 which I did not understand before. As I thought I heard
1 one of the questions imply, at least, that the complaint
2 process doesn't exist today for market power abuse. I
3 think that should be added if it doesn't exist today.
4 So I don't want to say that the existing rules are
5 necessarily sufficient. I do think the elements we have
6 talked about adding here, the complaint process, the filing
7 of contracts, the general oversight of market participants'
8 conduct, and the affiliate contract review, should all be
9 part of the Board's set of rules governing affiliates, and
10 governing the existence of market-based rates where
11 affiliate transactions may occur.
12 So to the extent that those elements need to be added,
13 I think they are appropriately added.
14 With that, I think that the Board is likely to have
15 adequate resources to deal with these issues. Again, I
16 would just urge that, to the extent that concern is about
17 the adequacy of codes of conduct and relationship code, the
18 answer to fix the code, not to deny market-based rates.
19 MS. SEBALJ: Thank you.
20 I'm now turning to attachment B of the Concentric
21 study. It's a table entitled: "Working Gas Market Share
22 and Market Concentration Analysis."
23 MR. REED: Yes.
24 MS. SEBALJ: And I'm just looking generally at the
25 table headings and what you've done with physical storage
26 for Duke Energy.
27 Can you explain to me, or give me a justification for,
28 separating the capacity planned by MHP and the capacity
1 owned by Union in the HHI calculation?
2 MR. REED: Our view is that the codes of conduct
3 provide sufficient separation between these two entities.
4 Whether one includes the MHP very, very small share in the
5 Union Gas component or not has no change in the conclusions
6 with regard to either the HHI or the four-firm or the
7 one-firm concentration levels.
8 MS. SEBALJ: So, in spite of the fact that in your
9 previous answer you indicated that codes of conduct should
10 be more robust --
11 MR. REED: I'm sorry, that the --
12 MS. SEBALJ: That the code of conduct should be more
13 robust, it should have elements added to it, you're
14 satisfied for the purpose of this analysis that it was okay
15 to separate the two?
16 MR. REED: And again, let us be clear. We are
17 proposing that those additional elements be added to the
18 Board's authority, and whether you take that -- excuse me,
19 0.5 percent market share on attachment B and include it or
20 don't include it in the Union Gas number, it has no impact
21 whatsoever on the conclusions.
22 MS. SEBALJ: Right. On that same table, can you
23 explain the basis for including infranchise and exfranchise
24 capacity in the calculations?
25 MR. REED: We felt it was appropriate to look at it
26 from the perspective of both segments, because they're
27 treated separately today, in terms of exfranchise
28 customers facing market-based rates and infranchise not.
1 So we wanted to see if there was, in fact, a differential
2 in the level -- a meaningful differential in the level of
3 market concentration in those sub segments, simply because
4 they're treated differently today.
5 MS. SEBALJ: Thank you.
6 Moving down the table where you indicate substitutes
7 for physical storage, you say you're including local
8 production, capacity release, and on-system peak-shaving.
9 Can you explain why've of these products belong in the same
10 antitrust product market?
11 MR. REED: Yes, let's take that one at a time.
12 First, local production. Local production has the
13 ability to provide supply into the market which is
14 essentially the same thing that storage is doing. It's
15 providing daily, monthly, seasonal supplies into the market
17 This is something that FERC has recently looked at, as
18 I think you're aware, and has proposed in its notice of
19 proposed rule-making, an expanded definition of products
20 that would include local production as an element of
21 competition for storage.
22 I think the real question is can local production act
23 as a competitive break on the exercise of market power if a
24 party attempted to exercise market power?
25 And I think the answer is it can. Parties could
26 contract for local production rather than storage and
27 achieve the same end result, which is getting supply out
28 into the market area delivered into their pipeline system.
1 Similarly, with regard to capacity release for
2 marketers, FERC has also said it is potentially appropriate
3 to include slack pipeline capacity or marketed pipeline
4 capacity as an alternative to storage because, certainly,
5 again, that capacity can be flexed to meet much of the same
6 market need that storage provides. So we've limited the
7 pipeline capacity component here to that capacity that's
8 held by marketers and potentially available as a substitute
9 for storage.
10 You'll see that, in fact, the percentages there do not
11 come into the market share calculations. They're zero.
12 But we've identified what we think are the appropriate
13 volumes by capacity holder.
14 The last element on system peak shaving is the same
15 thing, is essentially storage. It is LNG and Propane Air,
16 to the extent they're available. Again, this is a small
17 number, and it's not clear the extent to which this
18 on-system peak-shaving is, in fact, available for
19 exfranchise use or even contract use. It's there in the
20 marketplace, and it provides a role in terms of daily and
21 weekly, monthly, swing that's the same as storage. But
22 again, since has such a tiny piece, 0.5 percent and 0.7
23 percent, whether it's in or out doesn't really make much
24 difference. But we included it on the grounds, again, that
25 FERC has suggested that it can provide a competitive
26 alternative to storage service.
27 It can. The question is really is it available for
28 use on a contract basis.
1 MS. SEBALJ: Thanks. This next question is just a bit
2 of a clarification. The figures for local production, if
3 we take, for example, Michigan, which you show as 255,482
4 mmcfs, can you confirm that figure? Is that 1/365th of the
5 annual production in Michigan?
6 MR. REED: Yes, that is the intent with regard to that
7 number. I can confirm the calculation. It's something I
8 would have to do through an undertaking, if you would like.
9 MS. SEBALJ: We thought it just looked a little large
10 but it may be that large.
11 MR. REED: There is substantial production in
12 Michigan, but I'd be glad to go back to the source data and
13 check it if you would like.
14 MS. SEBALJ: Sure. I'll mark that as an undertaking,
15 MHP number 8.
16 MHP UNDERTAKING NO. 8: TO VERIFY LOCAL PRODUCTION
18 MS. SEBALJ: Now, I'm still in attachment B. The
19 figure for working gas held by Union is 149,600 mmcfs.
20 I'm going to make a differentiation between stock and
21 flow. It looks like that number is stock. Does it make
22 sense to add the stock and flow figures together, as you
23 have, computing the total relevant market?
24 MR. REED: Maybe I'm not understanding your use of
25 "stock and flow." By "flow," I would think you would be
26 referring to the deliverability that can come out of that
27 storage, which is what's in attachment D.
28 MR. SMITH: And remember, attachment D was updated
1 late last week.
2 MS. SEBALJ: I think the question was getting at the
3 difference between local production and the physical
4 storage, local production being flow.
5 MR. REED: Oh.
6 MS. SEBALJ: And physical storage being stock. And
7 whether or not those should be computed together.
8 MR. REED: I think, as I understand your question,
9 given that everything else on attachment B in the working
10 gas column is stock, as opposed to flow, shouldn't the
11 local production figure be a stock value as well as opposed
12 to a flow value.
13 MS. SEBALJ: Yes.
14 MR. REED: I think that would be appropriate. If it's
15 difficult to conceptualize what the stock is of local
16 production unless you're talking about reserves, but
17 reserves, of course, of production, unlike storage, aren't
18 produced in a year. Storage cycles through in a year.
19 So the annual component of production could be
20 included there. The annual production level, as opposed to
21 the peak flow level.
22 MS. SEBALJ: On page 47 of your report, you say that
23 there is -- I was just finding it myself – “a vibrant
24 pipeline capacity release market."
25 Can you just expand on that, and if you have
26 quantitative support, particularly in the context of
27 pipeline capacity upstream to Dawn? Sorry. The reference
28 is the last -- it's in the last paragraph, second-last line
1 of page 47. You say:
2 "MHP Canada, to exercise market power, is
3 further reduced by the fact that there is a
4 vibrant pipeline capacity release market."
5 MR. REED: And your question is with reference to
6 upstream pipelines. Can I expand on sort of the view, the
7 view as to --
8 MS. SEBALJ: Quantitatively.
9 MR. REED: The quantity of release that's occurring on
10 upstream systems? Let's look, for example, at ANR. ANR is
11 an upstream pipeline to Dawn. Capacity release on ANR is
12 very active. Obviously, shorter term releases as opposed
13 to longer term releases multi-year is less active than
14 shorter term. And you can get visibility on that by simply
15 looking at the FERC website -- or, I'm sorry, the
16 pipeline website and their electronic bulletin board as to
17 capacity release activities.
18 It's different on different systems. Great Lakes has
19 that capacity release activity as well. It's probably not
20 as active as ANR, but it's certainly significant.
21 Panhandle and Trunkline are upstream pipelines. They
22 both have active capacity release markets.
23 So those are the principal systems as I think of them.
24 MS. SEBALJ: Can you give me your thoughts on how
25 competitive you think this secondary market has to be to
26 prevent the exercise of market power by Union in the supply
27 of gas storage?
28 MR. REED: I don't think the level of competition in
1 the secondary market for upstream capacity has to be very
2 high or great in order to provide a check on market power
3 use for storage services. Again, they're functionally
5 The real question is does the existence of either a
6 constrained pipeline or inactive secondary markets provide
7 enhanced market power to a storage provider at Dawn, for
8 example. The answer is no. What it provides, if anything,
9 is enhanced competitive position and potential for market
10 power with regard to the capacity holder on the
11 transportation system, on the pipeline system.
12 The real question is who is going to capture to the
13 economic rent if there's an upstream constraint or there's
14 an inactive market. It's not the storage provider, it's
15 the capacity holder on the pipeline system that will
16 capture that economic rent.
17 In fact, what you may find is that storage providers
18 at Dawn are hampered in their ability to market their
19 product because of the dominance of the upstream capacity
20 market that will actually reduce the competitive position
21 of a storage provider, not provide them with market power.
22 MS. SEBALJ: Can you sort of answer the same question
23 with respect to the secondary market, the storage itself as
24 opposed to the pipeline capacity release?
25 MR. REED: This comes down to an understanding of how
26 the market really works.
27 Most of the secondary market for storage really is not
28 in the form of capacity release for storage. It's in the
1 form of a marketer taking a supply and a storage
2 product and providing either daily sales at the hub market
3 -- in this case Dawn hub, or at a city gate market on a
4 distribution system or pipeline system.
5 It is those daily peaking sales, or even weekly or
6 monthly peaking sales, that really provide the secondary
7 market for storage capacity. And that is, in fact, the
8 competitive check on storage service. You don't have to
9 contract separately for supply and storage. Certainly you
10 have the choice of simply saying: I'm going to buy
11 whatever my daily requirements are at the hub or at the
12 city gate, and just vary that volume every day.
13 That's the surrogate for storage. And, in fact,
14 that's where most of the secondary market activity occurs
15 with regard to storage. It's through the bundled daily
16 sales service that occurs, usually provided by marketers at
17 those two points: Hubs and city gates.
18 MS. SEBALJ: And just as a follow-up to both of those
19 questions, where you identify the secondary market for
20 pipeline capacity and for storage, can you give me your
21 thoughts on whether these are operating efficiently in
23 MR. REED: I would say they're operating very
24 efficiently. If you look at the activities at the Dawn
25 hub, it's turned out to be one of the most competitive and
26 effective hubs in North America with regard to supply
27 service, transportation service, and storage service. And
28 again, those are on both a bundled and unbundled basis.
1 Current volumes at Dawn are approaching 7 Bcf a day,
2 which is a multiple of the pipeline capacity that goes
3 through there, interestingly. So what you see is, in fact,
4 a compounded market with a lot of intermediaries, a lot of
5 marketers doing buys and sells at Dawn. 7 Bcf a day is a
6 very active hub.
7 MS. SEBALJ: I think you alluded to this in the first
8 part of your answer to the pipeline capacity question. But
9 I'm wanting to know whether you think an efficient
10 secondary market plays a role in mitigating market power in
11 the primary market.
12 MR. REED: Yes, it certainly plays a role in a
13 secondary market, whether it's in pipeline capacity or
14 storage. But my point was, the lack of a secondary market
15 or an active secondary market upstream of the Dawn hub, for
16 example, doesn't mean that storage providers have market
17 power. It suggests that, if anything, transportation
18 providers or transportation holders may have market power.
19 And they may have, in fact, market power with respect to
20 their conduct with storage service providers.
21 If they control the flow of gas into storage, and
22 without that you cannot effectively market storage, then
23 the answer is, it's the transportation holder not the
24 storage provider that derives the economic rent from that.
25 MS. SEBALJ: Thank you.
26 I had another -- just, my last question is a
27 follow-up, and I have to remind myself where -- I believe
28 it was Mr. Thompson's evidence on -- or questions on
1 transactional services. And you discussed the definition
2 of transactional services. And then, whether market-based
3 rates for transactional services existed, or something
4 along those lines.
5 And you said: Absent some overwhelming public policy
7 And that sort of twigged me to the FERC's recent
8 proposed changes in the NOPER. And if you can give
9 me an idea of what overwhelming public policy reasons would
10 cause or in your opinion should cause a regulator to
11 authorize market-based rates with the presence of market
13 MR. REED: No. That's a good question.
14 This is a balancing act at FERC right now, where
15 Congress and FERC have determined that the development of
16 incremental storage capacity is very important in terms of
17 managing price volatility in the nation, and also in terms
18 of enhancing supply options for swing customers, electric
19 generation being the largest.
20 Remember that what we do in a market power analysis is
21 determine concentration. And from that infer the presence
22 of market power. And from that infer the potential for the
23 exercise of market power. So there's three steps here.
24 It is the only actual exercise and abuse of market
25 power that leads to inefficient conduct or activities that
26 aren't in the public interest.
27 I think what FERC has recognized is, even in
28 concentrated markets, that inference that market power may
1 exist isn't iron-clad. And even where market power exists,
2 there may not, in fact, be an abuse of market power.
3 Therefore, if market-based rates will incent entry
4 and provide the public benefit that derives from entry,
5 then maybe we are better trying to police the abuse of
6 market power rather than prevent the use of market-based
8 And that balancing act of saying, okay, rather than
9 outlawing market-based rates let's at least try and
10 police conduct, that's more of a behavioural model than a
11 structural model, could be appropriate if it achieves the
12 benefit of incenting entry.
13 And that's the public policy that I think FERC is
14 wrestling be now, and certainly leaning towards, saying
15 maybe market-based rates provide the better path to
16 achieving the public good here of new entry.
17 MS. SEBALJ: Thanks.
18 I think Mr. Man has one question.
19 CROSS-EXAMINATION BY MR. MAN:
20 MR. MAN: Can I ask you to back to page 3 of the CEA
22 MR. REED: Yes.
23 MR. MAN: In point 3A, you mention the relevant
24 geographic market includes Ontario, Michigan, New York, and
26 Let's take Pennsylvania as an example. For a gas
27 consumer in Ontario, can you provide an example on how this
28 gas consumer can procure capacity in Pennsylvania and
1 transport the gas back to Ontario?
2 MR. REED: The answer is really the same for both
3 Pennsylvania and New York. The pipelines serving those
4 markets, National Fuel Gas and Equitrans, for example, have
5 backhaul rates, and the way one would achieve the use of
6 that capacity through the pipeline system itself is by
7 contracting for a backhaul rate on those pipeline systems
8 to the Canadian border and then a separate contract Canada
9 with TransCanada or Union or whomever.
10 I should also say that the way marketers work in the
11 United States and in Canada, it's not actually necessary to
12 contract for backhaul service itself. Frequently a
13 marketer will provide that service based on assets held in
14 Pennsylvania or New York through displacement, through an
15 exchange, effectively, where volumes that would be flowing
16 through Dawn to, let's say, a New England market, would be
17 diverted into Ontario. And this gas that comes out of
18 storage in Pennsylvania or New York would, in fact, flow
19 alternatively to New England.
20 So through the marketers' exercise of how they manage
21 their assets within their portfolio, they can make that
22 work without even having to contract for backhaul service
23 on the pipeline. They simply divert Dawn's supplies to the
24 Ontario market and take the storage supplies in
25 Pennsylvania to the New England market. So that the
26 physical path is different from the contract path.
27 MR. MAN: So you are saying the marketer will provide
28 a service, not a storage provider?
1 MR. REED: That is certainly, actually, the most
2 common way is that you deal with it through a portfolio of
3 assets and deal with it through displacement or exchange.
4 However, if the end-user or customer wanted to
5 directly contract for that service, you can also do that
6 through the backhaul tariffs, backhaul rates, filed by
7 these pipelines.
8 MR. MAN: So does this gas consumer have to purchase
9 the gas in Pennsylvania, in order to effect the exchange?
10 MR. REED: You can buy the gas anywhere. You can buy
11 the gas in Texas, and you have to inject the gas into the
12 storage in Pennsylvania, and then withdraw it in
13 Pennsylvania and have it transported or displaced back into
15 The gas can be bought in any market that can get to
16 the injection point in Pennsylvania.
17 MR. MAN: Okay. Thank you.
18 MS. SEBALJ: Thanks. Those are all our questions.
19 And I believe that terminates this panel's evidence.
20 MR. SMITH: Thank you.
21 MS. SEBALJ: Thank you, Mr. Smith. Thank you,
22 Mr. Reed, Mr. Redford, and let's take a little bit late
23 morning break, and we'll start back up, let's say, at
24 around 5 to 11 with Gaz Métro. Thank you.
25 --- Recess taken at 10:36 a.m.
26 --- On resuming at 10:57 a.m.
27 MS. SEBALJ: The Board hearing team does not have
28 questions for this panel, so I'm going to run down my list
1 and determine who does.
2 Union? Mr. Cameron, Mr. Leslie, are either of you
4 MR. LESLIE: No, I have no questions.
5 MS. SEBALJ: Market Hub partners?
6 MR. SMITH: I just have one brief question.
7 MR. LECLERC: Before we start, I'd perhaps like to
8 introduce the panel, or are you going to go through the
10 MS. SEBALJ: My apologies. No, I'm not going to go
11 through the roster. Please do.
12 MR. LECLERC: Good morning. My name is Louis-André
13 Leclerc, and I'm appearing on behalf of Gaz Métro. With me
14 are Louis-Charles Ratelle, advisor, out-of-town regulatory
15 affairs. My panel of witnesses this morning are Madame
16 Sophie Brochu. Madame Brochu is executive vice president
17 of the company. She will be assisted to her right by
18 Frédéric Morel. Frédéric Morel is senior manager,
19 contractual affairs, gas supply. Sorry, to her left. And
20 to Madame Brochu's right is Jean-Pierre Belisle, marketing
21 manager, gas supply.
22 GAZ METRO – PANEL 1:
23 SOPHIE BROCHU;
24 FREDERIC MOREL;
25 PIERRE BELISLE;
26 MR. LECLERC: Madame Brochu will have a brief opening
27 statement to make, and then she will be available for
1 Madame Brochu.
2 MS. SEBALJ: Please get go ahead, thanks.
3 OPENING STATEMENT BY MS. BROCHU:
4 MS. BROCHU: Good morning to you all. My colleagues
5 and I are very pleased to be here today, and as you can
6 already hear, English is not our mother tongue, so if for
7 any reason our thoughts are not properly conveyed, just let
8 us know and we'll try to do our best. But if some logic
9 seems a bit tight, it's because of our lack of vocabulary,
10 and I may turn to people more bilingual than us to help us
12 I'll do that very quickly. Gaz Métro, as you are
13 probably aware, is the largest natural gas distributor in
14 Quebec. Actually, we distribute 97 percent of the overall
15 volumes of natural gas being consumed in the province.
16 As such, we are, of course, responsible to
17 load-balance our customers, and because of that
18 responsibility, we have been turning to Union storage for
19 the last 30 years.
20 Access to Union storage capacity is an integral part
21 of our supply system, just like the Quebec market is really
22 integrated to the overall regional markets that is
23 encompassed by the eastern zone of TCPL. Quebec, Ontario,
24 is part of the same market.
25 Why are we here? We're here because we are a bit
26 concerned. We're concerned because when we read the report
27 of the OEB staff, we saw some wording there and the word
28 "clawback" being mentioned. And we have been a customer of
1 Union, as I said, for the last 30 years. We've been paying
2 market price since 2001, and as such we have contributed
3 over 100 million dollars, a good chunk of which has been
4 turned back to Union customers. So we have contributed to
5 lower the Union franchise customers’ overall cost-of-
7 As I said, we are part of that integrated system, and
8 we feel that, through the years, through that relationship
9 and being the largest out of franchise customers of Union,
10 that we have earned a right to access the Union storage.
11 We're not asking any privilege, but we want to be treated
12 fairly, and all we're asking is to be able to compete on a
13 going-forward basis to get access to that storage.
14 And in a nutshell, to the question: Is there market
15 power in our perspective? And bear with us, we're no
16 competition experts; we cannot generalize that as others
17 have done. But we are business people, entertaining
18 business relationship, and doing day-to-day deals with
19 other parties, and it has never been our experience to feel
20 that Union is exercising market power with us.
21 It has not been our experience. So far we have had no
22 indication of that.
23 Should the storage be deregulated? Well, we're not
24 here to tell the OEB what to do, and we are certainly not
25 here to mingle in the relationship between the OEB and its
26 regulated distributor.
27 As you know, we are already paying market price, so to
28 us, if deregulating the market means, you know, having
1 market price being paid by everybody, that's fine with us.
2 We have no problem with that from a pricing standpoint.
3 If staying regulated means that we have this -- and
4 I'm not sure what the translation will be, but this
5 Damocles sword -- does that ring a bell -- the Damocles
6 sword over our head, then we are concerned. And again,
7 it's not a matter that we want a specific pricing for us
8 but we want to be able to compete and access that storage.
9 In a nutshell, please bear in mind that this access is
10 critical for us.
11 I was not planning to talk about LNG, but I got a bit
12 called upon when I heard Mr. Reed this morning saying that
13 the coming on of either Rebaska or Cocuna could change the
14 pattern of the need or storage for the LDC. This is not
15 the case for Gaz Métro. The strategy that we're
16 entertaining is the diversification of our supply
17 portfolio, so part of the volumes that are coming from the
18 west will be coming from the east. It has nothing to do
19 with the supply -- with the storage pattern and our
21 So we do not see our requirements for Union storage
22 decrease when Rebaska or Cocuna comes on stream. So that
23 was our tiny bit this morning.
24 MR. LECLERC: Subject to these remarks the panel is
25 open for cross-examination.
26 MS. SEBALJ: Thank you.
27 Go ahead, Mr. Smith.
28 CROSS-EXAMINATION BY MR. SMITH:
1 MR. SMITH: Ms. Brochu, good to see you again.
2 MS. BROCHU: Good to see you.
3 MR. SMITH: We had circulated a written question to
4 all of the submitters, and rather than reading it into the
5 record, I'd just ask you if you have the question that we
6 had provided to Gaz Métro and ask if you could provide your
8 MS. BROCHU: Yes, we've had your question. And given
9 the existence of the affiliate protocols, we have no
10 problem with your proposal.
11 MR. SMITH: Thank you. That's all I have. Thanks.
12 MS. SEBALJ: I'm still trying to find the question.
13 Thank you, Mr. Smith.
14 Are there any questions from Enbridge? Mr. Brown?
15 MR. BROWN: No questions.
16 MS. SEBALJ: Mr. Moran?
17 CROSS-EXAMINATION BY MR. MORAN:
18 MR. MORAN: I can assure you that, given the remarks
19 that my children have made about my ability to speak
20 French, that your ability in English far exceeds my …
22 I only have a few questions. First, my name is Pat
23 Moran, and I'm here on behalf of the association of power
24 producers of Ontario, and in the context of this hearing we
25 are looking at the interests of gas-fired generators and
26 the need for additional services to meet those needs.
27 MS. BROCHU: Can you talk just a bit slower, please,
28 just so -- thank you.
1 MR. MORAN: Certainly, certainly.
2 MS. BROCHU: Thank you. That will be helpful.
3 MR. MORAN: In your evidence you have indicated that
4 access to Union's storage service is vital to your
5 operations. And you go on to say that because of its
6 geographical location, Dawn represents the only reasonable
7 storage operation for Gaz Métro outside its franchise area.
9 MS. BROCHU: Yes.
10 MR. MORAN: And you indicate that:
11 "The use of other sites would not be economically
12 attractive by reason of the greater distance in
13 addition to a number of operational constraints."
14 When you referred to the use of other sites, what did you
15 have in mind? What sites were you referring to? Were you
16 referring to, for example, Michigan storage?
17 MS. BROCHU: Yes. In fact, what we do when we look at
18 our options is to look at everything else that is within, I
19 would say, a reach, a market reach, for Gaz Métro. And we
20 look at various alternatives. And so that's what we look
22 MR. MORAN: All right. And is it correct to say that
23 the only storage contracts that you have are the ones that
24 you have with Union Gas?
25 MS. BROCHU: No, this is not correct to say. We have
26 other contractual arrangement within the Quebec province,
27 we have two relatively small storage facilities in Quebec.
28 But I would say outside of Quebec, yes, the only storage
1 contracts that we have physical are with Union.
2 MR. MORAN: All right. And the Quebec facilities are
3 actually located in Quebec?
4 MS. BROCHU: They are. Yes. They're much smaller,
6 MR. MORAN: Right. I wonder if you could indicate or
7 describe what the operational constraints are that create a
8 barrier for Gaz Métro to use other storage sites?
9 MS. BROCHU: I think, generally speaking, we need to
10 view that as an LDC, theoretically speaking, the closer you
11 are to your load-balancing tools, the better off you are.
12 So the further away you go, the more complexity you
13 get. Is it absolutely impossible to get there? The answer
14 is no. They are alternatives. But from Gaz Métro’s
15 perspective, there is no doubt that the easiest, the most
16 convenient, is it most competitive, as we speak, the more
17 operationally easy, is the Union's storage.
18 The further away you get, the more nomination you
19 get. That's what you call the pancaking. The more
20 nomination you get. The further away you are, you also
21 have the considerations of force majeure. You have more
22 likelihood of having a force majeure down the road.
23 So the closer you are, the better off you are.
24 So that's what we talk, when we talk about
25 constraint. Nomination windows -- is that how we say that
26 in English – windows -- nomination windows might not be
27 exactly synchronized.
28 MR. MORAN: Yes. Yes. In the context of Gaz Métro's
1 system, as I understand it, it's a local distribution
2 system; right?
3 MS. BROCHU: Local -- what do you mean by local
4 distribution? We're an LDC, we distribute gas in Quebec.
5 If it's local --
6 MR. MORAN: Right. And in the context of your
7 operation, do you have a need to withdraw gas and inject
8 gas from and into storage on a short-term basis within the
9 course of the day, for example?
10 MR. BELISLE: I will answer that question. Yes, of
11 course. Intra-denominations, yes, so we vary the
12 quantity we pull out or we inject during day.
13 MR. MORAN: I wonder -- could you just describe how
14 you go about doing that? How do you administer that
16 MR. BELISLE: Well, we have, first submission today
17 that is sent like a day before, for the following
18 day, for the following gas day. And then during the day,
19 during the following gas day, during that day, we can
20 re-nominate, higher or down, depending on, of course, of
21 the load in our franchise in Quebec. The load varies,
22 especially in winter when a few degree days there's a
23 really big variance. So we use storage at Dawn to load-
24 balance that.
25 MR. MORAN: All right. And what about on an hourly
26 basis? Do you --
27 MR. BELISLE: We cannot nominate on an hourly basis.
28 I think we have four or five windows a day.
1 MR. MORAN: So you wouldn't be withdrawing or
2 injecting gas from storage on an hourly basis?
3 MR. BELISLE: But we cannot do that. The nomination
4 process does not allow it. In that case, a very cold day,
5 for example, we'll use our LNG tanks in Montreal. We have
6 two LNG tank in Montreal, 2 Bcf of LNG.
7 MR. MORAN: 2 Bcf of LNG capacity in Montreal?
8 MR. BELISLE: Yeah.
9 MR. MORAN: Do you have any gas-fired generation
10 connected to your local distribution system?
11 MS. BROCHU: Yes. We have one gas-fired generation.
12 It's a small co-gen plant. We have one, I think, in
14 MR. MORAN: And it's a cogeneration plant?
15 MS. BROCHU: I'm sorry -- as of now, now there will be
16 a large facility coming on-stream in the next few months
17 which is TC -- which is a 500 megawatt plant, I think, so
18 the one that we have right now is about 30 Bcf, something
19 like that. 30 megawatts, I mean.
20 MR. MORAN: Thank you very much.
21 MS. BROCHU: Sure.
22 MS. SEBALJ: Thank you, Mr. Moran.
23 Mr. Aiken, did you have any questions?
24 MR. AIKEN: No.
25 MS. SEBALJ: Mr. Wightman?
26 MR. WIGHTMAN: No questions.
27 MS. SEBALJ: Ms. Ruzycki? Is she here? Nola? No.
28 Mr. Olsen?
1 MR. OLSEN: No questions.
2 MS. SEBALJ: Mr. Thompson?
3 MR. THOMPSON: No questions.
4 MS. SEBALJ: Mr. Quinn? Mr. Hemming? Not here...
5 Mr. Howe?
6 MR. HOWE: No, thank you.
7 MS. SEBALJ: You probably don't have questions of
8 yourselves so ...
9 We have just a few questions.
10 CROSS-EXAMINATION BY MS. SEBALJ:
11 MS. SEBALJ: Just as a matter of follow-up to Mr.
12 Moran's I believe it was his last question, you indicated
13 that you are unable to nominate hourly, therefore you
14 don't, or unable to balance hourly.
15 If you had that ability, would you?
16 MR. BELISLE: Well, when you have new services you
17 tend to use them all. If they fit in your pattern, your
18 load pattern, I believe we would use it, yeah, but we can
19 live without it now, and it works pretty well, as we speak,
21 MS. SEBALJ: And the new gas-fired generation that's
22 coming on-line is embedded within your LDC territory; is
23 that correct?
24 MS. BROCHU: Yes. They will be served by our system.
25 MS. SEBALJ: That's the TCE plant?
26 MS. BROCHU: Exactly.
27 MS. SEBALJ: Thank you. At paragraph 18 of your
28 evidence, just before I start this question. I'm trying to
1 reconcile your sort of need for Union's services with your
2 assertion that you don't believe they exercise market
4 MS. BROCHU: I'm sorry, I missed that with the noise.
5 I'm sorry.
6 MS. SEBALJ: I'm trying to reconcile your assertion
7 that you need the services of Union, the storage services
8 of Union, with your statement that you don't -- do not
9 believe they exercise market power.
10 So I just wanted to take you to your paragraph 18
11 statement, where you say:
12 "Storage facilities should ideally be located
13 where gas is consumed. Unfortunately this ideal
14 situation rarely exists. And even more so in the
15 case of Gaz Métro, which is not only dependent on
16 a single-supply basin, the Western Canadian
17 sedimentary basin, and on a single
18 transportation system, TCPL, but also, in
19 essence, depends on a single storage site."
20 Can you tell me how this observation that you make in
21 your evidence is consistent with your conclusion at
22 paragraph 22, where you say that Union Gas does not
23 exercise market power?
24 MS. BROCHU: I think I would answer that question by
25 saying that being physically dependent of somebody, and
26 having that entity extracting the very last penny out of
27 that situation is two different things.
28 MS. SEBALJ: Mm-hm.
1 MS. BROCHU: For us, the Union storage is a critical
2 part, integral part, of our supply. There are
4 but definitely this one is the very best, and by far.
5 That being said, when we sit down and negotiate with
6 Union, we look at the alternatives. And you will
7 understand that this is a bit commercially sensitive, but I
8 would say that we have not seen a situation where we have
9 been taken for granted, if it -- do you understand what I
11 MS. SEBALJ: Yes.
12 MS. BROCHU: We've not been -- we didn't feel like a
14 MS. SEBALJ: Right.
15 MS. BROCHU: So that's what we mean. So we are
16 dependent physically, but the other entity's not, you know,
17 pushing unnecessary roughness, let's say.
18 MS. SEBALJ: To use a hockey term.
19 There I go. Is it your view, just to follow up on
20 that, is it your view that Union possesses market power but
21 doesn't exercise it or that they do not possess market
22 power at all.
23 MS. BROCHU: It's very difficult for us to answer that
24 for -- because market power is a complex -- it's a
25 complex concept, and this is probably better answered by
26 people who know what means market power.
27 Again, having -- there is an economical rent
28 associated to the fact that this storage is there, it's
1 important, it's critical. The way people play with
2 this asset after that is a matter of something that is more
3 complex than what we understand it to be.
4 MS. SEBALJ: Okay. Now, you spoke a bit with Mr. Moran
5 about the alternatives, the alternative storage facilities,
6 and in particular I'm interested in Michigan and New York
7 and whether those are substitutes. And I think I heard you
8 say that technically they're substitutes but they're not
9 your ideal substitutes; is that accurate?
10 MS. BROCHU: Okay. Again, this is obviously
11 commercially sensitive, but we do look at Michigan. We
12 don't look as far away as New York, just -- okay, to let
13 you know, and so that exactly those alternatives exist.
14 And actually, we have, you know, little bells and whistles
15 around this cornerstone of the physical storage at Union.
16 We don't do just Union, we buy gas at Dawn, and we do
17 exchanges, but the cornerstone of our supply is Union. And
18 to that service there are alternatives; they are more
19 complex, more pricey, more remote. This is by far the
20 least preferable choices, given the economics.
21 MS. SEBALJ: Thank you. Those are all of our
23 Thank you very much.
24 MS. BROCHU: Thank you.
25 MS. SEBALJ: I believe that's it. Thank you for
26 coming all this way.
27 MR. LECLERC: Thank you very much. I have no
28 redirect, but I would like to take this opportunity to
1 thank the representative of Enbridge for accommodating our
2 timing concerns and letting us pass before him.
3 Thank you.
4 MS. SEBALJ: Thank you.
5 MS. BROCHU: Thank you.
6 MS. SEBALJ: Thanks.
7 So next up is Enbridge Inc. It's my understanding the
8 Board hearing team doesn't have any questions for Enbridge;
9 is that correct?
10 MS. CAMPBELL: We don't.
11 MS. SEBALJ: Does Union have any questions for
12 Enbridge Inc.?
13 MR. LESLIE: No, thank you.
14 MS. SEBALJ: Mr. Smith? Yes.
15 MR. SMITH: I have one question.
16 MS. SEBALJ: I'm imagining Enbridge Gas Distribution
17 does not have questions?
18 MR. HOWE: That's correct.
19 MS. SEBALJ: Mr. Brown?
20 MR. BROWN: No questions.
21 MS. SEBALJ: Mr. Moran?
22 MR. MORAN: Just a couple of questions.
23 MS. SEBALJ: Mr. Aiken?
24 MR. AIKEN: No, no questions.
25 MS. SEBALJ: Mr. Wightman?
26 MR. WIGHTMAN: One question for IGUA, and AMPCO
27 has some questions.
28 MS. SEBALJ: I wasn't allowed to speak until Karin got
1 back into her chair. Thank you.
2 [Off-the-record discussion]
3 MR. HOWE: Perhaps by way of introduction, I can
4 introduce myself. My name is Robert Howe, and I act on
5 behalf of Enbridge Inc.
6 Mr. Robert Craig is with us this morning. He is the
7 director of gas storage for Enbridge Inc., and he has a
8 brief opening statement. Bob?
9 ENBRIDGE INC. – PANEL 1:
10 ROBERT CRAIG;
11 OPENING STATEMENT BY MR. CRAIG:
12 MR. CRAIG: Yes, thank you. As indicated in my CV,
13 I'm the director of gas storage for Enbridge Inc. I've
14 been involved in the exploration, production, and storage
15 development and operation in Ontario since 1974, with
16 positions with Consumers Gas, British Gas Holdings, and
17 more recently with Enbridge Inc., and as indicated I've
18 been a witness at a number of OEB proceedings for storage
19 development and operation, as well as some oil and gas
21 The evidence of EI is, as you can see, fairly short,
22 so hopefully there's no confusion in finding between the
23 two pages. Essentially we believe, or based on information
24 that we have, that most of the large known, favourably
25 located, good pinnacle reef pools, and I'm talking about
26 pinnacle reef pools in Ontario, have previously been
27 developed for storage; that there's a limited amount
28 of known pools out there today. They're not necessarily
1 located close to the Dawn market hub. They tend to be
2 smaller in size, and in some cases tend to be poorer in
4 As a result of that, over the last number of years
5 Enbridge Inc. has undertaken some -- a limited amount of
6 exploration and pool evaluation activity. Unfortunately,
7 to this point it has not led to a storage development
8 application, but our efforts continue.
9 All of this is conducted outside of EGD at EEDI's
10 sole cost and risk, and that's in keeping with the decision
11 of the Board back in the mid-1980s, I think it was EBR-
12 0403, at which time the exploration and production
13 activities that Consumers Gas had predominantly on Lake
14 Erie, were removed from rate base.
15 So it's not an item that obviously from that
16 decision the Board would like to see under regulation.
17 Subject to identifying sufficient level of gas
18 storage, we would intend to bring an application before the
19 Board for designation, development and operation, and we
20 would do this at full arms'-length to EGD, without any
21 preferred status or cross-subsidy from EGD or its
23 In that regard, we believe we would be completely
24 separate from EGD, and we would not have market
25 Power, and we would seek to be treated no differently than
26 other independent storage development operators.
27 Just a word. My experience has been in the
28 exploration, production, and storage development side. I
1 have never been involved in the buying of storage services
2 at the retail or wholesale level or the selling of those
3 services. Market competitiveness, relevant market area and
4 those issues are not an area of my expertise. So with
5 that, I'm prepared to answer whatever questions you might
7 MS. SEBALJ: Thank you, Mr. Craig.
8 Mr. Smith?
9 CROSS-EXAMINATION BY MR. SMITH:
10 MR. SMITH: Good morning, Mr. Craig. My name is
11 Laurie Smith. I'm representing Market Hub Partners. We had
12 sent you, along with all the other submitters, a question
13 in writing, and if I might just quickly paraphrase it,
14 would you support the grant to MHP Canada of market-based
15 rate authority and contracting flexibility similar to that
16 afforded non-affiliated independent storage developers?
17 MR. CRAIG: I guess my answer to that is I have not
18 read the application or the evidence, but, subject to it
19 being in line with what was said by your witness, and that
20 there's no cross-subsidy from Union, then we would have no
21 opposition to the granting of market rates or forbearance.
22 MR. SMITH: Thank you.
23 MS. SEBALJ: Thank you, Mr. Smith. Mr. Moran?
24 CROSS-EXAMINATION BY MR. MORAN:
25 MR. MORAN: Thank you. My name is Pat Moran, and I'm
26 here on behalf of the Association of Power Producers of
27 Ontario, with respect to gas-fired generation issues, and
1 Just a couple of questions. First of all, could you
2 indicate when Enbridge Energy Distribution Inc. was
4 MR. CRAIG: It would have been consistent with the
5 name change from Consumers Gas to Enbridge, whatever time
6 frame that was -- the early 2000s. And that would have
7 been the -- now, there was an unregulated entity that
8 existed in advance of that, so I would say -- I mean the
9 activities that we have conducted under this unregulated
10 entity have gone on for probably seven to eight years.
11 MR. MORAN: All right. So there was a name change;
12 that's how –-
13 MR. CRAIG: Well, when you said Enbridge Energy
14 Distribution Inc., yes, it was --
15 MR. MORAN: Yes, but that company existed with a
16 different name, as I understand it, for about the last
17 seven or eight years?
18 MR. CRAIG: Seven or eight years, yes.
19 MR. MORAN: And could you describe the activities that
20 that company has been engaged in over those seven or eight
22 MR. CRAIG: Generally, exploration activity. We have
23 gone and got leases from private landowners. We have gone
24 and acquired seismic data from trade houses that you can
25 buy it from in Calgary. We have shot our own seismic, in
26 some instances. We have acquired gravity data and
27 reprocessed it, looking for gravity anomaly indications.
28 We used some AeroMag data to look at the basement, all of
1 which is available for purchase by -- from third-party
3 And in addition to that, we have drilled some wells,
4 and we have conducted some production operations in an
5 effort to determine the size of the things that we have -–
6 we found.
7 MR. MORAN: All right. And am I correct in
8 understanding that right now Enbridge Energy Distribution
9 Inc. does not provide any -- or does not operate any
10 storage services in Ontario?
11 MR. CRAIG: No, sir.
12 MR. MORAN: All right. And then, just so that we can
13 understand how the family fits together, in terms of the
14 directors and officers of EEDI -- well, let me rephrase it,
15 I wonder, and it may be best by way of undertaking, I
16 wonder if you could just provide me with a corporate
17 organizational chart for the Enbridge family of companies,
18 and indicating who the directors and officers are for the
19 individual companies, including, obviously, Energy
21 MR. CRAIG: Okay. I guess, as long as you limit it
22 to -- I mean, Enbridge has a lot of different oil pipeline
23 companies which, I guess, are really not germane to this
24 proceeding. But the ones in Ontario, the gas-related side,
25 yes, definitely, that's probably one page.
26 MR. MORAN: Well, I'd be interested in the whole
27 family, because, as I understood it, Enbridge does operate
28 on a family basis, and so those interrelationships would be
1 of interest.
2 MR. CRAIG: Well, for me to provide the directors of
3 all those companies, that's -- I have no idea how many
4 there are in different entities of Enbridge, so ...
5 MR. MORAN: I understand that it's information that,
6 first of all, is publicly available, and secondly, has been
7 produced on a number of occasions at various regulatory
8 proceedings. So perhaps we could just leave it this way.
9 You can make your best efforts to pull that information
10 together, and I'm not anticipating you'll have any
11 difficulty in doing that. But I'm prepared to take the
12 undertaking on that basis.
13 MR. HOWE: Well, Mr. Moran, I think what you're
14 indicating is that EGD may have made it available in
15 different places. As Mr. Craig has mentioned, the company
16 for whom he works is very different than EGD. Perhaps if
17 EGD has made the information available, you may ask them
18 for the undertaking. It may be more relevant to their
19 operation than his operation, because it's not relevant to
20 him, and he'd have to go out and have somebody else do this
21 work on his behalf.
22 So I'm not trying to be difficult here. It just seems
23 to me that there may be another party that has the
24 information in a more adaptable format.
25 MR. CRAIG: I guess what I was trying to do was just
26 limit it to the gas side. Because on the oil side, I mean,
27 they have a pipeline company in Saskatchewan, for example.
28 They have a pipeline company -- several pipeline companies
1 in the US that are oil pipeline related.
2 MR. MORAN: Right. And I'm fine, if you want to leave
3 out the oil business, that's fine.
4 MR. CRAIG: Okay. Yeah.
5 MR. MORAN: As I understand, as I understood, Mr.
6 Howe, it's the parent of the family who's here so I assume
7 that the parent would know this information, so --
8 MR. HOWE: Well, whether or not the parent knows,
9 Mr. Craig doesn't know. And I don't understand how
10 relevant that would be for purposes of Mr. Craig's
12 We're prepared to give the undertaking as Mr. Craig
13 has indicated that, for those companies that are carrying
14 on business in Ontario. We'll be happy to provide that
16 But I think it's too onerous a task to ask Mr. Craig
17 to have the entire family tree prepared and presented
18 through him. I mean, you may be better off pursuing it, as
19 I said, through EGD. So we're prepared to give a more
20 limited undertaking.
21 MR. MORAN: I thought the compromise was we would
22 extract the oil business and not base it on Ontario, the
23 gas businesses, and leave it at that.
24 MR. HOWE: Maybe I missed a subtlety there, but I
25 don't know if Mr. Craig went so far as to include the gas
27 MR. CRAIG: Well, I think, from my understanding, the
28 gas business is pretty much limited to Ontario.
1 MR. MORAN: But we do know that Enbridge Inc. has
2 interested in other gas businesses, and obviously there are
3 a number of companies involved with directors and so on.
4 So that's the undertaking I'm requesting.
5 MR. HOWE: Well, why don't we do this. Why don't we
6 take it under advisement. I'd like to speak to Mr. Craig
7 about it. We certainly will give you the more limited
8 undertaking, and you and I can discuss it, and I'll discuss
9 it with Mr. Craig, and I'll let you know.
10 MR. MORAN: Well, Mr. Craig, I guess I'm having a
11 little difficulty as to why this is a problem, because the
12 entity here is Enbridge Inc., so surely you can just go to
13 your client and ask them to provide the information, and
14 that's an answer to the undertaking. It's not a personal
15 undertaking from Mr. Craig. He's a representative of the
16 company, and that's what I'm asking for.
17 I'm not sure why it's a difficult proposition. But we
18 can leave it at that and --
19 MR. HOWE: All right. Well, let's leave it at that.
20 We can, if necessary, debate this in a different forum.
21 We're trying to accommodate what we feel are relevant
22 information requests and I'm not going to characterize your
23 request as anything else other than a not apparently
24 relevant to us at this point in time.
25 MR. MORAN: All right. Well, maybe I can help you
26 with that, then, because as an affiliate, there are
27 obviously issues that arise out of affiliate relationships,
28 and part of understanding whether those issues arise here
1 is an understanding of what the affiliate relationship is.
2 And I, obviously, can't exam the affiliate relationship
3 unless you provide me with that information.
4 So that's why we need the information. And it's
5 directly relevant to issues that are before the Board.
6 Market Hub Partners has raised the issue, the
7 difference between an affiliate and a non-affiliate, and
8 whether the treatment should be the same or not. Mr. Craig
9 has indicated on the subject of cross-subsidy issues that
10 he believes there shouldn't be any difference in treatment,
11 and so clearly it would be relevant to that issue.
12 MR. HOWE: That seems to be to me to be a different
13 request. And I think what you're asking us is to explain
14 the relationship between what Mr. Craig does in his
15 company, and presumably the regulated utility EGD. And
16 we're prepared to provide that undertaking. If that's what
17 you want, we'll give that to you.
18 MR. MORAN: The directors and officers of the
19 affiliate companies that are involved in gas businesses in
20 the Enbridge family. That's the undertaking.
21 MR. HOWE: All right. We'll give you that.
22 MR. MORAN: Thank you very much.
23 MS. SEBALJ: That's EI Undertaking No. 1.
24 EI UNDERTAKING NO. 1: TO PROVIDE NAMES OF THE
25 DIRECTORS AND OFFICERS OF THE AFFILIATE COMPANIES THAT
26 ARE INVOLVED IN GAS BUSINESSES IN THE ENBRIDGE FAMILY
27 MS. SEBALJ: Mr. Thompson.
28 CROSS-EXAMINATION BY MR. THOMPSON:
1 MR. THOMPSON: That debate occupied more pages in the
2 transcript than your evidence, Mr. Craig.
3 With your evidence, Mr. Craig, -- I represent IGUA and
4 AMPCO, I think, as you probably know -- with your evidence,
5 you've provided a CV, and you indicated in your opening
6 statement that you go back with the Consumer Gas company,
7 as back to 1974. That's more than 30 years; right?
8 MR. CRAIG: Yes, sir.
9 MR. THOMPSON: And you've been in the storage
10 exploration and development business throughout that time
11 frame? Am I right?
12 MR. CRAIG: Yes. Yes.
13 MR. THOMPSON: And in Ontario?
14 MR. CRAIG: Yes.
15 MR. THOMPSON: So are you very familiar with the
16 Ontario storage exploration and development activities,
17 first of all? Generally?
18 MR. CRAIG: Yes.
19 MR. THOMPSON: So are you Mr. Storage in Enbridge
21 MR. CRAIG: No, he retired. That was Jim Tricker.
22 MR. THOMPSON: Mr. Tricker. I was going to say. I
23 remember him well.
24 Now, in the pre-filed evidence in paragraphs 1 to 7,
25 you talk about the activities in which the Enbridge Energy
26 Distribution Inc. has engaged in terms of exploration and
27 evaluation -- sorry, exploration, evaluation, and pool
28 development activity. Could you explain what that
1 involves? Exploration, evaluation, and then pool
3 MR. CRAIG: Well, the exploration would involve the
4 acquisition of seismic or geological/geophysical
5 information, geological mapping and things of
6 that nature, trying to identify a prospect that may have
7 the potential for containing hydrocarbons. That would be
8 the exploration phase, but culminating in the drilling of
9 a well to prove or disprove the theory that there are
10 hydrocarbons in a particular prospect.
11 The evaluation phase would include the testing
12 that's undertaken, perhaps well testing, logging,
13 identification of the size of the feature. That,
14 basically, would be the evaluation phase.
15 Now, if you get one that is potentially suitable for
16 storage, you might do some other tests. We haven't got to
17 that stage, but cap rock type testing and that nature.
18 The pool development activity would be the production
19 phase, trying to produce a bit of the product that's there
20 and establish -- or confirm the size of the find. So those
21 are the activities encompassed by that kind of description.
22 MR. THOMPSON: Thank you. Now, you indicate in
23 paragraph 3 that Enbridge Energy Distribution Inc. has been
24 doing this over the last several years. And how many years
25 has this been going on?
26 MR. CRAIG: Well, I guess there was some limited
27 activity undertaken seven or eight years ago. More
28 predominantly, it's probably been within the last four
2 MR. THOMPSON: And are you the person that's been
3 doing it?
4 MR. CRAIG: Yes.
5 MR. THOMPSON: And what territory has been explored?
6 MR. CRAIG: The focus that we have in our exploration
7 is in the pinnacle reef belt of southwestern Ontario,
8 obviously with the objective of trying to find additional
9 pinnacle reefs that could be suitable for conversion
10 to storage.
11 MR. THOMPSON: Okay. And what have you found?
12 MR. CRAIG: At this point, we have two reefs that we
13 have found. We have another two reefs that have potential,
14 but we haven't evaluated them sufficiently at this point.
15 MR. THOMPSON: So, not much? Is that fair to say?
16 MR. CRAIG: Well, in the long run we believe that
17 these pools will potentially contribute a reasonable level
18 of storage.
19 MR. THOMPSON: Well, what is your view on the -- you
20 know, they used to call it in gas supply -- oil reserves,
21 proven reserves What is out there as proven storage
22 potential in Ontario, in your view?
23 MR. CRAIG: Proven remaining potential?
24 MR. THOMPSON: Right.
25 MR. CRAIG: In all of Ontario?
26 MR. THOMPSON: Right.
27 MR. CRAIG: Or in the pinnacle reef belt?
28 MR. THOMPSON: Well, the pinnacle reef belt first.
1 MR. CRAIG: I would say there's a number of potential
2 candidates out there. There are candidates that are not
3 necessarily close to Dawn or ideal candidates without
4 finding a couple more in the same area.
5 Somebody put together an estimate that said there's
6 potentially 150 Bcf and another estimate of 50 Bcf.
7 MR. THOMPSON: Quite a range. What's yours?
8 MR. CRAIG: My feeling, based on my years of
9 experience in this province, is that the number is closer
10 to 50 rather than 150.
11 MR. THOMPSON: And is it likely to be less than 50, in
12 your experience? In other words, a big fuss being made in
13 this case about potential storage development. And I think
14 what my clients would like to know, how much is really out
15 there in Ontario? Can you help us with that?
16 MR. CRAIG: I can only speak to the ones that, you
17 know, we're involved in. I do know of some others, but
18 I would venture to say that there is in the order of 50 Bcf
19 of unconnected storage that could come onstream within the
20 next ten years, given the proper market signals. I think
21 some of them are going to be smaller in size, because the
22 big ones for the most part have been developed. The big
23 known ones have been developed.
24 MR. THOMPSON: Right, and as an increment to the
25 existing capacity, that would be what in percentage terms?
26 Big picture.
27 MR. CRAIG: Well, I guess there's about 240 Bcf out
28 there, so add another 50 to that, and you've added about a
1 sixth, in Ontario.
2 MR. THOMPSON: Yes, that's what I'm talking about,
3 yes, in Ontario.
4 MR. CRAIG: Yes.
5 MR. THOMPSON: Thank you very much. Those are my
7 MS. SEBALJ: Thank you, Mr. Thompson.
8 I believe our one question was just asked.
9 And I don't think that -- oh, sorry, Mr. Quinn? Did
10 you have questions? No. I don't think that there are any
11 other questions. So, thank you so much.
12 MR. HOWE: And I have no redirect. Thank you.
13 MS. SEBALJ: Thank you, Mr. Craig.
14 So what do we do now, you ask? The City of Kitchener
15 is next.
16 Mr. Ryder. I turn it over to you.
17 MR. RYDER: My name is Alick Ryder. I represent the
18 City of Kitchener. And the panel is Mr. Dwayne Quinn,
19 director of utilities for the City of Kitchener, and James
20 Gruenbauer, manager of regulatory affairs and supply for
21 the City of Kitchener gas utilities.
22 CITY OF KITCHENER – PANEL 1:
23 DWAYNE QUINN;
24 JAMES GRUENBAUER;
25 MR. RYDER: So, are we open for questions here?
26 MR. QUINN: Just give me a minute here.
27 MR. RYDER: Mr. Gruenbauer will speed up as the
28 hearing progresses.
2 MR. GRUENBAUER: Thank you.
3 MS. SEBALJ: Did you have an opening statement or are
4 we just going straight to questions?
5 MR. RYDER: I think we can go straight to questions.
6 MS. SEBALJ: I turn it over to you.
7 MS. CAMPBELL: Thank you. This will be actually quite
9 CROSS-EXAMINATION BY MS. CAMPBELL:
10 MS. CAMPBELL: Page 3, paragraph 3, of your pre-filed
11 evidence, in the middle of the page, the first full
12 paragraph – second full, I apologize. Second full.
13 There's a reference to "non-discriminatory access to
14 storage and transportation service."
15 Could you tell me what you mean by non-discriminatory
16 access in that sentence?
17 MR. QUINN: The conditions we're describing would see
18 significantly more price disclosure and issues like
19 capacity available to the market, and then when there are
20 transactions that those are posted in some form, so that
21 the market is aware of what's going on.
22 We have read “non-discriminatory” used in different
23 applications here and we're concerned about how,
24 ultimately, does the Ontario Energy Board know that there's
25 non-discriminatory access?
26 MS. CAMPBELL: All right. You mentioned posting. You
27 mean posting on a website. There's been discussion of
28 different manners of posting information. Is that what you
1 were referring to when you said posting of information?
2 MR. QUINN: That would be one of the tools we can
3 would be effective in getting there.
4 Our experience is that sometimes even our firm rights
5 can be subordinated to market opportunities of exfranchise
6 rights, and we have no way of knowing what transactions
7 have occurred which have inhibited our opportunities to
8 transact, to accommodate our customers' needs.
9 MS. CAMPBELL: Moving on to page 4. At the bottom of
10 page 4, there's reference to the fact that:
11 “Union's aggregate excess methodology provides no
12 buffer for colder-than-normal weather which means
13 that Kitchener's customers are exposed to price
15 Has Kitchener estimated or quantified the price risks?
16 MR. QUINN: As part of trying to provide the most
17 prudent combination of asset rights and commodities to our
18 customers, we have worked to try to bridge the gap, I
19 guess, between what Union has offered to us and what we
20 believe, as we've stated in our evidence, would be a fair
21 allocation of asset rights. The difference between those
22 two storage allocations would result in a price risk in the
23 order of three quarters of a million to $1.5 million on an
24 annual basis.
25 MS. CAMPBELL: Thank you. And if I could ask you to
26 turn to page 6. The first sentence in the last paragraph
28 "At a minimum, Kitchener believes that storage
1 allocation should be based on the March 1 control
2 point methodology."
3 Has Kitchener approached Union with its revised
4 storage allocation methodology?
5 MR. QUINN: As an embedded LDC in Union's franchise
6 area, we're responsible to get our service from Union and
7 through our negotiation process have provided that
8 methodology to Union, citing the decision in RP-99-017,
9 where the Board stated that:
10 "Union's proposal for unbundled should not be
11 viewed as set in stone."
12 So Kitchener offered that alternative to the aggregate
13 excess-over-average alternative. Union declined, stating
14 that the only Board-approved methodology is the aggregate
15 excess methodology.
16 MS. CAMPBELL: Thank you. Those are my questions.
17 MS. SEBALJ: Thank you, Ms. Campbell.
18 Mr. Leslie.
19 MR. LESLIE: Yes, thank you.
20 CROSS-EXAMINATION BY MR. LESLIE:
21 MR. LESLIE: Mr. Quinn, I'll direct this question to
22 you. It's really a request for information, an undertaking
23 to provide information in connection with your proposals.
24 And what we would like you to provide is five years of
25 actual consumption data by rate class within your
26 franchise. And we'd like your rate schedules as well. And
27 the consumption data should be monthly, and for the five
28 peak days segregated between firm and interruptible
2 MR. QUINN: There are a number of requests, sir, and
3 I'd like to make sure we get some clarity on those
4 requests. First off, I understand you're saying five years
5 of actual consumption data?
6 MR. LESLIE: Yes.
7 MR. QUINN: Now, you've added a stipulation, by rate
9 MR. LESLIE: Yes.
10 MR. QUINN: I think you would be aware, as in Union's
11 case, that our M2 customers do not have individual daily
12 meters, which does not allow us to break it do you know
14 MR. LESLIE: Well, you can give us the M2 number, can
15 you not?
16 MR. QUINN: We cannot give you the M2 number on a
17 monthly basis. We can give you an estimate of that number
18 as our algorithms in our CAS would allow.
19 MR. LESLIE: You could back it out, I would assume in.
20 MR. QUINN: Not completely. We can approximate the
21 number --
22 MR. LESLIE: Do the best you can, and tell us how you
23 did it, that's all.
24 MR. QUINN: Okay. And I want to add one point of
25 clarification also. Our CAS was developed to meet the
26 requirements of Y2K. And subsequently we had to add a what
27 we called a direct purchase module, which allowed us to
28 allocate volumes to whomever was responsible for providing
1 the gas. That is where we added the functionality to
2 get descriptors and segregation of load by rate class.
3 That information may not go back five years but it may go
4 back four, so we'll give you the limit of what we have.
5 MR. LESLIE: Thank you. Could we also have that on a
6 weather-normalized and --
7 MR. RYDER: Sir, does that have a number?
8 MR. LESLIE: -- actual basis.
9 MS. SEBALJ: I'm sort of waiting in --
10 MR. LESLIE: I'm not quite finished. I was just about
11 to ask if we could have it on a weather-normalized and
12 actual numbers basis.
13 MR. QUINN: We have the actual numbers, sir. We do
14 not have weather-normalization methodologies that date back
15 to that time.
16 MR. LESLIE: Do you have any that go back any length
17 of time?
18 MR. QUINN: We had, in aggregate, weather-
19 normalization methodologies for the entire system. And
20 that was what was provided to Union a couple of years ago.
21 MR. LESLIE: Just a clarification question. Given
22 that you don't have a weather normalization methodology,
23 how do you plan for variances in weather on your system?
24 MR. QUINN: Over the years, we've refined our
25 weather-normalization methodologies. We have used some
26 simple tools of looking at history and projecting forward,
27 based upon weather patterns as we perceive. We still use a
28 30-year average, as we believe that that helps us to be
1 more prudent in the allocation.
2 In addition, we add a contingency factor to ensure
3 that we are not short because we believe the costs of being
4 short are higher than the investment of being long.
5 MR. LESLIE: Well, can you provide us what you have,
6 using your methodology and just give us the assumptions?
7 MR. QUINN: We will endeavour to do that and that will
8 likely be an aggregate, because that is all we broke it
9 down to, that was an aggregate.
10 MR. LESLIE: Do what you can, Mr. Quinn.
11 MR. QUINN: Thank you. But that was on the
12 consumption data. I want to go back to a few other
13 requests that you made in your opening request.
14 Rate schedule. I'm trying to understand the, I guess,
15 the request’s relative to relevance to what we're
16 undertaking here?
17 MR. LESLIE: Oh, we just want to be able to know how
18 your rate classes are defined, basically. You're giving us
19 the data by rate class. We'd like to know what those rate
20 classes mean.
21 MR. RYDER: We can give you, then, a definition of the
22 rate classes?
23 MR. LESLIE: I think that will do it. We're not
24 interested in your rates.
25 MR. QUINN: Thank you. With that clarification, we
26 can undertake that.
27 You also mentioned peak day. Now, can you help me
28 with what you're looking for in peak day?
1 CK UNDERTAKING NO. 1: TO PROVIDE A DEFINITION OF THE
2 RATE CLASSES
3 MR. LESLIE: I was told that there would be five-peak
5 MR. QUINN: Where are you getting that from, sir?
6 MR. LESLIE: From the gentleman to my right.
7 What I'm looking for are the five days with a maximum
8 consumption, the five peak days in the sense of those would
9 be the five days during the course of any one of the years
10 you're going give me for the maximum consumption, Mr.
12 MR. GRUENBAUER: Let me see if I can help, seeing as
13 Mr. Packer's sitting right beside you.
14 We would go back for our last five years' worth of
15 actual calendar years and pick the peak day in aggregate in
16 those five years and those volumes would come off the
17 billing information that we are provided from Union.
18 We have three daily meters that we could sum up, and
19 that would be in aggregate what our peak day was in each of
20 those five years. I think that's about the best we can do.
21 MR. LESLIE: Okay. That would be fine. Can you
22 identify whether or not any of the consumption on those
23 days was interruptible?
24 MR. GRUENBAUER: Sorry again. Would it help if it's
25 just confirmation as to whether we curtailed interruptible
26 customers on those peak days, and an estimate or an extent
27 of what that curtailment might have been?
28 MR. LESLIE: Is that the best you can do, Mr.
2 MR. GRUENBAUER: Well, subject to checking with --
3 MR. LESLIE: We'd just like to know how much of the
4 load was interruptible on those days.
5 MR. QUINN: We'll do our best.
6 MR. LESLIE: Okay. Thank you.
7 MR. QUINN: Thank you.
8 MR. LESLIE: I think that's it.
9 MS. SEBALJ: I think we have an undertaking. CK
10 Undertaking No. 1. I don't propose to even attempt to
11 repeat it, but we'll have to bring it all together from the
13 MR. LESLIE: Thank you very much.
14 CK UNDERTAKING NO. 2: TO PROVIDE DETERMINATION OF HOW
15 MUCH OF THE LOAD WAS INTERRUPTIBLE ON PEAK DAYS
16 MS. SEBALJ: Thank you, Mr. Leslie. Mr. Smith.
17 CROSS-EXAMINATION BY MR. SMITH:
18 MR. SMITH: Good morning, gentlemen. My name is
19 Smith, and I represent Market Hub Partners.
20 We had circulated a written question to you in
21 advance. If you were able to just provide us with your
22 answer, I could avoid reading it back into the record.
23 MR. QUINN: Yes. Thank you, sir. We appreciate you
24 providing it in advance for our consideration, and we have
25 a very brief answer.
26 As an affiliate of Union Gas, who we are convinced has
27 market power, we are persuaded by the evidence and the
28 Technical Conference that it would not be in the public
1 interest to grant such opportunity.
2 MR. SMITH: And would you agree, sir, that if Market
3 Hub Partners was able to develop this incremental storage
4 that there would be additional choice for the City of
5 Kitchener to secure storage services if it had that need?
6 MR. QUINN: I fail to understand the mechanism how
7 that storage would become available to us, because that is
8 not clearly defined at this point. So I don't know if that
9 will enhance our opportunities or if that storage would
10 flow completely to Union Gas and we would have to get it
11 through them.
12 MR. SMITH: Sir, and I think it's important to
13 understand the basis of your position, you were here this
14 morning with Mr. Redford and heard his evidence?
15 MR. QUINN: Yes, sir.
16 MR. SMITH: And did you hear him indicate the
17 intention to market the capacity by means of an open season
18 to the market at large?
19 MR. QUINN: I remember him saying that, yes.
20 MR. SMITH: And is there anything that would prevent
21 the City of Kitchener from participating in such an open
23 MR. QUINN: I don't know what the access conditions
24 will be, how we get the gas from wherever they were
25 developing through to our system, including the interlink,
26 which would obviously be Union Gas, so those mechanisms are
27 not in place, and therefore I cannot comment.
28 MR. SMITH: That's fine for now. Thank you, sir.
1 MR. QUINN: Thank you.
2 MS. SEBALJ: Thank you, Mr. Smith.
3 Enbridge? Is Mr. Cameron -- did you have any
5 MR. CASS: It's Fred Cass, and no, we have no
7 MS. SEBALJ: Thank you very much. Mr. Brown?
8 MR. BROWN: No questions.
9 MS. SEBALJ: Mr. Moran?
10 MR. MORAN: No questions.
11 MS. SEBALJ: Mr. Aiken? I always have lots of
12 questions for Duane, but not today.
13 MS. SEBALJ: Mr. Wightman?
14 MR. WIGHTMAN: No questions.
15 MR. QUINN: I'm disappointed in that.
16 MS. SEBALJ: Mr. Thompson?
17 MR. THOMPSON: No, thank you.
18 MS. SEBALJ: Mr. Howe?
19 MR. HOWE: No, thank you.
20 MS. SEBALJ: And I don't believe that we have any
21 questions. So I think that wraps it up. Thank you, Mr.
22 Quinn, Mr. Gruenbauer.
23 MR. GRUENBAUER: Thank you.
24 MR. QUINN: Thank you very much.
25 MS. SEBALJ: For once the timing works. I don't
26 believe that we have any evidence.
27 Mr. Brown and Mr. Moran, perhaps you can confirm for
28 me that you're not intending to have anyone with respect to
1 this issue by way of panel?
2 MR. MORAN: That's correct.
3 MS. SEBALJ: I know there were a few small references
4 to this, but I didn't know whether you were planning to
5 call evidence.
6 So that means the gas-fired generators piece is off
7 the schedule. Does that cause any concern for anyone in
8 the room?
9 Okay. So, let's break for lunch and start with other
10 gas consumer groups, which is IGUA and AMPCO, after lunch,
11 say, 1:15? Is that --
12 MR. THOMPSON: That's fine.
13 MS. SEBALJ: Is that acceptable? Thank you.
14 --- Luncheon recess taken at 12:04 p.m.
15 --- On resuming at 1:17 p.m.
16 MS. SEBALJ: If I could ask everyone to settle in, I
17 think we'll get started. And unless there are any
18 preliminary issues, I'll turn it over to Mr. Thompson, who
19 who has a panel of 1. Mr. Butler. And Mr. Butler's
20 evidence, I understand, will be followed by Mr. Stauft.
21 IGUA AND AMPCO – PANEL 2:
22 JOHN BUTLER;
23 MARK STAUFT;
24 OPENING STATEMENT BY MR. THOMPSON:
25 MR. THOMPSON: Yes, that's correct. Let me just take
26 a moment to introduce this.
27 The IGUA evidence – IGUA/AMPCO evidence, with respect
28 to this Issue II is found primarily in an overview piece at
1 pages 12 and 13, that's paragraphs 28 to 32, and then a
2 little later pages 27 to 29, paragraphs 56 to 59, I
4 Mr. Fournier would ordinarily have been here to speak
5 to this testimony, along with others that have provided
6 evidence on which the IGUA evidence is based, but
7 unfortunately he had a longstanding medical commitment
8 today in Ottawa, so he's unable to be here.
9 So, to the extent there are questions that would have
10 been posed to Mr. Fournier and only he can answer, I'd like
11 to say I'll try and answer them but -- and that may be
12 possible in some cases, but I'll take undertakings for
13 anything substantive, to make sure that he screens them.
14 And so the plan is to have Mr. Butler speak to the
15 part of the evidence that he prepared, which is at tab 2 of
16 the document, and you'll see a reference made to that at
17 page 2 of paragraph -- in paragraph 5 of the IGUA evidence.
18 And then, following that, the plan is to have Mr.
19 Stauft speak to his evidence, which was prepared not only
20 to support IGUA and AMPCO, but also a number of other
21 ratepayer groups.
22 So, hopefully, that's satisfactory. If it isn't, it's
23 the best we can do. And with that, there isn't a CV for
24 Mr. Butler in the material. I know he's well-known to
25 many, but for those of you who don't know him, perhaps he
26 could just give us a brief overview of his experience.
27 MR. BUTLER: Good afternoon. From my accent, most
28 people will realize that I was educated in England as a
1 mechanical engineer, and I'm not a Professional Engineer in
3 I spent a number of years, after coming to Canada,
4 working for a contracting company, ultimately became with
5 president of that, mainly in the natural gas industry, all
6 aspects of utilization of natural gas.
7 The time came to move on, and I joined the Ontario
8 Energy Board as director of operations for about two years,
9 and then moved on from that to a member of the Board, and
10 ultimately became Vice-Chair of the Board, for about five
12 And again, time came to move on, and I, since then,
13 have been operating as an energy advisor to a number of
14 industrial, commercial, the mush sector clients, generally
15 in the natural gas area, natural gas issues, assisting them
16 with their contracts with the utilities and purchasing gas,
17 those issues.
18 And this is a thumbnail sketch, the. CV will be
19 available later on but this is just to fill in the gaps for
20 some people, if there are any questions I can deal with
22 I should say that so far, since becoming an energy
23 advisor, I've managed to avoid testifying before the Board,
24 but it seems it’s caught up with me at last.
25 MR. THOMPSON: Thank you, Mr. Butler. He's ready for
27 MS. SEBALJ: Thank you. Does the Board hearing team
28 have questions for Mr. Butler?
1 MS. CAMPBELL: Yes, it does -- no, it doesn't, I'm
2 sorry. Premature. I'm just so excited about getting up
3 again. No. No. Not right now. Thank you.
4 MR. THOMPSON: That's showing deference to a former
5 Board Member.
6 MS. CAMPBELL: Yes, certainly. I know my place.
7 Sorry. Sometimes.
8 MS. SEBALJ: Mr. Leslie.
9 CROSS-EXAMINATION BY MR. LESLIE:
10 MR. LESLIE: Good afternoon, Mr. Butler.
11 MR. BUTLER: Good afternoon.
12 MR. LESLIE: I just really wanted to confirm the work
13 that you'd done starting at page 11 of your evidence, and
14 going through towards the conclusion to confirm our
15 understanding of what you've been doing there, what your
16 analysis was.
17 At page 11 you say that you looked at three
18 alternatives, three options, I guess, to contracting for
19 storage with Union. And those were to bid for storage at
20 market-based rates with Union -- I guess the first option
21 is really the one that's available now.
22 MR. BUTLER: Except that today it's available through
23 the utility ask, this was --
24 MR. LESLIE: As part of the aggregate excess
26 MR. BUTLER: Yeah.
27 MR. LESLIE: The second would be to increase your
28 upstream transportation, and that's on the TransCanada
1 Pipeline system, is it?
2 MR. BUTLER: Correct.
3 MR. LESLIE: And the third would be to contract for
4 storage outside of Ontario. And at page 17, as I
5 understand it, your table sets out the results based on
6 your analysis of those three options?
7 MR. BUTLER: Correct.
8 MR. LESLIE: So, in the first case, which is to
9 contract with Union for storage at market-based rates,
10 you're showing a range of increases for a customer in the
11 South and east, for example, of 100 percent to 200 percent.
12 MR. BUTLER: Correct.
13 MR. LESLIE: What accounts for the ranges?
14 MR. BUTLER: The range?
15 MR. LESLIE: Why 100 percent to 200 percent? Why not
17 one number?
18 MR. BUTLER: Because the market prices that would be
19 involved in the future, I expect, would fall between that
20 -- those levels. At this point in time, there is some
21 uncertainty as to the exact cost of that storage until it's
22 deregulated, and until we know what those exact costs are,
23 I would anticipate that it would fall between these ranges.
24 MR. LESLIE: And as I understand, you've used 50 cents
25 per gJ as the cost-based rate.
26 MR. BUTLER: That is correct.
27 MR. LESLIE: So the 100 percent would be a dollar a
28 gJ, would it?
1 MR. LESLIE: That's in the evidence, and it ranges
2 between a dollar and $1.50, yes.
3 MR. LESLIE: Thank you. And then option number 2 is
4 an increase in upstream transportation. As I understand
5 it, that would involve contracting with TransCanada for
6 firm capacity in order to meet the needs that might not
7 otherwise be met by storage.
8 MR. BUTLER: Yes. That's correct.
9 MR. LESLIE: And you've got a column there, cost with
10 storage, and then another column, cost without storage, and
11 I wasn't sure what the cost with storage column
13 MR. BUTLER: That's effectively the costs today for a
14 customer using storage. And the second one is the cost
15 with the increased capacity on TCPL, taking it up to peak
16 capacity. This isn’t strictly replacing the storage that
17 goes to peak capacity, because I anticipate that the
18 customer may well wish to go to peak capacity to -- to meet
19 his peak with firm delivery.
20 MR. LESLIE: And then -- I see. So the percentage, if
21 I'm being a little more industrious, I could have
22 calculated that from the number you have given us.
23 MR. BUTLER: I would hope so.
24 MR. LESLIE: The percentage is just the first column
25 divided by the second column.
26 MR. BUTLER: That's correct.
27 MR. LESLIE: Option number 3, as I understand it, is
28 your estimation of the percentage increase in cost of
1 contracting for storage on the ANR system?
2 MR. BUTLER: Yes.
3 MR. LESLIE: And that's using the Washington 10
4 storage pool.
5 MR. BUTLER: I used that that as an example only.
6 That's correct. And Vector for the transportation.
7 MR. LESLIE: Right. I wonder, Mr. Butler, in order to
8 save time, if I could ask you, do you have a set of working
9 papers that would provide me with the numbers you've used
10 for these calculations?
11 MR. BUTLER: I could provide that as an undertaking,
13 MR. LESLIE: Would you do that, then, sir?
14 MR. BUTLER: Yes.
15 MR. LESLIE: I'm really just interested in knowing how
16 you arrived at your percentages. Thank you. Could we give
17 that a number?
18 MR. BUTLER: Are you interested in all of the -- the
19 last option, 3 or?
20 MR. LESLIE: No, all of them, if we could.
21 MR. BUTLER: Yes, we'll do that.
22 MS. SEBALJ: We'll call that IGUA Undertaking No. 1.
23 IGUA UNDERTAKING NO. 4: TO PROVIDE NUMBERS USED IN
25 MR. LESLIE: Your working papers will probably tell me
26 this, but when you were determining the numbers to use, the
27 values to use, for transportation, were you looking only at
28 firm transportation?
1 MR. BUTLER: Yes.
2 MR. LESLIE: And were you looking only at peak day
4 MR. BUTLER: I was looking at the volumes required for
5 storage, so that it would be -- this would be replacing the
6 storage. So if the deliverability on storage -- I believe
7 in the example that I was using was that we would have
8 6,000 gJs a day in and out of storage.
9 MR. LESLIE: All right. It's not in your evidence,
10 but we have heard some discussion yesterday and today of
11 other options which, involve accessing secondary
12 markets, exchange, displacement, that sort of thing.
13 Did you give any consideration to those options when
14 you were doing your analysis?
15 MR. BUTLER: Exchange and displacements where? I'm
16 not sure what we're talking about here. Are we talking
17 about between two storage hubs or -- what?
18 MR. LESLIE: Yes, that's my understanding of how it
19 works. I just wonder whether you looked at it.
20 MR. BUTLER: I did not look at those, in part because
21 you would still be left with the problems of transportation
22 if you limited it to that. You still need transportation.
23 MR. LESLIE: What would the problems of transportation
24 be if you exchange between hubs?
25 MR. BUTLER: Oh, I'm sorry, a straight exchange
26 between the hubs?
27 MR. LESLIE: Mm-hm.
28 MR. BUTLER: No, did not look at that.
1 MR. LESLIE: All right. Those are my questions, thank
2 you very much, Mr. Butler.
3 MS. SEBALJ: Thank you. Before you leave, Mr. Leslie,
4 I just want to correct that should be IGUA Undertaking No.
5 4, because there were some of the first issue, just to keep
6 the numbering consistent.
7 CROSS-EXAMINATION BY MR. SMITH:
8 MR. SMITH: Thank you. Good afternoon, Mr. Butler.
9 My name is Laurie Smith, and I represent Market Hub
11 We had forwarded to you and others last week some
12 written questions, and in your case there were a couple of
13 questions beyond the standard question we've posed to all
14 the submitters on Issue II. I saw you desperately looking
15 over at Mr. Thompson. Do you have a copy of those written
17 MR. BUTLER: I had a copy a few minutes ago, and I
18 suspect I left it in my -- when I pulled this out, I left
19 it in my briefcase. Do you have a spare copy?
20 MS. SEBALJ: I have a copy here.
21 MR. SMITH: Yes, it would be probably more efficient
22 if we could do it that way.
23 MR. BUTLER: Thank you.
24 MR. SMITH: I see that Mr. Thompson has folded back
25 his answers so ...
27 MR. THOMPSON: Actually, that's not my answer. It's
28 Mr. Fournier's response to the question above that you've
1 asked IGUA, so if you want, I can put that on the record,
2 or undertake to have it typed, whatever you wish.
3 MR. SMITH: No, that's fair.
4 I didn't mean anything by it.
5 Just before we start, though, Mr. Butler, as I
6 understand it, you are appearing as an expert on behalf of
7 IGUA and AMPCO; correct?
8 MR. BUTLER: I'm appearing on behalf of IGUA and
9 AMPCO. I'm not sure that I would classify myself as an
10 expert. I'm knowledgeable in these areas, but it depends
11 on your definition of expert.
12 MR. SMITH: And that's not where I was going, sir.
13 MR. BUTLER: Okay, that's fine, then.
14 MR. SMITH: I certainly don't quarrel with your
15 experience. It's just who you're representing. And I had
16 noted that Mr. Stauft appeared to be representing the same,
17 IGUA and AMPCO, but as well a number of others. Is that
19 MR. BUTLER: As I understand it, yes. Mr. Thompson
20 can probably elaborate.
21 MR. THOMPSON: That's correct.
22 MR. SMITH: Okay. And so for the purposes of this
23 question, I guess what I am trying to solicit is the
24 position of IGUA and AMPCO, and if you are looking at
25 question number 1 -- you've seen it before, sir -- would
26 you have a response, or, Mr. Thompson, can you help us?
27 MR. THOMPSON: I just have to read it. Sorry. As
28 well, I understand that it's here.
1 MR. SMITH: That's right.
2 MR. THOMPSON: Question number 1 is IGUA and AMPCO, so
3 I can now read this, if you wish.
4 MR. SMITH: The questions for IGUA, AMPCO, and
5 Mr. Butler's at the top. You're going to have to fold it
7 MR. THOMPSON: Do you want to ask the question or do
8 you want me to just read in the question?
9 MR. SMITH: If you would. I think they're all on the
11 MR. THOMPSON: It’s a bit confusing, but K indicates
12 -- this is a quote:
13 “IGUA does not object to MHP Canada's
14 proposal that it be able to contract for its
15 storage capacity at market-based pricing and have
16 contract flexibility.
17 “At the same time, it is IGUA's position, as
18 stated in paragraph 29 of its evidence, is that
19 Enbridge and Union should be required to provide
20 storage services to Ontario users under the
21 auspices of cost-based rates.
22 “If MHP Canada sells storage to Union, then Union
23 will have to demonstrate that the costs it has
24 agreed to pay to MHP have been prudently incurred
25 and satisfy the requirements of the affiliates
26 code in Ontario. Service providers' costs and
27 return may become an issue at that time.
28 “Similarly, if EGD acquires storage from MHP, it
1 will have to demonstrate that the costs it agreed
2 to pay have been prudently incurred, and, once
3 again, service providers' costs and return may
4 become an issue at that time.
5 “It is the only prudently incurred costs that can
6 be rolled in to the Union and EGD rates."
7 MR. SMITH: There's some on the back.
8 MR. THOMPSON: Right. Tell Mr. Smith “strong letter
9 to follow.”
10 MR. SMITH: Thank you very much, sir.
11 MR. BUTLER: Now I can unfold it.
12 MR. SMITH: You can. Sir, the next question I had is
13 the one which appears question 2 on that list. At page 13
14 of your evidence, in paragraph 38, you had asserted, and I
16 "There is little uncontracted storage capacity
17 available at this time, anywhere within a
18 reasonable distance from Ontario."
19 That should have said, “little or no uncontracted
20 capacity available at this time within a reasonable
21 distance from Ontario."
22 And the question for you, sir, was, what was the basis
23 of your assertion, and only one could you speak to the
24 particular time frames involved, both the current storage
25 year, 2006/2007, as well as future storage year, 2007 and
27 MR. BUTLER: My research was limited to what was
28 available today. If it happened today, what would an
1 industrial customer be faced with, looking to replace
2 storage from the utility, and what options would he
3 have to replace that storage?
4 I did not look two, three, four years ahead because,
5 while I know that there are some expansions taking place,
6 the information I had was that there were no firm numbers
7 at this stage as to how much storage would be available,
8 except that it would be available through open seasons
9 when it did come into the marketplace.
10 MR. SMITH: Okay. And, sir, when you said today, you
11 wrote these words -- I'm not sure exactly what time frame,
12 but that's -- can you just give me an indication of what
13 was the period, broadly speaking, that you ascertained
14 there was no storage capacity available from.
15 MR. BUTLER: Within the last month, six weeks.
16 MR. SMITH: Fair enough.
17 MR. BUTLER: Yes.
18 MR. SMITH: If we could just move over to page 14,
20 In paragraph 39, we had identified this sentence:
21 "It is, however, understood that Vector and all
22 other pipelines connecting Michigan storage to
23 Dawn are fully subscribed."
24 You see that?
25 MR. BUTLER: Yes.
26 MR. SMITH: And what we wanted to get was your general
27 understanding about whether or not significant portions of
28 that pipeline capacity currently delivers to -- gas to and
1 from existing storage operations in Michigan and Ontario.
2 MR. BUTLER: I'm not aware of the numbers. I did not
3 check the numbers as to the amount of gas delivered to and
4 from storage. I discussed with people from Vector the
5 options, could it be done? Was there capacity available
6 today? And the response was, no. That there -- no
7 capacity available at this stage. But there would be open
8 seasons in the future which anyone wishing to ship on those
9 lines would need to bid in an open season.
10 MR. SMITH: And you had identified two questions you
11 posed to Vector. One was: Was there available capacity
12 today, to which the answer was no. And I believe the other
13 question you posed was, could it be done? And what was
14 their answer to that?
15 MR. BUTLER: Subject to bidding in an open season.
16 MR. SMITH: Okay.
17 MR. BUTLER: And whether --
18 MR. SMITH: The -- I'm sorry, I interrupted you.
19 MR. BUTLER: Sorry, with respect to the
20 transportation into and out of storage from Dawn, they
21 indicated what would be necessary, what contracts would be
22 necessary, to handle that.
23 MR. SMITH: Fair enough. Now, what the question I was
24 trying to get at, though, was, existing capacity on Vector,
25 and the extent to which it is used by existing shippers to
26 move gas in or out of storage. Do you have any
27 appreciation for the extent to which that capacity is used
28 for those purposes?
1 MR. BUTLER: I think I mentioned that earlier. I did
2 not check that, no.
3 MR. SMITH: And that's fine. Thank you very much,
4 sir. That's all I had.
5 MS. SEBALJ: Thank you, Mr. Smith.
7 MR. STEVENS: No questions.
8 MS. SEBALJ: Mr. Stevens? Mr. Cass? Mr. Brown?
9 MR. BROWN: Yeah.
10 CROSS-EXAMINATION BY MR. BROWN:
11 MR. BROWN: Mr. Butler, good afternoon.
12 MR. BUTLER: Good afternoon.
13 MR. BROWN: My name is David Brown. I'm counsel for a
14 group of companies that are constructing and developing
15 gas-fired generators, largely in the Greater Toronto Area.
16 Mr. John Wolnik, who's with me, is a gas consultant who is
17 advising them.
18 I really only have questions on three statements in
19 your evidence. I'll go through them order. If I could ask
20 you to turn to, I think it's page 3 of your evidence,
21 paragraph number 6.
22 Yeah, page threshing right at the end of paragraph
23 number 6, you talk about:
24 "The LDC provides a very valuable service to the
26 Do you see that sentence?
27 MR. BUTLER: Yes.
28 MR. BROWN:
1 "... acting, in effect, as a bank, allowing the
2 industrial to deposit excess gas on a day of
3 lower consumption and withdraw gas on days of
4 higher than average consumption."
5 From your perspective, sir, do you view this --
6 perhaps I could call it the storage for balancing service
7 that the utility provides, as an integral part of the
8 distribution or transportation service that the utility
9 provides to industrial customers?
10 MR. BUTLER: I'm not sure I understood the question.
11 Are you talking about the balancing storage being used for
13 MR. BROWN: Well, essentially this bank concept, that
14 on certain days you may take more than you deliver. Other
15 days you may consume more than you deliver. And the
16 storage is sort of a balancing bank, the is the way I read
17 your evidence.
18 MR. BUTLER: Yes.
19 MR. BROWN: And my question is do you view that sort
20 of storage as a balancing bank function as an integral part
21 of the utility's distribution service to customers?
22 MR. BUTLER: For some industrial customers, the answer
23 is yes. For others, it is -- the storage is not used in
24 this exact way.
25 MR. BROWN: And for those for whom you say yes, could
26 you please explain the type of customer who would fit into
27 that category.
28 MR. BUTLER: Customer, for example, using -- on Union
1 Gas system, using T1, where they do use storage in this
3 MR. BROWN: If I could ask you to move ahead, sir, to
4 page 4 of your evidence, paragraph number 10, under the
5 heading: "Current use of storage by industrial customers."
6 In paragraph 10, the last sentence, you write:
7 "Storage is an important component of achieving
8 reliability. And, in addition, it reduces the
9 cost of delivered gas for all consumers."
10 Could you briefly summarize your views, sir, as to how
11 storage achieves those benefits for consumers?
12 MR. BUTLER: It achieves the benefits to all consumers
13 by virtue of being storage in the -- at the consuming end
14 of the pipe, by virtue of reducing the size of the pipe,
15 the capacity of the pipe needed to deliver gas from the
16 West to Ontario. It reduces the transportation costs of
17 getting gas to Ontario. Those transportation costs are
18 passed on to the -- or the reduction results in lower
19 rates to Ontario customers.
20 MR. BROWN: Are there any other benefits that you were
21 referring to in that sentence, or is that the --
22 MR. BUTLER: In that sentence, that's what I was
23 referring to.
24 MR. BROWN: If I could ask you to move ahead with me,
25 sir, to page 8 of your evidence. Right at the top of page
26 8, and perhaps going back to the bottom of page 7, there's
27 a section "how industrials are using Union's storage." And
28 at the end of paragraph 21, in which you have talked about
1 Union's bundled storage services, you conclude that:
2 "This service enables the consumer to take
3 advantage of pricing opportunities during the
4 fill cycle and to use the stored volumes to
5 optimize cost."
6 Is that application or that advantage that you've
7 described there one that is unique to industrial consumers
8 or would it be characteristic also of other gas consumers?
9 MR. BUTLER: In the case of the industrial consumer
10 who controls his storage, controls the storage, that
11 consumer has the opportunity to buy gas and put it into
12 storage when prices are what the consumer considers to be
13 low and at the same time to withdraw it when the prices are
15 MR. BROWN: And my simple point, is that flexibility,
16 I take it you would agree, is not one that is unique to
17 industrials, it would be shared by other large-volume gas
19 MR. BUTLER: An industrial that controls the storage
20 has that ability to do that. If the storage is managed by
21 the utility, then the utility may not be doing the -- may
22 have a different agenda for filling the storage.
23 MR. BROWN: So the advantage, in your view, stems from
24 the ability of the end-user to control the ins and outs
25 into storage.
26 MR. BUTLER: I think I say that clearly. Yes.
27 MR. BROWN: Perfect. Great, thank you, sir. Those
28 are the clarifications I was looking for.
1 MR. BUTLER: Thank you.
2 MS. SEBALJ: Thank you, Mr. Brown.
3 Mr. Moran?
4 MR. MORAN: No questions.
5 MS. SEBALJ: Mr. Aiken?
6 MR. AIKEN: No questions.
7 MS. SEBALJ: Mr. Wightman?
8 MR. WIGHTMAN: No questions.
9 MS. SEBALJ: Mr. Quinn?
10 MR. QUINN: No.
11 MS. SEBALJ: Mr. Howe?
12 MR. HOWE: No, thank you.
13 MS. SEBALJ: Is Gaz Métro in the room?
14 That leaves us. We have just a few questions.
15 In your report, at paragraphs 31 and 32, you suggest
17 "Power generators might successfully bid for all
18 the available storage capacity in a totally
19 unregulated market."
20 Can you tell me what assumptions would be required for
21 this to be a realistic prediction?
22 MR. BUTLER: I'm sorry? Could you repeat it?
23 MS. SEBALJ: The question? You have the quote, do
25 MR. BUTLER: I have the quote, yes.
26 MS. SEBALJ: Okay. I'm wondering what assumptions are
27 required for this to be a realistic predictions, the
28 prediction that power generators might successfully bid for
1 all the storage. In particular, we're thinking of the
2 elasticity of demand of gas end-users versus that of
3 electric, of gas-fired generators.
4 MR. BUTLER: In making that statement, I was
5 considering that the power generators may not be as
6 cost-constrained, by virtue of them having a guaranteed
7 return and an ability to pass on costs into the price of
9 MS. SEBALJ: Thank you.
10 Have you had an opportunity to look at Dr. McConihe's
11 evidence, the expert witness for the Board hearing team?
12 MR. BUTLER: I have not read it properly, thoroughly,
14 MS. SEBALJ: Okay. I'll leave that one, then.
15 Last couple of questions with respect to secondary
16 market. In your view, does the existence of an efficient
17 secondary market mitigate market power in the primary
18 market? And that's a secondary market for storage.
19 MR. BUTLER: It has the possibility of doing that,
21 MS. SEBALJ: Can you explain how a secondary market
22 mitigates the market power in the primary market?
23 MR. BUTLER: This is not an area that I've looked at
24 very carefully, I must admit.
25 MS. SEBALJ: Sorry, this is a question we've been
26 asking many of the panels. We're just trying to get a view
27 on --
28 MR. BUTLER: I should have been here earlier to think
1 about it in advance.
2 MS. SEBALJ: That's fine.
3 MR. THOMPSON: Do you want consider it, and we can
4 take an undertaking on it if you wish.
5 MR. BUTLER: Yes, if you wish we can do that.
6 MS. SEBALJ: Sure. That's IGUA Undertaking No. 5.
7 IGUA UNDERTAKING NO. 5: TO PROVIDE EXPLANATION OF HOW
8 SECONDARY MARKET MITIGATES MARKET POWER IN PRIMAIRY
9 MARKET/SPECIFIC CASE OF STORAGE IN ONTARIO
10 MS. SEBALJ: And I guess if I could expand that
11 subject to what your counsel has to say. So the general
12 question, then, followed by in the specific case of storage
13 in Ontario, whether you think an efficient secondary market
14 would mitigate market power.
15 MR. BUTLER: Okay.
16 MS. SEBALJ: Thank you. Those are our questions.
17 MR. THOMPSON: Thank you.
18 MS. SEBALJ: Thank you very much, Mr. Butler.
19 MR. THOMPSON: Thanks, John. I guess it's Mr. Stauft
21 MS. SEBALJ: Yes.
22 MR. THOMPSON: The next witness is Mark Stauft, and
23 his direct evidence has been pre-filed. There is a CV as
24 appendix 1 to his testimony. And Mr. Stauft has indicated
25 that there are a few corrections to the written material
26 that he'd like to deal with firstly before we throw it open
27 to questions. Mr. Stauft, please.
28 MR. STAUFT: Thank you.
1 As Mr. Thompson said, I have a come up couple of sort
2 of clarifications or corrections that I thought I would
3 perhaps save time by noting right off the bat.
4 The first of those is at page 32. The first full
5 paragraph at the top of the page describes Union's response
6 to undertaking 16 from the April Technical Conference, and
7 reports at the bottom that:
8 "Union's predicted market value of storage is
9 US$.97 per mmbtu."
10 That is a typo. I checked this, and the actual number
11 in the undertaking response is .917. So that's a little
12 bit different. And actually, in fact, the piece here goes
13 on to say that that reflects at least a hundred percent
14 premium to the cost-based level. That's a little bit
15 generous. It's more like 75 or 80 percent premium.
16 Although, actually, I would like to note in this that
17 in Union's undertaking response this value was calculated
18 without reference to what they characterize as the
19 extrinsic value of storage. So it's just a straight
20 differential calculation, basically, with adjustments for
21 time value of money, and exchange rates and so on.
22 Union is correct -- in their undertaking response,
23 they said that they can't quantify what that extrinsic
24 value is because it will be different for different people.
25 To some extent that's true, but I am aware, or I have been
26 told, at any rate, that in the Alberta market, for example,
27 where storage providers do compete with one another, there
28 is some kind of market value for that extrinsic component
1 of the value of storage.
2 It's basically an optionality premium, is really
3 what's going on. And I've been told that it's sort of
4 between 10 and 20 percent of the intrinsic value that Union
5 calculates here.
6 That's sort of outside the scope of my evidence, but
7 just since I was thinking about it last night, I thought
8 I'd mention it.
9 The other point I wanted to make is at page 20. And
10 then there's a question here about: Can you describe in
11 general terms the applications that the FERC has received
12 for market-based rate authority.
13 MS. SEBALJ: Market-based rate authority.
14 MR. STAUFT: Market-based rate authority. Sorry. If
15 I'm speaking too quickly or too softly, feel free to yell
16 at me. That's fine.
17 MR. THOMPSON: I'll do that too.
18 MS. CAMPBELL: We all will.
19 MR. STAUFT: That's good. That's nice.
20 MS. CAMPBELL: It's a party thing here.
21 MR. STAUFT: Yeah. In any event. My response points
22 out that, or says that generally the applications that the
23 commission has reviewed involve relatively small
24 facilities, most often in the supply area, and then I go on
25 to say that:
26 "The commission has not received, much less
27 approved, applications for market-based rate
28 authority for large-scale market area storage
1 facilities,” et cetera, et cetera.
2 And as Ms. McConihe pointed out in her testimony
3 certainly one exception to that would be the CNG
4 transmission case that she discussed.
5 Now, the commission rejected that, as she said, but
6 it's not correct to say that the commission hasn't received
7 any applications for market-based rate authority from
8 interstate pipelines that have significant storage assets.
9 MR. THOMPSON: Those are the corrections Mr. Stauft?
10 MR. STAUFT: Yes.
11 MR. THOMPSON: Thanks. Just before the
12 questioning begins, I just wanted to indicate for the
13 record that -- and this is addressed at page 1 of Mr.
14 Stauft's evidence that the sponsoring intervenors are IGUA,
15 AMPCO, the Consumers Council of Canada, the Vulnerable
16 Energy consumers coalition, the Schools Energy Coalition,
17 the City of Kitchener, and the Canadian Manufacturers and
18 Exporters Inc.
19 Thank you very much. Mr. Stauft is available for
21 CROSS-EXAMINATION BY MS. CAMPBELL:
22 MS. CAMPBELL: Thank you. Some clarification for you,
23 Mr. Stauft, but not very many, you'll be happy to hear.
24 The first question takes us to page 31 of your
25 evidence. It starts at the bottom of page 31 and goes up
26 to page 32.
27 And the complete sentence that I'm interested in, if
28 you start at the bottom of 31:
1 "I am advised that at that conference, EGDI
2 indicated that under a long-term market priced
3 arrangement that it recently entered into with
4 Union the premium to a cost-based rate is in the
5 order of 0.50 gJ. As discussed below, such a
6 rate probably represents approximately 100
7 percent premium to the base cost level."
8 First of all, as discussed below, is that related to
9 the paragraph you just changed or are you talking about the
10 further on in your report?
11 MR. STAUFT: Actually, no, sorry. That is a pretty
12 vague reference. It's really a reference to, further on, I
13 went through the exercise of calculating, you know, some
14 version of a cost-based rate for Union, and it came out to
15 56 cents or something like that.
16 So it's actually not quite 100 percent premium, it's
17 more like, say, 90 percent. But what I was thinking of
18 was that the cost based rate is 50 to 55 cents, somewhere
19 in that range.
20 MS. CAMPBELL: Is it possible -- you made reference,
21 sorry, to calculations. Is it possible for you to provide
22 us with the calculations for this? Or is it this statement
23 at the top page 32? Or is it elsewhere in your report?
24 MR. STAUFT: It's in appendix 2.
25 MS. CAMPBELL: It's in appendix 2.
26 MR. STAUFT: Yeah.
27 MS. CAMPBELL: Would you mind telling me which page?
28 MR. STAUFT: I will point you there. On the second
2 MS. CAMPBELL: Okay.
3 MR. STAUFT: There's a calculation of a unit storage
4 cost for Union's storage.
5 MS. CAMPBELL: Okay.
6 MR. STAUFT: 56 cents.
7 MS. CAMPBELL: Thank you. There's nothing like hiding
8 it in plain view, Mr. Stauft.
9 MR. STAUFT: Well, I'm sorry.
10 MS. CAMPBELL: Thank you. Page 38 of your evidence.
11 If I go down to line 13. It says:
12 "With respect to pipeline capacity, there is no
13 significant amount of uncontracted pipeline
14 capacity into Ontario."
15 And I'd just like to know the evidence on which you
16 rely for that statement.
17 MR. STAUFT: Again, in the context of the sort of
18 hypothetical examples that are set out in appendix 2 and
19 discussed at some other point in the body of the evidence,
20 I believe there's a discussion about, you know, I looked at
21 Great Lakes’ website, I looked at Vector's, I looked at --
22 well, basically those two. And my understanding of the
23 information on the websites was that there is very little,
24 if any, unsubscribed capacity into Ontario on either of
25 those systems. None on Vector, as I think Mr. Butler
26 confirmed for you.
27 MS. CAMPBELL: Mm-hm.
28 MR. STAUFT: And I believe Great Lakes has a little
1 bit. Maybe 30,000 or something.
2 MS. CAMPBELL: Thank you.
3 MR. STAUFT: So this is really just summarizing that.
4 The reference is really to that.
5 MS. CAMPBELL: Okay. So the sum of your
6 investigations were examining the websites for Vector and
7 for Great Lakes?
8 MR. STAUFT: Well, basically --
9 MS. CAMPBELL: That's how you established it?
10 MR. STAUFT: Basically, yeah. I mean, TransCanada
11 isn't relevant.
12 MS. CAMPBELL: Yes, I appreciate that.
13 MR. STAUFT: And, you know, I understand there are
14 other possible routes, but my understanding as well is
15 that the volumes available on those are small. The
16 pipeline capacities are small.
17 MS. CAMPBELL: So there was no survey done by you?
18 That's what I'm trying to figure out. Did you do anything
19 else? And you said no. So thank you.
20 Moving on to page 47. I'm at the bottom of the page.
21 Lines 17 to 21. And there's a statement there that talks
22 about, essentially, starting in the middle of 18:
23 "The transportation saving that results from
24 effectively substituting Dawn-Trafalgar capacity
25 for TransCanada mainline capacity, i.e., to
26 transport the excess of peak demand over annual
27 average demand more than offsets the cost of
1 And I was wondering if you could provide the
2 calculations and the assumptions behind that statement,
3 that conclusion.
4 MR. STAUFT: I guess I could. It might be helpful if
5 you could explain to me what puzzles you about the
6 statement, if anything.
7 MS. CAMPBELL: I'm trying to -- I guess what I'm
8 looking for is it strikes me that you did a comparison of
9 some form to arrive at the conclusion, and I'm trying to
10 figure out the steps you took to arrive at that conclusion.
11 MR. STAUFT: Okay. I can do that by way of
12 undertaking, if you want, with an example, but I can
13 certainly explain to you in sort of rough terms what's
14 going on with that analysis.
15 If, suppose that a customer -- say the type of
16 customer that's, again, hypothetically described in
17 appendix 2, I mean, that whole analysis, if that customer
18 wanted peak capability of 10,000 gJs per day, and it was
19 really only going to be using it in the winter, one of the
20 alternatives, and I didn't discuss it in appendix 2, but
21 one of the alternatives would be to just contract for
22 TransCanada capacity at the 10,000 gJ per day level on a
23 firm basis, firm year-round basis. And then whenever the
24 customer, the party, needed that gas during the
25 winter, they would just buy it in Alberta at NIT and
26 transport it on the TransCanada system.
27 The point is that if you go through and calculate the
28 load factor that that transportation capacity
1 would be operated at, it's very low. It's like 20 -- I
2 actually calculated it out as, if you have 10,000 per day
3 of capacity, and 833,333 gigaJoules of sort of total annual
4 volume that you're going to move, the average annual load
5 factor is about 23 percent.
6 So the unit cost on TransCanada capacity at a dollar
7 per gigaJoule, say, is, like, $4.
8 All right. That's why I didn't even include that
9 example in the analysis here. I mean, in theory, that's
10 one of the things you could do, is just hold massive
11 amounts of TransCanada main line capacity to meet your peak
12 requirements, but the cost would be outrageous. It would
13 be something, as I say, north of $4 per gJ.
14 So the observation that's being made here is paying
15 for storage at roughly 50 cents a gigaJoule, and paying for
16 Dawn-Trafalgar capacity, even at a low load factor,
17 whatever that cost is, it's going to be much, much less
18 than holding TransCanada capacity that you only use a
19 quarter of the time, roughly.
20 MS. CAMPBELL: Thank you.
21 MR. STAUFT: Is that explanation sufficient or do you
22 need a --
23 MS. CAMPBELL: I think we figured it out. Thank you.
24 MR. STAUFT: Okay.
25 MS. CAMPBELL: So, on page 48, I'm going to ask you,
26 there's, again, lines 7-10. And can I take it from the
27 answer you've just given me you used the same logic to
28 arrive at that conclusion?
1 MR. STAUFT: Sorry, the last sentence there?
2 MS. CAMPBELL: Yes, the last sentence, “At the limit,
3 e.g., if the storage was in Alberta.”
4 I'm just saying --
5 MR. STAUFT: That's essentially the case I just
6 described for you. Yes.
7 MS. CAMPBELL: That's what we thought. And the same
8 load factor?
9 MR. STAUFT: Yeah, I mean, in here I didn't calculate
10 the load factor out but it would be, in any event, very low
11 and the unit costs would be, as a result, very high.
12 MS. CAMPBELL: Thank you. If I could ask you to turn
13 to page 52 of your evidence. I'm interested in the
14 sentence at the bottom. You've told me about Vector and
15 Great Lakes.
16 At the bottom you say:
17 "At the present time none of ANR, ANR
18 storage, natural or NFG has unsubscribed storage
20 And I'm wondering if you could advise me of the
21 evidence on which you rely to make that statement, what
22 sort of investigations you did.
23 MR. STAUFT: Again, that's the informational posting
24 section of the websites of each of those companies.
25 MS. CAMPBELL: For each of them?
26 MR. STAUFT: Yes.
27 MS. CAMPBELL: Thank you.
28 MR. STAUFT: The commission requires -- this isn't
1 just sort of advertising websites.
2 MS. CAMPBELL: No, I understand.
3 MR. STAUFT: The commission requires them to put
4 certain information on their websites and make it
5 available, and I went to those places and that's what I
7 MS. CAMPBELL: You weren't citing the nice promotional
8 material, you were actually citing hard facts. I
10 MR. STAUFT: Well, yes.
11 MS. CAMPBELL: Okay. If I could ask you to turn to
12 page 55. This is another question on unsubscribed
13 capacity. And I think I know what the answer is now, just
14 based on our last couple of exchanges.
15 It talks about:
16 "On the Great Lakes system, there is currently no
17 unsubscribed capacity available from Emerson to
18 the eastern part of the system, but about 13,000
19 gJ capacity available from the far well
20 interconnect with ANR MichCon to St. Clair,
21 and about 167 gJ available from Muttonville to
22 St. Clair.”
23 Muttonville. Mm, what a destination.
24 So my question again, supporting evidence. Is that
25 the -- the answer that you gave to me concerning Great
26 Lakes, is that a result of the inquiry that you told me
27 about to Great Lakes?
28 MR. STAUFT: Yes.
1 MS. CAMPBELL: Thank you. Page 56.
2 Okay, the last one. Page 80. This has to do with one
3 of your recommendations It's lines 20 to 22.
4 MR. STAUFT: Sorry, were you on page 56?
5 MS. CAMPBELL: I apologize. We realize that you had
6 answered the question we had on page 56 when you advised us
7 about Vector. We had asked you previously. You've given
8 us some information about Vector already. So I've moved on
9 to page 80.
10 MR. STAUFT: Oh. Okay.
11 MS. CAMPBELL: Line 20 to 22. And it deals with one
12 of your recommendations.
13 And the question was:
14 “How would your recommendation affect expansions
15 of existing storage facilities by EGDI or Union
16 and their affiliates?”
17 And the answer you gave was:
18 "If an affiliate of Union or EGDI wished to
19 independently develop and operate a new storage
20 facility, it would have the same right to seek
21 approval of market rates as any other storage
23 My question to you is could this policy encourage the
24 utilities to spin off storage development affiliates to
25 circumvent the cost of service requirement.
26 MR. STAUFT: It could, yes. I would point out,
27 actually, that the language is a little bit equivocal here,
28 where what I have actually said is if a Union or EGDI
1 affiliate wanted to go ahead and do that it would
2 have the same right to seek approval as anybody else.
3 And, I mean, that's a bit -- obviously they could do
4 that if they wanted to. Obviously an issue that has come
5 up in this case, and Mr. Smith may want to talk to me about
6 it in a while, is that of what do you do about cases of
7 utility affiliates who want to go out and develop new
8 storage facilities as opposed to total third parties.
9 MS. CAMPBELL: Yes.
10 MR. STAUFT: And I think I've said that I don't, at
11 least as presently advised, have any particular problem
12 with market-based rate authority for total third parties.
13 I'm not sure if all of my clients agree with that, but
14 that's what my evidence says, anyway.
15 Obviously, when you ask the same question in the
16 context of utility affiliates, it's a lot more complicated.
17 You know, I mean I can see the argument of somebody like
18 MHP that, you know, so long as they are behaving
19 separately, what difference does it make who owns them sort
20 of thing.
21 On the other hand, just sort of making a determination
22 now that you would want -- that you would be willing to
23 give them market-based rate authority, to use the FERC's
24 phrase, in order to do that, it seems to me you would have
25 to be comfortable that your market structure in terms of
26 the availability of information and reporting requirements
27 and so on, and also your affiliate rules, would be
28 effective at preventing the utility from using its market
1 power to benefit whatever the affiliate was that was doing
3 And, given that I've equivocated a little bit in here,
4 as I say, I think I was not asked to consider that question
5 specifically or to analyze whether the market structure and
6 affiliate provisions in Ontario would be adequate for that
7 purpose. So I really can't offer an informed opinion about
8 whether I would recommend that or not. I think it would
9 have to be something that you look very carefully at.
10 I mean, IGUA, on this question, pointed out
11 that really what I would guess the most likely outcome is,
12 would be if an affiliate developed a storage facility is
13 that they'd end up selling it to one of the utilities.
14 And again, as Mr. Thompson said, you would immediately
15 get all kinds of issues about prudence, and boy, is this a
16 fair market value? And all that kind of thing.
17 So it complicates the thing a lot. And obviously you
18 could avoid those kind of issues by just putting a blanket
19 prohibition on affiliates getting market-based rate
20 authority, and maybe that would be the way to go. But,
21 again, as I say, I don't have a firm opinion on that.
22 MS. CAMPBELL: Thank you. Those are my questions.
23 Thank you.
24 MS. SEBALJ: Thank you, Ms. Campbell.
25 Mr. Leslie.
26 CROSS-EXAMINATION BY MR. LESLIE:
27 MR. LESLIE: Good afternoon, Mr. Stauft. My name is
28 Glenn Leslie, and I act for Union Gas.
1 MR. STAUFT: Good afternoon.
2 MR. LESLIE: Can I ask you to turn up your résumé,
3 sir. I think it's appendix 1 in your evidence.
4 MR. STAUFT: Yes.
5 MR. LESLIE: And, in particular, there's a listing of
6 the various cases in which you've appeared and given
7 evidence starting in 1992. And my understanding from the
8 preface, or the short statement of your credentials, is
9 that everything before 2001 would relate to a period when
10 you were employed by TransCanada Pipelines or one of its
12 MR. STAUFT: Yeah. TransCanada Gas Service for the
13 most part, so the marketing affiliate of TransCanada, yes.
14 MR. LESLIE: Fine. So the stuff on page 3 --
15 actually, the cases that you list on page 3 and page 4
16 would be cases involving your employer.
17 MR. STAUFT: No. Sorry. Maybe I'm not understanding
18 the question.
19 MR. LESLIE: The cases that you list on page 3 and
20 page 4, starting in 1992 and running through the year 2000.
21 MR. STAUFT: Yes?
22 MR. LESLIE: My understanding is that all of those
23 cases and all of those appearances involved your employment
24 with TransCanada Pipelines or one of its affiliates.
25 MR. STAUFT: Well, I -- yes, when I appeared I was an
26 employee of TransCanada Gas Services. For the most part,
27 the testimony was filed in -- you can read it but a lot of
28 interstate -- US interstate pipeline proceedings, NOVA
1 proceedings. They weren't typically TransCanada Pipeline
3 MR. LESLIE: No, but you were working for TransCanada
4 Pipelines at the time.
5 MR. STAUFT: For TransCanada Gas Services.
6 MR. LESLIE: Gas Services, which is an affiliate, I'm
8 MR. STAUFT: Yes.
9 MR. LESLIE: Let's leave it at TransCanada Gas
11 And then in the year 2000 -- and as you say, you can
12 tell from the description what you were doing in those
13 cases more or less.
14 MR. STAUFT: Yeah.
15 MR. LESLIE: In the year 2000, as I understand it, you
16 established your own consulting practice?
17 MR. STAUFT: Yes.
18 MR. LESLIE: So that the cases that are listed on page
19 2 of 4 are cases in which you've appeared after you left
20 TransCanada Gas Services and you were employed as a
21 consultant in those cases?
22 MR. STAUFT: Yes.
23 MR. LESLIE: And is there anything that you have done,
24 sir, relating to work on competitive markets or analysis of
25 competitive markets, either from a legal or an economic
26 standpoint, that does not appear in your résumé?
27 MR. STAUFT: Sorry. Could you repeat that?
28 MR. LESLIE: Yes, I can.
1 MR. STAUFT: I'm dozing off.
2 MR. LESLIE: Is there anything that you have done in
3 your consulting capacity, working on an analysis of
4 competitive markets, either from an economic or a legal
5 standpoint, that is not set out in your resume?
6 MR. STAUFT: So since, in the period since 2000,
8 MR. LESLIE: Yes.
9 MR. STAUFT: Well, okay. If you're asking about, have
10 I been advising people in cases of this nature, where
11 you're looking for a -- somebody's looking for market-based
12 rate authority? No. I mean, concepts around, you know,
13 the economics of transportation, the economics of storage,
14 market power issues, things like that, come up in many
15 regulatory contexts. I have done some work just in an
16 advisory capacity for people that relates to regulation
17 of -- regulation or non-regulation of pipeline facilities,
18 but I have not filed any testimony on that.
19 MR. LESLIE: Mr. Stauft, as I read your resume, you
20 have appeared, and given evidence, in one case in which the
21 purpose of your evidence was to deal with market power
22 issues. Is that correct?
23 MR. STAUFT: That's true. Yes.
24 MR. LESLIE: And there's nothing, no other case or
25 appearance, giving of evidence, that involved competitive
26 issues or analysis of the competitive markets apart from
27 that one?
28 MR. STAUFT: As I said, with testimony, yes. I mean,
1 you can tell from the description of -- I hope you can tell
2 from the description of the testimony that is provided what
3 it was about.
4 MR. LESLIE: Yes. Thank you, sir.
5 Mr. Stauft, Union had changed its proposal from the
6 initial position with respect to storage regulation. Are
7 you aware of that change, sir?
8 MR. STAUFT: Yes. Yes, I am.
9 MR. LESLIE: And is it your understanding that Union
10 is now proposing that the sale of storage be deregulated as
11 it relates to exfranchise sales, but insofar as Union is
12 dealing with infranchise customers, it would continue to be
13 regulated, at least to the extent of the aggregate excess
14 amount of storage that's available to those customers?
15 MR. STAUFT: Yes, I understand that that's their
16 proposal, their client's proposal.
17 MR. LESLIE: And is it your understanding from that,
18 sir, that customers within Union's franchise who were
19 receiving bundled services would continue to get storage,
20 by and large, at regulated rates, at cost-of-service rates?
21 MR. STAUFT: For now, yes. That's --
22 MR. LESLIE: Well, that's the proposal, isn't it, sir?
23 MR. STAUFT: Yes. That's my understanding.
24 MR. LESLIE: And my question, there's a great deal of
25 your evidence that deals with the concerns that arise, for
26 you, at least, and when a storage company is selling
27 storage as part of a bundled service. Does Union's current
28 proposal deal with your concerns in that regard?
1 MR. STAUFT: Well, it deals with -- I mean, it
2 addresses the issue that you referred to in my testimony
3 about the problem --
4 MR. LESLIE: That's not my question --
5 MR. STAUFT: Yeah, the problem that's created by
6 bundled service. Sure. I mean, there may be other issues
7 with Union's position that -- I'm not going to say that
8 Union's changed proposal makes all of my concerns go away,
9 but you're right, to the extent that that whole bundled
10 services argument kind of goes away if Union is proposing
11 to continue with cost-of-service or cost-based bundled
13 MR. LESLIE: Thank you. That was the point of my
15 MR. STAUFT: Sorry sir. I didn't mean to be obtuse.
16 I was just trying to make sure I understood what you were
18 MR. LESLIE: You're aware that Union is currently
19 selling storage at market-based rates?
20 MR. STAUFT: Yes.
21 MR. LESLIE: And there's about 67 Bcf of storage that
22 is or has been sold in that way?
23 MR. STAUFT: That is my understanding, yes.
24 MR. LESLIE: How much do you know about the way in
25 which that storage is sold?
26 MR. STAUFT: Sorry, I'm not sure if I understand the
28 MR. LESLIE: Do you know how Union goes about selling
1 that storage, whether the rates are negotiated or arrived
2 at through an auction or in some other fashion?
3 MR. STAUFT: No, I have no idea what the mechanism is
4 that they use. I mean -- and I don't think that it makes
5 any difference. At the end of the day, they sell for a
6 price that they find acceptable, and for all I know, they
7 use different methods of --
8 MR. LESLIE: Do you know who the customers are?
9 MR. STAUFT: My understanding is that Enbridge is a
10 big customer, and that Gaz Métro is a big customer.
11 MR. LESLIE: Anyone else? Well, let's assume --
12 MR. STAUFT: Not specifically.
13 MR. LESLIE: Sorry, Mr. Stauft, I didn't mean to
15 MR. STAUFT: No.
16 MR. LESLIE: Let's assume for these purposes that
17 Union auctions off storage that's exfranchise, or at least
18 a substantial portion of it. Is it your view, sir, that a
19 vendor or a seller who is auctioning off a product could be
20 in a position of exercising market power?
21 MR. STAUFT: They could be, sure.
22 MR. LESLIE: How?
23 MR. STAUFT: Depends how much of the -- well... it
24 depends how much of the product is on the market.
25 MR. LESLIE: Are you saying, sir, that they could
26 exercise market power by withholding capacity and creating
27 scarcity where it doesn't need to exist?
28 MR. STAUFT: Well, there may just be scarcity in the
1 market. There may just not be as much storage as you would
2 see under competitive conditions, and so there's a shortage
3 of it, and the price that people are willing to pay is very
5 MR. LESLIE: But that price reflects capacity
6 constraints, not market power; is that not correct?
7 MR. STAUFT: Well, I mean, it reflects the... at the
8 point of time that the auction is conducted, it reflects
9 the amount of capacity that's being made available and the
10 value that people put on it.
11 MR. LESLIE: Well, how does that reflect market power,
12 Mr. Stauft?
13 MR. STAUFT: Mr. Leslie, I'm not sure I understand the
15 MR. LESLIE: Well, you just -- as I understand what
16 you've told me, and I agree with you, what it reflects is
17 perhaps a capacity restraint -- or limitations on capacity.
18 And it reflect what the buyers are willing to pay for it,
19 the value they put on it. But I don't understand how it
20 can reflect market power. I take it you can't help me with
21 that any more than you already have.
22 MR. STAUFT: Sorry, I can think about it. I'm just
23 not --
24 MR. LESLIE: Well, if you want to do that, and if you
25 want to expand on what you've said --
26 MR. STAUFT: Sure.
27 MR. LESLIE: -- you can do that.
28 MR. THOMPSON: Do you want to give that a number?
1 MS. SEBALJ: Yes, sorry. Was that an undertaking? I
2 need some nomenclature.
3 MR. THOMPSON: To reflect on Mr. Leslie's question
4 about how capacity constraints evidence market power and
5 get back to him, if so advised.
6 MS. SEBALJ: Thank you. That was helpful. I was
7 actually looking for nomenclature for this particular set
8 of undertakings. Can I just say Consumers Undertaking No.
9 1, because it's not really IGUA/AMPCO.
10 MR. THOMPSON: Stauft undertaking.
11 MS. SEBALJ: Fair enough. Thank you.
12 CONSUMERS UNDERTAKING NO. 1: TO DEMONSTRATE HOW
13 CAPACITY CONSTRAINTS EVIDENCE MARKET POWER
14 MR. LESLIE: Mr. Stauft, I wanted to go to your
15 analysis. As I understand one of the major themes of your
16 evidence, and this is starting at page 17, you are of the
17 view that if the prices that Union could achieve in an
18 unregulated market were 10 percent higher, than Union's
19 cost-of-service rates for storage then that would be
20 evidence of market power. Have I correctly stated your
22 MR. STAUFT: Yes. And in that I am following the
23 FERC's analytical model.
24 MR. LESLIE: Well, let me just go to that. That's at
25 page 17, I believe.
26 MR. STAUFT: Right.
27 MR. LESLIE: And at the bottom of the page, you say --
28 this is starting at line 20 on page 17:
1 "In its rate design policy statement, the FERC
2 established a 10 percent threshold for expected
3 price increases in cases where a pipeline is
4 seeking market-based authority, stating that the
5 Commission believes that if a company can sustain
6 an increase in trades in the order of 10 percent
7 or more without losing significant market share,
8 the company is in a position to exercise market
9 power to the detriment of public interest."
10 And that's what you rely on for your analysis of what
11 you think Union could achieve in the market over and above
12 its cost-based rates, and for the proposition that that
13 remits market power?
14 MR. STAUFT: Yes, that's the standard that the
15 Commission has established. You know, when we have the
16 definition of market power as the ability to profitably
17 increase prices above the competitive level, the question
18 comes up of what the competitive level is.
19 And as I understand what the Commission is doing here,
20 or in the rate design policy statement, they're basically
21 saying that that's the standard, that basically, the cost-
22 based rates are, as Mr. Reed described it, I think, a proxy
23 for the competitive level.
24 MR. LESLIE: Right. And the cost-based rates is, as I
25 understand it, and I think you just said, the competitive
26 price in that analytical model?
27 MR. STAUFT: Well, it's obviously not a real
28 competitive price, but it's a proxy for the competitive
2 MR. LESLIE: And is there any way of testing the
3 extent to which that proxy is an accurate proxy?
4 MR. STAUFT: In a utility context, there probably...
5 there probably is not, actually, because it seems to me
6 what you could do is sort of run the experiment and let the
7 utility charge whatever it wanted, and you would get some
8 price coming out of that exercise. But, you know, the
9 whole question to begin with was whether they have market
10 power or not. So I mean, no, that's not a fair test of it.
11 MR. LESLIE: Well, how do they do it in other
12 industries, Mr. Stauft? When they're trying to assess
13 whether a dominant incumbent has market power, how do they
14 determine what the competitive price would be?
15 MR. STAUFT: Most industries aren't regulated and this
16 issue doesn't come up in most industries.
17 MR. LESLIE: Well, I recognize that, but what we're
18 engaged in is an analytical exercise which is one that is
19 applied to markets in many industries, not just regulated
20 industries, as I understand it. We have merger guidelines
21 in Canada. FERC uses different tests, but they have many
22 of the same analytical tools. And they're not restricted
23 to regulated industries. And how do they do this exercise
24 outside of regulation, where there's a need to determine
25 the competitive price?
26 MR. STAUFT: Well, the merger context is different,
27 obviously. My understanding of that is a merger requires
28 regulatory approval. If you've got two unregulated firms
1 merging, or proposing to merge, and the Competition Bureau
2 examines that, I believe that the analogous threshold
3 there is actually 5 percent.
4 My understanding is that what the Competition Bureau
5 looks for is evidence about whether the merged firm will be
6 able to increase the market price, the competitive price,
7 of its -- well, the market price of its products by more
8 than 5 percent relative to what it was before the merger.
9 That has nothing to do with regulation, obviously. That's
10 just moving from one market, unregulated scenario to
11 another one, and trying to determine whether the merger
12 itself is leading to market power.
13 The only other -- I mean, the other place where it
14 typically comes up, as we've said, is in cases like this or
15 cases like market-based rate authority cases that the
16 Commission -- the FERC looks at, where, yes, you're right.
17 The starting point is a cost-based regulated rate that is
18 treated as the proxy for competitive rate.
19 I mean, that is consistent with the -- my
20 Understanding -- is consistent with the general theory of
21 why we're regulating utilities to begin with.
22 MR. LESLIE: Let me ask you this question, just to get
23 down to what you're using as your basis.
24 The FERC proxy for a competitive price is the
25 regulated -- is the cost-of-service rate. Do you know
26 whether or not the pipelines that they're dealing with when
27 they apply that formula have rolled-in rates or incremental
1 MR. STAUFT: They may have both.
2 MR. LESLIE: Do you know?
3 MR. STAUFT: On which pipeline? I'm sorry.
4 MR. LESLIE: Do you know? Don't ask me. I'm asking
5 you. Do you know? Tell me if they're different pipelines
6 tell me that.
7 MR. THOMPSON: Well, we're here to get information,
8 Mr. Leslie. You're sounding very aggressive for a
10 MR. LESLIE: I'm sorry.
11 MR. THOMPSON: But if you would like us to -- if we
12 don't know, try and find out, perhaps we'd be happy to do
13 that for you.
14 MR. LESLIE: Yes, would you do that? Yes, thank you,
15 Mr. Thompson.
16 MR. THOMPSON: Would we be happy to do that for him,
17 Mr. Stauft?
18 MR. STAUFT: Maybe I'd be happy if I understood what
19 it was he was asking.
20 MR. LESLIE: Let me tell me you what my information
21 is, Mr. Stauft, and you can take an undertaking to confirm
22 it or not confirm it. My information is that the pipelines
23 in question have incremental rates not rolled-in rates.
24 MR. STAUFT: So we're talking about market-based rates
25 for transmission services.
26 MR. LESLIE: Cost-based rates for pipelines with
27 incremental rates as opposed to rolled-in rates.
28 MR. THOMPSON: Well, I think --
1 MR. STAUFT: Are we talking about storage or
2 transmission here?
3 MR. LESLIE: Well, I've just been told it's both. But
4 what I'd like to know is whether or not, whether or not you
5 would disagree --
6 MR. THOMPSON: Why don't you check first, and then --
7 MR. LESLIE: I did check.
8 MR. THOMPSON: No, that's okay.
9 MR. LESLIE: The facts.
10 MR. THOMPSON: That’s okay.
11 MR. LESLIE: Mr. Stauft, do I have an undertaking that
12 you will let me know whether or not the pipelines in
13 question under FERC have incremental rates or rolled-in
15 MR. STAUFT: Well, let me --
16 MR. THOMPSON: Again, let me step in here. I think
17 what we'll do is we'll check the FERC policy statement that
18 we've used as our source, and we'll check, I guess, the
19 cases that we've referenced, and see if we can help you.
20 MR. LESLIE: All right. Thank you.
21 MS. SEBALJ: Is that an undertaking? I'm afraid to
23 MR. THOMPSON: Yeah. That's Stauft number what?
24 MS. SEBALJ: Stauft number 2. Thanks.
25 MR. THOMPSON: Stauft 2.
26 CONSUMERS UNDERTAKING NO. 2: TO ADVISE WHETHER OR NOT
27 THE PIPELINES IN QUESTION UNDER FERC HAVE INCREMENTAL
28 RATES OR ROLLED-IN RATES
1 MR. LESLIE: One of the frailties that's been alluded
2 to this morning with using cost-of-service rates as a proxy
3 for competitive price is that the different storage
4 companies will have different costs and therefore different
5 cost of storage rates. Do you agree with that?
6 MR. STAUFT: Yes. I mean, it is a proxy because we
7 can’t observe, in the real world, what the competitive
8 level would be. So, yes, there's uncertainties about this
9 kind of thing; I accept that.
10 MR. LESLIE: So you would agree with me that it's an
11 arbitrary proxy in the sense that the competitive price can
12 vary depending on the company involved?
13 MR. STAUFT: Well, the cost-based rate will vary
14 according to the company, but --
15 MR. LESLIE: In your view, dealing with markets more
16 generally, is any price above cost and a reasonable return
17 a reflection of market power?
18 MR. STAUFT: No, I think that's too broad a statement.
19 I don't think that's necessarily fair. There's lots of
20 industries where prices go up and down a lot, right, so
21 that at certain periods they're much higher than a
22 cost-based -- much higher than cost. And at other times
23 they're much lower so that, you know, in the long run you
24 like to thing that they more or less even out. But there's
25 a lot of volatility in that. And the question of what is a
26 reasonable return, in figuring out what cost-based prices
27 are in industries other than very capital-intensive things
28 like utilities, can be very difficult.
1 MR. LESLIE: I take it from that answer that I should
2 not take away from your evidence the understanding that
3 anything above cost and a reasonable return in any
4 industry reflects market power; that that proposition is
5 limited only to regulated industries?
6 MR. STAUFT: I'm hesitating just because there's
7 measurement difficulties. I mean, if you -- if you found
8 an industry where -- well, I mean, in this context, if the
9 Board was to say to Union and Enbridge, yes, you can charge
10 whatever you like for all storage, and let's assume we get
11 over the bundled service problem somehow and the kind of
12 market prices that had been talked about that I've
13 discovered as best I could and referred to in my evidence
14 were actually what was found in the market, I mean, the
15 equity returns to have utilities would be enormous. They
16 would be -- you know, I don't know what it would be exactly
17 but you could calculate it out from looking at their rate
19 You know, and that might be 60 or 70 percent after
20 tax. I would say that if you found an unregulated industry
21 where, on a sustained basis, all of the market participants
22 had 70 percent rates of return on an equivalent basis, then
23 that suggests to me that there's some imperfection in the
24 market going on, and likely somebody being able to exercise
25 market power.
26 But I mean, that's a very vague, that's a pretty vague
27 description of it. But at some level, then, sure, if
28 prices get far enough out of whack with what you would
1 expect, based on the costs of the industry, then, sure,
2 that suggests to me that there's market power being
3 exercised somewhere. Somehow.
4 MR. LESLIE: Can you provide me with any economic text
5 reference or any other reference to support the statement
6 that you've just made?
7 MR. STAUFT: Not off the top of my head, no.
8 MR. LESLIE: That's an opinion that you have, is it,
9 sir? Is it based on anything other than your own views?
10 MR. STAUFT: Well, I mean, it's based on -- well, I
11 mean, it is my view, yes.
12 MR. LESLIE: At page 35 of your evidence you talk
13 about price elasticities. And I take it you're talking
14 about owned priced elasticities there, as opposed to cross
15 price elasticities?
16 MR. STAUFT: Yes.
17 MR. LESLIE: And you make the statement that heating
18 load customers have very low price elasticity, and
19 marketers have much higher price elasticity; is that
21 MR. STAUFT: I think that's generally true, yes.
22 MR. LESLIE: And what do you rely on for those
23 statements? What -- have you done any research or have you
24 any studies that support those views?
25 MR. STAUFT: I don't think -- no, but I don't think
26 research is necessary. I mean, if you're a heating load
27 customer and the question is, what are you willing to pay
28 to have your house heated in the winter, it's going to be a
1 lot. In fact, the market evidence for that is the fact
2 that people still buy gas and heat their houses with it
3 even when the delivered price to Ontario goes from, well,
4 sorry, when the Alberta price goes from $2 to $10 or $12.
5 People still buy the stuff.
6 MR. LESLIE: Did the marketers stop buying gas during
7 those periods?
8 MR. STAUFT: No. Because they resell it. They don't
9 care about the overall level; all they care about is what
10 they can resell it for.
11 MR. LESLIE: But the statements that you make on page
12 35, as I understand it, Mr. Stauft, are statements that
13 reflect your perception of what's going on; you don't have
14 any studies or any material to support the views that
15 you've stated on price elasticity? Nothing beyond what
16 you've told me?
17 MR. STAUFT: No. No, I've explained to you the basis
18 for my view.
19 MR. LESLIE: No, that's fine. That's fine, sir. I
20 think what you're telling me is it's self-evident, in your
22 MR. STAUFT: Yes. Pretty much, essentially.
23 MR. LESLIE: Would you agree that in order to exercise
24 market power, given the view you take that price
25 elasticities, the seller, in this case Union, would have to
26 engage in price discrimination.
27 MR. STAUFT: I think I agree with that, yes. I mean,
28 what this paragraph basically says is there is a great deal
1 of -- there's a good potential for -- I think I'm going to
2 agree with you, sorry.
3 MR. LESLIE: I was going to say, why don't we leave it
4 on the basis that if you find later that you don't agree
5 with me you can let me know.
6 MR. STAUFT: Yes.
7 MR. LESLIE: Make that an undertaking question.
8 MR. STAUFT: Yes. I mean, if the utility could
9 effectively price discriminate and charge a higher price,
10 you know, to the heating load customers, the residentials,
11 then, yes, that price would be very high for them.
12 If it's not able to price-discriminate, then it will
13 be limited to the lower end of the demand curve.
14 MR. LESLIE: All right.
15 MR. STAUFT: And it may be that it couldn't do any
16 better than the prices that it's already getting out of the
17 marketing sector. It's a function of how effective they
18 would be at price-discriminating and I haven't thought
19 about that.
20 MR. LESLIE: Just to go back to our earlier
21 discussion, I want to make sure I understand your position.
22 Are you saying that in any market where vendors are
23 achieving returns in excess of what you would consider to
24 be a reasonable level, there must be market power?
25 MR. STAUFT: Well, there's something inhibiting
26 competitive entry, right? I mean, under competitive
27 conditions, again, speaking at a high level, if you see
28 very high returns in the industry, what you expect is for
1 that to attract new people into the business. They create
2 more capacity, more product, more output. Eventually you
3 get so much output that the price goes down to a level that
4 ultimately sort of in the long run and on average reflects
5 more or less average cost.
6 In the long run, in that competitive market, prices
7 trend towards long-run average cost. So if you see
8 something that deviates significantly from that, then it
9 suggests something's wrong. I mean, it might be a patent
10 or something like that, right? A patent or a copyright
11 confers market power. There may be situations involving
12 land or something where very long-lived assets, where a
13 particular market participant has a sort of permanent
14 advantage that will enable it to collect economic
15 rents indefinitely that can't be competed away. But in an
16 industry as a whole, yes.
17 MR. LESLIE: Do all the participants in the industry
18 have to make roughly the same rate of return, in your view,
19 for it to be a competitive market?
20 MR. STAUFT: No. No, they may not.
21 MR. LESLIE: And you refer to the long term and the
22 prospect of entry and profits being eroded as a result of
23 new entry. What's the long term in your view, sir?
24 MR. STAUFT: Well, I mean, again, it's sort of a... in
25 the economics textbooks, the long run isn't defined in
26 terms of calendar years; it's just the period over which
27 all adjustments, all resources and all decisions are
28 adjusted. And in some businesses that might be two days
1 and in others it might be 20 years.
2 For this type of purpose, I mean, one has to pick a
3 time frame. And I think it probably is necessarily a bit
4 arbitrary, but my understanding is -- I'd have to check
5 this -- but the FERC, and I think the Competition folks
6 look for an ability to maintain price above whatever they
7 think the competitive level is for at least a year, perhaps
9 MR. LESLIE: And do you know what period they use to
10 assess the barriers to entry and the extent to which
11 barriers to entry exist? You referred to new entry in one
12 of your earlier answers.
13 MR. STAUFT: Well, it would be the same thing, right?
14 I mean, if -- it's really -- those are really two sides to
15 have same question.
16 If you can anticipate competitive entry quickly,
17 within six months, then what will happen is –- you can
18 predict that that's what will happen and the price will
19 have to come down, the market price would come down.
20 MR. LESLIE: Well, Mr. Stauft, is that six months your
21 number or is that the number the Bureau uses?
22 MR. STAUFT: That's just a number I picked out of the
23 air for the example I was using.
24 MR. LESLIE: That's what I thought. Do you know what
25 number the competition law authorities use in this country?
26 MR. THOMPSON: Do you want us to find out?
27 MR. LESLIE: I can tell you.
28 MR. THOMPSON: They why don’t you tell us?
1 MR. STAUFT: Go ahead and tell me.
2 MR. THOMPSON: You’re asking him for information you
3 already know.
4 MR. LESLIE: Alright. We’ll leave this, then.
5 MR. THOMPSON: Most of us are here to get information,
6 not to beat up on the witness. That's the next go-around.
7 MR. LESLIE: All right. Mr. Stauft, at pages 44 to 46
8 of your evidence you discuss capacity. And as I understand
9 your evidence, you're saying that in order for the storage
10 market in Ontario, or the storage market that Ontario
11 participates in, to be competitive, Union's market share
12 would have to decline substantially, and that would require
13 access to additional capacity in the order of, I think it's
14 150 Bcf, is it?
15 MR. STAUFT: I think the number actually is 120.
16 MR. LESLIE: All right.
17 MR. STAUFT: But I think -- no, I think you're
18 overstating the claim that's being made here, right?
19 MR. LESLIE: I'm sorry, well --
20 MR. STAUFT: The discussion is, again, if we're trying
21 to apply this conceptual framework that the FERC uses, the
22 question is, are there viable alternatives at a low enough
23 cost, in sufficient quantity that you can -- that their
24 availability will constrain prices charged by the utility
25 to an appropriate level.
26 And that immediately raises the question of how much
27 of those alternatives has to be there? Right? And I think
28 I acknowledge, yeah, there's probably different answers to
1 that. I don't think it would be fair to say, yes, we
2 need -- that the utilities, if they're looking for market
3 rate authority, would have to demonstrate that the whole
4 240 Bcf could be immediately replaced.
5 On the other hand, I don't think that it would make
6 sense to say that they can demonstrate a lack of market
7 power if they demonstrate that, you know, 10 percent of the
8 capacity could be replaced.
9 It's some other number in the middle. And what I'm
10 suggesting in this passage is one way to look at it would
11 be to match the requirement up with the market
12 concentration ratios that the different agencies use. And
13 on that basis, just as a rough number, I said, well, let's
14 think about it in terms of 50 percent. But I acknowledge
15 that you could make arguments for higher or lower numbers.
16 I think at the end of the day my conclusion is that
17 they're zero anyway, so it doesn't matter whether it's 10
18 percent or 50 or 80.
19 MR. LESLIE: Well, I was interested in what number you
20 would pick, sir. Is it the number you've put in your
21 evidence, or could it be a lesser number?
22 MR. STAUFT: Well, I mean, I think there is a rational
23 basis for using that number, let's put it that way.
24 MR. LESLIE: I'm sorry?
25 MR. STAUFT: I think there is a rational basis for
26 using that number.
27 MR. LESLIE: Would that kind of an analysis apply
28 outside of this particular industry, or is that an
1 analysis, again, that is unique to the gas industry, the
2 gas storage industry?
3 MR. STAUFT: Well, no. But where the analysis came
4 from was, as I had just said, is from a consideration of
5 the market concentration thresholds that the Competition
6 Bureau folks and the FERC, when it uses its HHI analysis,
8 So those are of general application.
9 MR. LESLIE: All right. Can we go to appendix 2 of
10 your evidence, sir?
11 MR. STAUFT: Sure.
12 MR. LESLIE: I want to make sure that we understand
13 what you've done here, sir. So, if I might, I'll take you
14 through it and you can correct me if I'm wrong about my
16 MR. STAUFT: Sure.
17 MR. LESLIE: Your case 1 is essentially an analysis of
18 the cost of purchasing the amount of storage that you've
19 assumed from Union Gas?
20 MR. STAUFT: Yes.
21 MR. LESLIE: And that 56 cents is the cost-of-service
22 rate, is it?
23 MR. STAUFT: Yes.
24 MR. LESLIE: And what was your source for the
25 information you used in that table relating to Union's
27 MR. STAUFT: It was a bunch of -- it was their last
28 rate order.
1 MR. LESLIE: I'm sorry?
2 MR. STAUFT: I think it was Union's last rate order.
3 MR. LESLIE: All right.
4 MR. STAUFT: I'm not sure; I don't have it with me.
5 MR. LESLIE: Now, your case 2, as I understand it, is
6 using storage at ANR, in Michigan.
7 MR. STAUFT: Yeah, it's actually ANR Storage Company,
8 not ANR Pipeline.
9 MR. LESLIE: Right. But it's in Michigan, is it not.
10 MR. STAUFT: Yes.
11 MR. LESLIE: The storage. And how does that gas get
12 to the storage in Michigan?
13 MR. STAUFT: The model, the picture, the model that I
14 was using was that the hypothetical shipper here would have
15 storage with ANR storage, and some kind of interconnection
16 between that storage facility and the Great Lakes system.
17 MR. LESLIE: Well, how do you get the storage to ANR?
18 Do they get it there on the Great Lakes system?
19 MR. STAUFT: Sorry, I'm being too slow but I'm getting
20 to that.
21 MR. LESLIE: Oh, I’m sorry.
22 MR. STAUFT: Okay. And you've got a segment of pipe
23 on the Great Lakes system between whatever that
24 interconnect is, let's call it Farwell and St. Clair. So
25 that the model is the shipper basically takes the gas off
26 of -- that it's already bought off the TransCanada system,
27 ships it backwards on Great Lakes to point X, Farwell, I
28 was calling it, injects it through, goes through whatever
1 it needs to go through to inject it into forge in to the
2 summertime, and then ships it back on a forehaul on Great
3 Lakes to St. Clair and into the Dawn system during the
5 It's not really firm in both direction. What the
6 shipper would really do is have a firm forehaul from
7 -- with primary receipt and delivery points at Farwell and
8 St. Clair, and then during the summertime you can
9 basically flip the receipt and delivery points using the
10 secondary points, using the secondary point provisions in
11 their tariff, and backhaul it. So you're using the same
12 capacity both in and out of storage.
13 MR. LESLIE: All right. Well, can I just restate that
14 to make sure that I understand it?
15 MR. STAUFT: Sure.
16 MR. LESLIE: And be gentle with me, because I don't
17 understand how well these pipelines can be configured as
18 well you do.
19 My understanding is that, in order to get the gas to
20 the ANR storage facility in Michigan, the gas is first
21 shipped to Dawn; is that correct?
22 MR. STAUFT: Yeah. That's the assumption in the --
23 MR. LESLIE: And what pipeline is used to get it to
25 MR. STAUFT: Probably TransCanada.
26 MR. LESLIE: And then out of Dawn --
27 MR. STAUFT: Doesn't matter. I mean, it could be
28 anywhere. But --
1 MR. LESLIE: So that's not important to your analysis.
2 MR. STAUFT: No.
3 MR. LESLIE: And then it comes out of Dawn on the
4 St. Clair Pipeline into the Great Lakes pipeline system, to
5 ANR; is that correct?
6 MR. STAUFT: Well, it comes out of Dawn probably on a
7 little segment of TransCanada into Great Lakes.
8 But, yeah, and then in any event -- backwards.
9 MR. LESLIE: And then the reverse occurs when you want
10 to get the gas out of storage.
11 MR. STAUFT: Right.
12 MR. LESLIE: Now, when you're looking at the pipeline
13 transportation charges that you've used for your analysis
14 there --
15 MR. STAUFT: Mm-hm.
16 MR. LESLIE: -- were you looking at tariffs for firm
17 service, interruptible service?
18 MR. STAUFT: Firm.
19 MR. LESLIE: Firm service.
20 MR. STAUFT: FT service.
21 MR. LESLIE: And my understanding is that the
22 withdrawal from storage in order to meet your hypothetical
23 customers needs would be during the winter.
24 MR. STAUFT: Right. That's the assumption. And that
25 there's --
26 MR. LESLIE: Did you ascribe any value in your
27 analysis to the unused capacity during the summer?
28 MR. STAUFT: Well, in this particular case, actually,
1 what would likely be happening is that you would be using
2 it -- well, on the model that we just talked about, the
3 customer would be using it to transport gas from Dawn into
5 MR. LESLIE: All summer long?
6 MR. STAUFT: Well, maybe not at a hundred percent load
7 factor. So, you're right, there may be -- there may be
8 some slack capacity.
9 MR. LESLIE: Did you consider the possibility of using
10 interruptible service on the backhaul?
11 MR. STAUFT: You could do that yeah. And that would
12 be reliable. The problem then would be, I'm assuming that
13 this customer has an ongoing requirement for this service.
14 The problem would be, having an ongoing entitlement to the
15 Great Lakes capacity for the forehaul, for the winter.
16 It's not likely that you can contract for -- well, you
17 can't contract for renewable capacity just for the
18 wintertime like, year after year, just during the winter.
19 MR. LESLIE: I'm told that you could release the
20 capacity during summer and sell it in the secondary market.
21 Would you agree with that?
22 MR. STAUFT: To the extent that you weren't using it,
23 yes. But capacity from Farwell to Dawn during the summer,
24 pretty questionable whether it would have any meaningful
26 I take it your joint, that, yes, there may be
27 mitigation opportunities by which the hypothetical customer
28 that's described here could mitigate its costs to some
1 extent. And there may be some of that. But there is
2 actually a discussion of that in my testimony where I make
3 the observation -- I mean, I acknowledge that. But then go
4 on to say that, fair enough, any individual customer may be
5 able to do it. That discussion actually takes place as
6 relates to the Vector case.
7 But in aggregate, they won't be able to do it. In
8 aggregate, customers in Ontario will not be able to come
9 anywhere close to completely mitigating the costs of that
10 stranded capacity.
11 MR. LESLIE: All right. Could you turn to your case
12 3. Again, I just want to make sure that we understand the
13 transportation flows there.
14 MR. STAUFT: Right.
15 MR. LESLIE: As I understand it, the gas moves out of
16 Alliance to Chicago and then to Dawn on Vector? Is that
18 MR. STAUFT: That's the assumption, sure. The
19 Alliance part of it is not a critical assumption, but --
20 MR. LESLIE: No, you're only worried about the leg
21 into Dawn, are you?
22 MR. STAUFT: Right. Yes.
23 MR. LESLIE: And how does it get from Dawn to the
24 storage field, the GPL storage field?
25 MR. STAUFT: Sorry. My assumption was that, as I
26 said, that it would come along the Alliance system --
27 Canadian gas shipped on Alliance to Chicago, interconnect
28 with Natural Gas Pipe, NGPL, in Chicago, put into NGPL
1 storage in Natural’s market area. They have a zone in the
2 Chicago area, and I'm pretty sure that there's an
3 interconnect with Alliance there.
4 So it comes directly along the Alliance system.
5 MR. LESLIE: How does it get to Dawn? Sorry.
6 MR. STAUFT: Okay. Obviously this wasn't as clear as
7 it should have been.
8 The theory is that gas would be shipped on the
9 Alliance system to Chicago, stop off in Chicago to be put
10 into storage, and then, when it's needed, come out of
11 Natural's storage, put into the Vector system, and shipped
12 to Ontario on the Vector system.
13 MR. LESLIE: For use by the customer.
14 MR. STAUFT: Yes, during the winter.
15 MR. LESLIE: Oh, I understand. So that in this case
16 the gas does not actually go to Dawn.
17 MR. STAUFT: No, I'm sorry -- yeah, you're right.
18 That's where it was confusing.
19 MR. LESLIE: But there was a backhaul in case 2.
20 MR. STAUFT: Yes, case 2 assumed that it was going
21 backwards on Great Lakes, whereas this just assumes that
22 it's going –-
23 MR. LESLIE: Did you make the assumption of a
24 backhaul in case 2 or is that just something you added?
25 MR. STAUFT: Well, actually, no, I did look at -- I
26 thought about other cases. You could do it the other way,
27 where you would just take it directly from Alberta to Great
28 Lakes -- sorry, to Emerson along the Great Lakes system to
1 Michigan, and then put it into storage. But it really
2 would come to pretty much the same thing, because you would
3 still have to hold the leg in the Great Lakes eastern zone,
4 from Far Well to Dawn, or to St. Clair, on a year-around
5 basis anyway.
6 So your capacity burden is going to be pretty much the
8 The other slight problem with that scenario, and I
9 actually did talk to some people at TransCanada about this,
10 is that it's not clear that -- first of all, there is no
11 uncontracted Great Lakes capacity from Emerson to the
12 eastern zone, and if you tried to get TransCanada to do it,
13 to drop it off, it's not clear that they can legally do
14 that given their certificates and their import/export
16 It's a possibility. It might be doable, but it was
17 awkward, and I don't think there's any real economic
19 MR. LESLIE: All right. And case 4, again, I just
20 want to track the transportation flows.
21 In this case I understand that the gas moves on if
22 TCPL line to Parkway/Kirkwall; is that correct?
23 MR. STAUFT: Well, Niagara, actually, was again --
24 MR. LESLIE: Goes back to Niagara from there, does it
26 MR. STAUFT: Well, sorry. The scenario is, long haul
27 transportation on TransCanada that the customer already
1 MR. LESLIE: Right.
2 MR. STAUFT: Somehow they divert it, at no cost, to –-
3 and on a firm basis, both of which are possibly
4 questionable assumptions, but nevertheless.
5 MR. LESLIE: I was going to ask you about that. What
6 is a no-cost diversion?
7 MR. STAUFT: Well, on the TransCanada system, if the
8 customer we’re talking about is an eastern zone domestic
9 customer. It pays the TransCanada postage stamp eastern
10 zone rate. If it wants to divert volumes to Niagara, say,
11 an export point, if there's a rate difference between
12 eastern zone rate and a Niagara rate the customer will be
13 charged that. But it will be small, it will be a penny or
14 two. And in some years it might be negative, just
15 depending on the -- it might be zero in some cases.
16 MR. LESLIE: All right. Well, to get back to my
17 original question, the gas moves on TCPL to where?
18 MR. STAUFT: To Niagara.
19 MR. LESLIE: And where does it go from Niagara?
20 MR. STAUFT: On the National Fuel system into National
21 Fuel's storage, and then back again.
22 MR. LESLIE: And then the same route in reverse to get
23 it back to Ontario.
24 MR. STAUFT: Right. Right. So you would end up with
25 the gas being delivered by NFG to Niagara, and then you’d
26 have to get TransCanada to backhaul it on their system.
27 MR. LESLIE: Thank you. That clarifies our
28 understanding of how the flows would work.
1 I wonder, sir, do you have working papers for the
2 calculations you've done in your appendix 2?
3 MR. STAUFT: Sure. I can do that. I'm not sure that
4 I have anything right --
5 MR. LESLIE: No, no. By way of undertaking.
6 MR. STAUFT: Yes. I'm sorry if that wasn't clear. I
7 was trying to make it as clear as I could without getting
8 too wordy, but obviously it didn't work out quite right.
9 So I can produce something that explains the
10 calculation and the assumptions in more detail.
11 MR. LESLIE: All right. Fine.
12 MS. SEBALJ: That's Stauft Undertaking No. 3.
13 CONSUMERS UNDERTAKING NO. 3: TO PRODUCE EXPLANATION
14 OF CALCUALTION/ASSUMPTIONS
15 MR. LESLIE: You mentioned earlier in response to a
16 Question that in your view the Alberta market for storage
17 is a competitive market?
18 MR. STAUFT: Well, yeah, in the sense that there are a
19 number of storage providers that compete with each other on
20 pretty much a level playing field. And it's an unregulated
21 market, as I'm sure you know.
22 MR. LESLIE: And NISKA, as I understand it, has 125,
23 Roughly, Bcf of storage in Alberta?
24 MR. STAUFT: Sorry, NISKA?
25 MR. LESLIE: The name I have is N-I-S-K-A. NISKA.
26 MR. STAUFT: A firm or a storage facility.
27 MR. LESLIE: I believe it's a firm. I'm told they
28 just purchased the AECO hub, and the associated --
1 MR. STAUFT: Oh, okay. Sure. They -- the Alberta
2 Energy owned the AECO facility. It became EnCana's when
3 AEC and PanCanadian merged. And I knew that EnCana was
4 trying to dispose of that facility, and apparently
5 NISKA is the people they sold it to, so -- new information.
6 MR. LESLIE: Do you know what the total amount of
7 storage available in Alberta is?
8 MR. STAUFT: No.
9 MR. LESLIE: My understanding is the Alberta market is
10 also divided between infranchise and exfranchise customers
11 for some purposes. Is that your understanding, sir?
12 MR. STAUFT: No, actually, but if you explained to me
13 what you mean --
14 MR. LESLIE: No, that's fine.
15 MR. STAUFT: It may be that we can agree.
16 MR. LESLIE: I don't want to get into another
18 MR. THOMPSON: It’s Mr. Stauft's information. Not to
19 have you tell us your secrets.
20 MR. LESLIE: No, that’s fine. I just wondered if
21 maybe your understanding… But you don't know, sir?
22 MR. STAUFT: Well, again the problem is, I'm not sure
23 that I understand what you mean.
24 There are different rates for intra-Alberta
25 deliveries off the NOVA system, and extra-Alberta
26 deliveries off the NOVA system. That may be what
27 you're -- that's true. I know that.
28 MR. LESLIE: Can you tell me, is some of the market in
1 Alberta served at cost-based rates and other customers
2 served at market-based rates?
3 MR. STAUFT: With storage?
4 MR. LESLIE: Yes.
5 MR. STAUFT: The only storage facility that -- well,
6 sorry. The major storage facility that is owned by a
7 utility is the Carbon facility. That is owned ultimately
8 by ATCO. It was, in times past, used to serve ATCO's
9 utility customers in the ATCO-south region. So basically
10 the Calgary area. My understanding, though, is that it's
11 not actually used for that purpose anymore. ATCO is very
12 fond of affiliate transactions, as many utilities are, and
13 they have -- my understanding, anyway, is that they have
14 leased, basically sold all the capacity of the Carbon
15 facility to an affiliate who just markets it in the open
16 market, and that that facility is not actually used for the
17 purpose of providing utility delivery service at all.
18 MR. LESLIE: I'm sorry. I'm not sure that I got an
19 answer to my question. But was the answer yes or no, sir?
20 MR. STAUFT: Well, the answer is, there isn't any
21 storage used to provide utility delivery service in
22 Alberta, as far as I'm aware.
23 MR. LESLIE: All right. That's fine, sir. Thank you
24 very much.
25 MR. THOMPSON: Well, I'm glad that's over. Now we get
27 MS. SEBALJ: Mr. Smith, did you want -- is your -- are
28 your questions short? Can we do them before break?
1 MR. SMITH: What's that about being short? I mean,
2 I'd be happy to take a break if you would like.
3 MS. SEBALJ: Let's take a 10 minute break and come
4 back at 3:30, see how much we can get done this afternoon.
5 --- Recess taken at 3:19 p.m.
6 --- On resuming at 3:35 p.m.
7 MS. SEBALJ: If I could ask people to generally get
8 settled, we're going to start.
9 MR. SMITH: Good afternoon, Mr. Stauft.
10 CROSS-EXAMINATION BY MR. SMITH:
11 MR. STAUFT: Hello.
12 MR. SMITH: Something about Thursdays in hearing rooms
13 in different provinces for you and I.
14 MR. STAUFT: Yes, yes.
15 MR. SMITH: Preferred chairs last week and storage
16 this week.
17 Mr. Stauft, we had provided copies of our written
18 questions to you to try and streamline the process. I
19 think a good deal of what I had proposed to put to you has
20 already been put on the record, but I'll go over some of it
21 to clarify.
22 Can I ask you a general question. Is it a good thing
23 for there to be new storage development in the Province of
25 MR. STAUFT: That appears to be the consensus, yes, I
27 MR. SMITH: And you agree with the consensus?
28 MR. STAUFT: Not having conducted an exhaustive study
1 of it, yes, I have no reason to disagree with it. It seems
2 to be that there is continuing demand for storage, and
3 certainly the Board's expectation, as I recall, in the NGF
4 report is that there will be growth and a continuing --
5 continuing growth in the requirement for storage and
6 overall supply. So, yes.
7 MR. SMITH: And you do not object to market-based rate
8 authority for independent storage developers in Ontario; is
9 that fair?
10 MR. STAUFT: Yes. I think that's what my testimony
12 MR. SMITH: No, that's a segue to the stock question
13 that we've put to all the submitters. And before I ask you
14 to respond to that question, because you had adverted to it
15 in your discussion with Mr. Leslie earlier, or perhaps it
16 was Ms. Campbell?
17 MR. STAUFT: Right.
18 MR. SMITH: You are appearing for IGUA, AMPCO, CCC,
19 VECC, SEC, CME.
20 MR. STAUFT: Yes. Sorry.
21 MR. SMITH: And I had posed this question to Mr.
22 Butler and I received from Mr. Thompson a policy position
23 on behalf of IGUA and AMPCO. Can you just tell me, are you
24 able to speak on behalf of those other intervenors with
25 respect to the answer to that question that we posed on MHP
26 and market-based rate authority?
27 MR. STAUFT: No, I am not. I haven't discussed that
28 with them.
1 MR. SMITH: So you're not in a position to put on the
2 record their policy position, but I am free to ask you, as
3 Mark Stauft, expert witness, your view?
4 MR. STAUFT: Sure. Yes. That's right.
5 MR. SMITH: And you're familiar with the question
6 Posed. Do I need to repeat it?
7 MR. STAUFT: Yes. I believe I'm familiar with the
9 MR. SMITH: And would you care to provide us with your
10 response, sir?
11 MR. STAUFT: Well, I think the response I gave to
12 Staff -- I think I actually responded to this earlier, to
13 Staff, and what I said was, I can't really give you a
14 firm view on the question. Just to be clear, the question
15 as I understand it is, assuming that everybody's going to
16 be okay with market-based rates for non-affiliated storage
17 developers, do I have a problem with extending that to
18 affiliated developers of new and sort of disconnected
19 storage facilities?
20 MR. SMITH: Yes.
21 MR. STAUFT: Right? And what I said before was I can
22 see the argument from MHP's position, but I think that how
23 comfortable customers and the Board should be with that is
24 basically a function of how comfortable they are that the
25 market structure, in terms of reporting requirements and,
26 you know, transparency of transactions and so on, and the
27 affiliate rules, are going to be effective in preventing
28 the utilities from using their market power to confer an
1 advantage of some kind on people like your clients.
2 And that is a question that I have not been asked to
3 think about, and I haven't considered. So, all I can tell
4 you is how I would look at the question.
5 MR. SMITH: Right.
6 MR. STAUFT: But I don't know, I don't have a firm
7 view on whether the system that exists now in Ontario is
8 adequate for that purpose or not.
9 MR. SMITH: If the customer proposing to deal with
10 Market Hub Partners Canada L.P. was Brooklyn Union Gas,
11 and the issue was whether or not they could charge that
12 customer market-based rates, does that affect your
13 thinking? I'm just trying to isolate the factors of
14 significance to you.
15 MR. STAUFT: Right. Well, I mean, in that situation,
16 where you have an arms'-length transaction going on, then
17 -- I'm having difficulty thinking of a reason to object to
18 that. You know, the problem is always going to be in the
19 cases -- or that the most acute problems are going to be in
20 the cases where MHP is proposing to sell capacity to Union.
21 And I'm ignoring --
22 MR. SMITH: Say again? To Union?
23 MR. STAUFT: To Union. Right. And I'm assuming for
24 these purposes that any issues around, you know,
25 competitive advantages that MHP may have operationally, in
26 terms of access to the transmission system and that kind of
27 thing, are all taken care of somehow.
28 MR. SMITH: Right.
1 MR. STAUFT: Assuming that there's no issues like
2 that, if MHP is just operating a stand-alone system and
3 they're doing a deal with Brooklyn Union, difficult to see
4 what the objection would be.
5 MR. SMITH: On that basis, then, the objection would
6 not be so much to the awarding of market-based rate
7 authority to someone like an MHP Canada, but the additional
8 scrutiny that had to be brought to bear in the event there
9 was a contract entered into with the affiliate; is that
11 MR. STAUFT: Yes, I think that's fair. I mean, as I
12 was describing before, that creates a whole bunch of other
13 problems, if you've got an affiliate transaction where if
14 the standard is fair market value -- it may be very
15 difficult to figure out what fair market value is in a sort
16 of one-off transaction like that.
17 So, yes, having an arms'-length transaction
18 simplifies that. Assuming again that all the other
19 operational stuff is taken care of.
20 MR. SMITH: And the position that had been identified
21 on behalf of IGUA and AMPCO, whereby there was a caveat
22 registered that there would of course have to be a prudence
23 review conducted in the event that the MHP Canada had done
24 a contract with Union Gas, that would be a protection for
25 Union Gas customers if they were the successful one in the
26 MHP open season. Does that sound sensible to you?
27 MR. STAUFT: Sure. It's a protection. And what I
28 think I was trying to suggest before is that, yes, that's a
1 protection, but that's a bit of an uncertain process too,
2 so --
3 MR. SMITH: Okay. I'm just trying to help to sculpt a
4 happy convergence with at least two of your clients.
5 MR. STAUFT: Okay. Okay.
6 MR. SMITH: Mr. Stauft, can we just go back to the
7 discussion about the Alberta storage market for about two
9 MR. STAUFT: Sure.
10 MR. SMITH: You had made reference to the fact that
11 there is LDC-owned storage in Alberta, correct?
12 MR. STAUFT: Yes.
13 MR. SMITH: That it is the Carbon storage facility,
14 and the owner is ATCO Gas?
15 MR. STAUFT: Yes.
16 MR. SMITH: And that it is not used presently for
17 utility purposes; it is being, in effect, leased out?
18 MR. STAUFT: That is my understanding, yes.
19 MR. SMITH: And were you aware of the Energy &
20 Utilities Board order U-2005-133 that directed ATCO Gas to
21 lease out its storage to its affiliate at a placeholder
22 price for the foreseeable future, beginning the 1st of
23 April, 2005?
24 MR. STAUFT: I could not have given you the order
25 number, but your description is consistent with my
26 understanding. I understand there's actually a sort of an
27 ongoing issue about, as you said, a placeholder, there's an
28 ongoing issue about what happens to the money, basically,
1 with that.
2 MR. SMITH: And the placeholder is intended to allow
3 the Board to come back and fix what is a market-related
4 price for that capacity?
5 MR. STAUFT: I think that, yes, I think that's my
7 MR. SMITH: It's a market-determined price rather than
8 a cost-of-service-based price?
9 MR. STAUFT: Right. Yeah. My understanding of the
10 situation is that basically, this is utility storage that
11 isn't necessary, basically, according to ATCO, anyway,
12 isn't necessary for utility purposes. So it's been through
13 various devices, basically, sold off into the open market
14 in much the same way that Union has sold off excess
15 capacity under these transactional service, short-term
16 transactional services.
17 And now there is an issue about who gets to keep the
18 money, basically.
19 MR. SMITH: And that's fine, sir. I just thought that
20 it might help to clarify the record a bit.
21 You had a discussion with Mr. Leslie, I'm now moving
22 to question 2 in the list that I gave you. This had to do
23 with your prior testimony in the antitrust and market power
24 concentration areas, including any market power analysis
25 prepared with respect to a storage provider in Canada or
26 United States.
27 Do I take it your answers to Mr. Leslie that there is
28 no prior testimony of that nature that you have prepared?
1 MR. STAUFT: Include -- well, in the nature of any
2 market power analysis prepared with respect to a storage
3 provider in Canada or the United States?
4 MR. SMITH: Let's start there.
5 MR. STAUFT: That's true. Yes. The only -- to cut
6 this short, the only testimony that I had filed, I believe,
7 dealing with these issues was this a TransCanada mainline
8 case a few years ago, where it really wasn't -- I mean, it
9 wasn't -- the issue wasn't whether these -- TransCanada
10 should get market-based rate authority, heaven forbid. It
11 was a cost of capital case, basically. So the issue was,
12 was business risk, and the gist of my testimony was that
13 TransCanada has all kinds of market power and that
14 mitigates their business risk relative to what a firm that
15 actually faced effective competition would face. It really
16 didn't have much to do with the kind of thing we're talking
17 about here.
18 MR. SMITH: Did you conduct an HHI analysis in that
20 MR. STAUFT: No. No.
21 MR. SMITH: Is this the first time you have conducted
22 an HHI analysis as part of your testimony?
23 MR. STAUFT: I suppose so. I mean, an HHI analysis is
24 just figuring out some market shares and doing a simple
26 MR. SMITH: And, sir, as part of your academic
27 training, had you ever conducted HHI analyses?
28 MR. STAUFT: You mean, done an HHI calculation?
1 MR. SMITH: Or analysis as part of your academic
2 training? I'm just reflecting on your law and philosophy
4 MR. STAUFT: Right. Not in those disciplines I
5 didn't, no. I mean, I had known for a long, long time --
6 MR. THOMPSON: Kindergarten you did.
7 MR. STAUFT: Kindergarten I did, yeah. I had known
8 for a long time what an HHI is and what it's used for, and
9 I did get some economic training, but as a formal academic
10 matter, no.
11 MR. SMITH: Okay. Can we just turn to page 32 of your
12 evidence. This is the second question on the sheet that I
13 gave you.
14 This was just to ask you to describe the factors that
15 result in pricing differentials between summer and winter
16 prices. I think we just want to get on the record that
17 your view is, and giving you this question in advance,
18 hopefully, you would have a chance to organize your
20 MR. STAUFT: The one thing I can just say to preface
21 all of this is that it is the question of how these
22 differentials are formed in the market is very complicated.
23 So if you are looking for any kind of a sort of
24 modelling-type analysis, that's not available, from me or
25 anybody else.
26 MR. SMITH: That's not what I'm asking for, sir.
27 MR. STAUFT: Okay. I mean, there is --
28 Prices across North America are basically driven by
1 US Gulf Coast prices. That's kind of the underlying --
2 same way as, you know, west Texas intermediate crude prices
3 drive prices across North America for different types and
4 locations of crude oil. So everything sort of ripples out
5 from there. And for these storage value evaluation
6 purposes, what you're looking at is forward numbers,
7 forward curves, and you can get that just from NYMEX
8 strips going forward.
9 So, you know, the Gulf Coast market has a sort of
10 forecast summer/winter differential built into it.
11 Just based on the market's perceptions of supply ask
12 demand conditions going forward.
13 And then, going beyond that there are going to be all
14 kind of local influences on forward prices, depending on
15 local supply and transportation conditions in different
16 places that will affect the basis differentials between
17 those different areas and the Gulf Coast.
18 So -- and I mean, I can't come anywhere close
19 to giving you an exhaustive description of how those would
20 work in different areas.
21 I mean, the example cited here in this footnote is,
22 suppose Union decided to shut in 50 Bcf of storage, says,
23 we're just not going sell that storage, for the forthcoming
24 year. Basically, what that signals the market is, there
25 isn't going to be enough gas for the next heating season
26 and I would expect that winter prices would go up a lot
27 because people will expect a shortage because some or part
28 of that physical infrastructure for delivery to Ontario has
1 been taken out of play.
2 I mean, that's kind of local factor you could get.
3 You know, in Alberta, say, if you had -- there have
4 been periods in the past, as I'm sure you know, that where
5 pipeline capacity out of Alberta has been badly
6 constrained. So Alberta prices become, essentially,
7 disconnected from the grid prices, and my recollection is
8 that in those circumstances, those summer/winter
9 differentials flatten out a lot.
10 So, in the Alberta context, for instance, that would
11 drastically reduce the value of storage. That's another
12 sort of local market phenomenon that could come up. Those
13 are, frankly, the only two examples that have come to mind
14 in the hour or so since I've seen this question, so...
15 MR. SMITH: Thank you. I just wanted to get your
16 views on the record.
17 My last question had to do with appendix 2, and you
18 have fairly comprehensively canvassed that with my friend
19 Mr. Leslie.
20 I just wanted to be clear that the information that we
21 had requested in the written question is part of what may
22 be provided subsequently. I believe you had taken an
23 undertaking from him to provide the underlying unit costs
24 of the transportation pieces and so forth to try and give
25 us a better understanding of how you derived the numbers
26 that appear in that appendix?
27 MR. STAUFT: Right. Yes. It seemed that Mr. Leslie
28 -- or, well, not Mr. Leslie's fault but it seems that I
1 have not been quite explicit enough in that, so I agreed to
2 produce something that I hope -- that I believe will
3 explain it more clearly.
4 MR. SMITH: And that would include an example of the
5 calculation of the unit costs, both storage and
6 transportation, that you used in the appendix?
7 MR. STAUFT: Yes.
8 MR. SMITH: Okay. That's fine, then. We don't need
9 anything further, we'll rely on that.
10 My final question, sir, is not on the written list.
11 You're familiar with certain of the financial instruments
12 that are commonly used by producers?
13 MR. STAUFT: Yes.
14 MR. SMITH: Have you ever heard of a YD instrument?
15 MR. STAUFT: I'm sorry?
16 MR. SMITH: YD?
17 MR. STAUFT: YD.
18 MR. SMITH: YD.
19 MR. STAUFT: Not OD, but YD.
20 MR. SMITH: Not OD yet.
21 MR. STAUFT: I have heard the expression but I'm
22 afraid I don't -- I'm not familiar with what it means.
23 MR. SMITH: I'm not asking you to get into a
24 description of it.
25 Let me put a different question to you. How do
26 producers typically balance on the NGDL system, do you
28 MR. STAUFT: Well, they respond to orders from NOVA,
1 as far as I understand it.
2 MR. SMITH: Right. And in order to comply, if they're
3 offside one way or the other, they can buy or sell gas?
4 MR. STAUFT: Yes. I'm sorry, yes. They can buy or
5 sell gas at NIT.
6 MR. SMITH: Right.
7 MR. STAUFT: I believe, and balance their accounts out
8 that way.
9 MR. SMITH: And are you familiar with a day-before or
10 a day-after instrument in order to accomplish that result?
11 MR. STAUFT: I wouldn't be, no.
12 MR. SMITH: And that's fair enough. We'll leave it
13 there. Thank you very much.
14 MS. SEBALJ: Thank you. You would think I'd know this
15 by heart by now. Mr. Stephens, Mr. Cass?
16 MR. CASS: Yes. Thank you.
17 CROSS-EXAMINATION BY MR. CASS:
18 MR. CASS: Mr. Stauft, I am Fred Cass, and I have a
19 few questions on behalf of Enbridge Gas Distribution.
20 MR. STAUFT: Good afternoon, sir.
21 MR. CASS: Good afternoon. My questions are truly
22 intended to be informational. Also, please take them in
23 that spirit, including this first one, which, again, it is
24 intended to be informational, but could you please
25 elaborate on any training that you do have, formal
26 education or training, in the field of economics?
27 MR. STAUFT: Okay. Actually, no, I studied economics
28 extensively as an undergraduate before I went to law
1 school, but that was 25 years ago or so.
2 MR. CASS: All right. Thank you. Do you consider
3 yourself to be an economist?
4 MR. STAUFT: No. That term -- somebody that calls
5 themselves an economist I would normally think of as
6 somebody who at least has an undergraduate degree, and more
7 likely a graduate degree in economics. Neither of which I
9 MR. CASS: Right. And I take it, then, since you
10 don't consider yourself to be an economist, I'd be right in
11 assuming that you've not been accepted as an expert
12 economist by any tribunal?
13 MR. STAUFT: No. I mean, my expertise has been... I
14 am familiar with regulatory economics. I mean, I have been
15 in this field for 20 years. I understand the concepts and
16 I understand the logical and economic basis for regulation
17 and why it's done, and why it's done the way it is. When I
18 appear, typically, anyway, it's in the areas of
19 transportation economics or cost allocation issues or
20 things like that. And so there's a certain -- there's a
21 lot of sort of economic background or substrate to that.
22 But I don't present myself as an expert economist
23 because I don't have the academic credentials for that.
24 MR. CASS: Thank you. Now, in your written evidence
25 you've referred to the CRTC at least briefly. And I did
26 want to ask you some questions in that regard. First, as I
27 understand what you've said in your evidence, you see some
28 statutory similarities between the OEB and the CRTC,
1 but insofar as the sort of issues in this case are
2 concerned, you see factual dissimilarities. Did I sum that
3 up accurately?
4 MR. STAUFT: Yes.
5 MR. CASS: All right. And I will come to the factual
6 dissimilarities and give you a full opportunity to tell me
7 about them, but first, if I could just understand a little
8 bit more about your background in that area.
9 Have you ever actually participated in a CRTC
11 MR. STAUFT: No. No. I have never had anything to do
12 with them.
13 MR. CASS: Would I take it, then, that your
14 understanding of the CRTC's role in forbearance would be
15 really nothing more than reading CRTC decisions?
16 MR. STAUFT: Yes.
17 MR. CASS: Fair enough. And could you help me with
18 which particular CRTC decision you would have read that
19 would have helped you to come to your conclusion about
20 factual dissimilarities.
21 MR. STAUFT: Actually, I'll have to get back to you on
22 that. Off the top of my head -- I have read a couple
23 recent decisions, but I'm afraid I don't remember what they
24 were, and I don't have them with me. I neglected to bring
25 them with me.
26 MR. CASS: Fair enough. So you don't remember off the
27 top the of your head any particular one that you have read?
1 MR. STAUFT: I don't -- well, I'll tell you what I had
2 in mind with respect to these factual dissimilarities.
3 MR. CASS: Yes, please do.
4 MR. STAUFT: I mean, and again, you know, as I've
5 already acknowledged, I'm not terribly familiar with the
6 business of the CRTC, or with the telecom business, for
7 that matter. But my understanding is that in a lot of
8 these CRTC forbearance cases what's going on is that there
9 are new and competing technologies coming into the market
10 that are essentially unregulated but are cheaper than the
11 embedded –- or than the services that are provided by the
12 regulated entities.
13 So the question comes up of whether it makes sense to
14 basically stop regulating ting incumbent, the incumbent
16 That's a big -- that's completely unlike the situation
17 we have here, it seems to me, where the situation we have
18 here is there may be alternatives, but they’re, by my
19 reckoning, at any rate, very expensive. It's not a
20 question of the incumbent sort of having the ability to
21 fight off new, inexpensive competitors and, you know,
22 issues arising about whether they will, you know, use their
23 market power to price-discriminate and put the new entrants
24 out of business by pricing unfairly, at unfairly low levels
25 or any of that kind of thing.
26 What we've got here is an incumbent that is already an
27 inexpensive service provider that wants market-based rate
28 authority and is pointing to alternatives that are three or
1 four times as costly as its own product -- well, and then
2 using that to argue for market-based rate authority.
3 So in that respect, it's, as I've said, this situation
4 is much more analogous to the fact situations that the FERC
6 MR. CASS: Right. Now, I just want to be sure that I
7 understand what you are saying about the factual
8 dissimilarities between what the CRTC has been looking at
9 and what the OEB is looking at here.
10 So you've referred to technology. I take it, then,
11 that the issues that arise out of technology would be one
12 of the factual dissimilarity that you are referring to?
13 MR. STAUFT: That's my understanding, sure, is that
14 the problem -- one of the big problems CRTC faces in
15 regulating telephone companies is, what do we do about
16 cell phones and what do we do about Voice-Over-Internet
17 providers and that kind of thing.
18 MR. CASS: Right. And I'm trying to be fair to you,
19 just to be sure that I understand the similarities as
20 you've described them. And the other point I took out of
21 what you said is that, arising from this technology issue,
22 you perceive that before the CRTC is that what's going on
23 is an issue about incumbents, I think you used the words
24 "fighting off" competitors that have the ability to use
25 new, inexpensive technologies, is that the other factual
26 distinction you were trying to draw?
27 MR. STAUFT: That's the understanding that I have.
1 MR. CASS: Now, is there anything else in terms of
3 MR. STAUFT: No, that's basically it. To me they just
4 seem like very different industries, basically.
5 MR. CASS: All right.
6 MR. STAUFT: The technological issues are completely
7 different and the cost structures are different. So -- I
8 mean, maybe I was unfair to the CRT jurisprudence, but it
9 does seem to me a heck of a lot easier to just default to,
10 if we're looking for guidance, it makes a lot more sense to
11 default to an industry where the facts and the
12 infrastructure, cost issues are pretty much the same
13 as what we're looking at here.
14 MR. CASS: Are you aware of any Canadian regulator
15 with greater experience in forbearance than the CRTC?
16 MR. STAUFT: No. No.
17 MR. CASS: Are you aware of any Canadian regulator
18 with anything near the experience in forbearance that the
19 CRTC has?
20 MR. STAUFT: The CRTC is the only agency that I am
21 aware of where that concept has come up.
22 MR. CASS: Fair enough. Thank you.
23 Now, in your review of the CRTC decisions, you've told
24 me about factual dissimilarities. Were you able to discern
25 any similarities or analogies that might be useful?
26 MR. STAUFT: Well, as I think I said in my evidence, I
27 reviewed the, in particular, the sort of generic framework,
28 and I don't remember that there's a proceeding, where the
1 Commission basically addressed the question of how it was
2 going to apply, or how it was going to deal with,
3 applications for forbearance. And they described, at
4 least as I understood it, a conceptual framework that's
5 pretty much the same as, or very similar, to what the FERC
6 has done.
7 MR. CASS: Right. And my question was a little bit
8 more related to the factual similarities, if any, that you
9 were able to discern.
10 MR. STAUFT: No, I can't say that I really noticed
11 anything. I wasn't -- I have to say I wasn't looking for
12 that though, so --
13 MR. CASS: Was it specifically in the context of this
14 proceeding that you chose to review those decisions or --
15 MR. STAUFT: Yes.
16 MR. CASS: Yes?
17 MR. STAUFT: Yes.
18 MR. CASS: So you did at least consider that that was
19 a place to go and look for the purpose of this proceeding?
20 MR. STAUFT: Yes.
21 MR. CASS: Thank you.
22 From your review of the decisions, are you aware
23 whether the CRTC completely withdrew from regulation of
24 services in its forbearance decisions?
25 MR. STAUFT: I don't believe that they have, but I
26 would be more comfortable if I could go back and check
27 that. Again, I'm afraid that stuff just didn't stick in my
28 head very well, so --
1 MR. CASS: All right, well, if you don't mind doing
2 that, I'd appreciate it.
3 MR. STAUFT: Yeah, my understanding is that they still
4 were kind of keeping a string on the applicants to some
5 extent, anyway.
6 MR. CASS: In other words, it's not necessarily an all
7 or nothing proposition?
8 MR. STAUFT: Right. Sure.
9 MR. CASS: Thank you.
10 MR. STAUFT: And I think that's common -- well, I
11 mean, the FERC does the same thing. They don't call it
12 forbearance, but -- and it's probably legally a bit
13 different, but, sure, they -- understandably, I think, want
14 to keep -- they don't want to just give up jurisdiction
15 altogether and on a permanent basis.
16 MR. CASS: Now, from your review of the decisions --
17 MR. THOMPSON: We need a number there?
18 MR. CASS: Well, I think we more or less ended up at
19 the same spot, so I'm not sure that I need it, unless you
20 care to go back and refresh your memory and elaborate any
21 more, Mr. Stauft?
22 MR. STAUFT: I'll go back and look, and if I'm just
23 dead wrong I'll let you know but otherwise you won't hear
24 from me, how's that?
25 MR. CASS: Fair enough. Thank you.
26 Now, similarly, from your review of the CRTC
27 decisions, do you know whether or not the CRTC required
28 full unbundling before it approved forbearance of any
1 incumbents' telecom services?
2 MR. STAUFT: I can't give you a good answer on that.
3 I'm not sure I even understand what unbundling means in
4 the telecom context, so --
5 MR. CASS: All right, well, then I don't think it's
6 fair for me to push it further.
7 MR. STAUFT: I think of unbundling in a gas context.
8 MR. CASS: All right. Then, just one last question in
9 this same vein about the CRTC decisions.
10 Are you aware whether or not the CRTC continues to
11 regulate the rates for any services provided by telecom
12 carriers that do not have market power?
13 MR. STAUFT: Well – sorry -- where they have
14 determined that the firm -- made a determination that the
15 firm does not have market power?
16 MR. CASS: Yes.
17 MR. STAUFT: Or they have decided, notwithstanding
18 that we'll carry on regulating that?
19 MR. CASS: Yes.
20 MR. STAUFT: Again, I can't recall off the top of my
21 head whether that has happened or not.
22 MR. CASS: Is that anything that you could elaborate
23 on if you refreshed your memory from the decisions you've
24 seen, or is that, again, something that's pushing you a
25 little too far into the CRTC area?
26 MR. STAUFT: I can review the decisions that I have,
27 which is a limited set, to be honest, and I can respond to
28 that. But I don't propose to do a whole bunch of research
1 on CRTC cases.
2 MR. CASS: No, I'm not proposing you to do that.
3 MR. STAUFT: If you need that, I'm sure your experts
4 can provide it themselves.
5 MR. CASS: Fair enough. No, I'm just trying to
6 understand your information.
7 MR. STAUFT: Sure.
8 MR. CASS: So in the context of the answer you've just
9 given, do you mind just providing me with the information
10 as to what those decisions are that you’re referring to
11 that you say you have and you would look at without doing
12 any further research?
13 MR. STAUFT: Sure.
14 MS. SEBALJ: That's Stauft number 4.
15 CONSUMERS UNDERTAKING NO. 4: TO PROVIDE THE
16 INFORMATION AS TO WHAT THOSE DECISIONS ARE THAT YOU’RE
17 REFERRING TO THAT YOU SAY YOU HAVE AND YOU WOULD LOOK
18 AT WITHOUT DOING ANY FURTHER RESEARCH
19 MR. CASS: I just had one clean-up question as it
20 were, if I may. During cross-examination by Mr. Leslie,
21 you had some exchange about the FERC policy guideline. Do
22 you recall the particular document I'm referring to? I can
23 take you to where it's referred to in your evidence, if you
25 MR. STAUFT: Yeah, I think we're okay.
26 MR. CASS: My question was simply if this hasn't
27 already been asked, can you please provide a complete copy
28 of the policy guideline?
1 MR. STAUFT: Sure. The FERC policy statement on
2 alternative -- yeah. I have it. It's footnoted in my
3 evidence, and I will provide a copy.
4 MR. CASS: Yes, if I recall, it was footnote 2 where
5 it's first referred to.
6 MR. STAUFT: I think that's right.
7 MR. CASS: Thank you.
8 MS. SEBALJ: That's Stauft number 5.
9 CONSUMERS UNDERTAKING NO. 5: TO PROVIDE COMPLETE COPY
10 OF FERC POLICY STATEMENT
11 MR. CASS: Sorry, I'll just be a moment. I'm going to
12 turn up a reference in the evidence.
13 I'm moving to I believe it's page 38 of your evidence,
14 if you want to turn it up at the same time as me,
15 Mr. Stauft.
16 MR. STAUFT: Okay.
17 MR. CASS: I don't think there is anything I
18 particularly need to read from here, but if you look at
19 line 13, you make a statement about a lack of:
20 "A significant amount of uncontracted pipeline
21 capacity into Ontario."
22 My question to you is whether, in your mind, there is
23 any reason why an expansion of pipeline capacity would not
24 be considered as a viable alternative.
25 MR. STAUFT: A viable alternative to? In Ontario
27 MR. CASS: Yes, well, I suppose it's an alternative in
28 two senses. It's an alternative to your view about
1 pipeline capacity constraints, and in and of itself I
2 believe it's an alternative to storage. But, really, I'm
3 looking for your comment on this, again. I'm trying to be
4 informational, so I'm looking for you to enlighten me as to
5 whether, in your mind, there's any reason why pipeline
6 capacity expansion shouldn't be viewed as a viable
8 MR. STAUFT: It will always come down to the
9 economics, obviously. You know, the market will drive
10 those kinds of decisions based on the economics.
11 Maybe there are two situations we're talking about
12 here. One kind of alternative is just to hold long-haul
13 pipeline capacity, basically for peaking purposes, to meet
14 peak requirements during the winter. And, as I think I
15 indicated to Board Staff, that is an alternative.
16 The difficulty with it is that it is a very expensive
17 alternative if what you're talking about is meeting solely
18 winter peak requirements that vary around a lot, right?
19 Your average load factor will be very low, and your unit
20 costs will be very high.
21 So, yes, I mean, in principle it's an alternative.
22 And there are some pipeline systems in North America where
23 there just isn't any storage, and that's what people have
24 to do. The Northern Natural system in the Midwest is sort
25 of like that.
26 So, again, if you're talking about TransCanada
27 capacity, on a unit basis if you're holding large amounts
28 of it at a low load factor, it's very expensive. And the
1 same with the Alliance/Vector path, or even
2 TransCanada/Great Lakes if you break it down that way.
3 Those are all going to be just dreadfully expensive if
4 you try to hold it for peaking purposes.
5 The other kind of model that we'd been talking about
6 or that I talk about in my testimony is, well, all right,
7 maybe we can hold storage in an area X, Ontario, a little
8 bit closer than Alberta or a little closer than the Gulf
9 Coast, and that's probably a more economic alternative.
10 Basically the closer the storage facility is to where
11 you actually want to consume the gas, and therefore the
12 shorter the pipeline segment on which you're paying,
13 basically, for year-around capacity that you're only going
14 use for a quarter of the time, the cheaper it's going to
16 MR. CASS: But, I'm sorry, Mr. Stauft, what I'm trying
17 to come to grips with is, to the extent that you have any
18 concerns about pipeline capacity into Ontario --
19 MR. STAUFT: Right.
20 MR. CASS: -- to connect that storage you're referring
21 to, why is expansion of the pipeline capacity not a viable
23 MR. STAUFT: Well, if the expansion is, say, on the
24 Vector system -- say somebody wanted to use Chicago or
25 Michigan storage and use the Vector system, again, you
26 could, sure. I mean, somebody could do that. They could
27 expand. They could try, at least, to persuade Vector to
28 install facilities.
1 But, again, if the sole -- if the facilities were
2 being built, the capacity was being built for the purpose
3 of being used just to move storage withdrawal of gas during
4 the wintertime into Ontario, you will find that the unit
5 cost of that is very high.
6 MR. CASS: Are you aware of whether there are any
7 proposals to expand any of this pipeline capacity that
8 interconnects into Ontario?
9 MR. STAUFT: My understanding is that Vector has a
10 planned expansion. I have heard about that from other
11 people and I saw it on their website. And my understanding
12 is that it is -- their Web site, at any rate, claimed that
13 it is fully contracted.
14 But, I mean, again, my understanding of that is that
15 we are talking about annual requirements there. Right?
16 I would be very surprised if whoever is contracting for
17 that capacity has it in mind that they will let it sit
18 there empty during the summer and use it at a 50 percent
19 load factor in the winter. That just doesn't seem like the
20 kind of thing, at least any unrepresented party -- no
21 unregulated party would do that anyway.
22 MR. CASS: Of course. I don't think that's what's
23 being proposed, Mr. Stauft.
24 MR. STAUFT: Right.
25 MR. CASS: We can leave that for now. Thank you.
26 Now, at page 3 of your evidence, you indicate that as
27 to whether, as against Ontario consumers, the utilities
28 have market power in relation to storage services, you've
1 reached a particular conclusion.
2 MR. STAUFT: Mm-hm.
3 MR. CASS: And so I just wanted to focus for a minute
4 on your analysis that is as against Ontario consumers.
5 Do I take it from this that the focus of your analysis
6 is at the burner tip as opposed to at a liquid trading
7 point, like Dawn?
8 MR. STAUFT: No, I think at the general level the
9 analysis relates to Dawn, basically, to the inlet to the
10 utility systems.
11 There's a whole section of my evidence that talks
12 about the difficulties that arise with, you know, market-
13 priced storage embedded in bundled services. But I don't
14 think that's what you're getting at here. But the basic
15 focus is at the inlet to utility systems.
16 MR. CASS: All right. But, well, perhaps I should ask
17 it this way, then. When you refer to Ontario consumers,
18 are you referring to end use consumers of the gas or are
19 you referring to market participants who would be trading
20 at a hub like Dawn?
21 MR. STAUFT: I'm talking about ultimate consumers,
22 recognizing, of course, that there may be all kinds of, you
23 know, intermediaries, and any number of trades of gas
24 between production in Alberta and transportation through
25 the grid, and, you know, commercial activity happening at
27 But, you know, the analysis assumes, basically that
28 the costs of all of that ultimately get borne by end-use
1 Consumers. Whatever the chain of title is through the
2 transportation system, at the end of the day it's by and
3 large end-use consumer that bear the costs of this stuff.
4 So that's sort of the focus. I'm not making any
5 particular assumptions about how they actually transact for
6 that. I'm just kind of making the assumption that the
7 costs flow through to them ultimately.
8 MR. CASS: Yes, well, I think you've clarified that
9 for me. My assumption was that you were referring to end-
10 use consumers.
11 MR. STAUFT: Yes.
12 MR. CASS: And in fact, you've confirmed that.
13 MR. STAUFT: Yes.
14 MR. CASS: Right. Now, have you read the Enbridge Gas
15 Distribution evidence in respect of this portion of the
16 proceeding dealing with forbearance?
17 MR. STAUFT: Unfortunately, I have to confess that I
18 have not. I, as you can see, have a binder with all kinds
19 of stuff but the one that I don't have in here is
20 Enbridge's. I didn't get it until just a couple of days
21 ago. So I have it on my computer, but I'm embarrassed to
22 say that I haven't read it.
23 MR. CASS: I see. Do you have any awareness of how
24 Enbridge Gas Distribution's proposal works opposite bundled
25 infranchise customers?
26 MR. STAUFT: Not really, no. I have to say I just
27 sort of skimmed there -- I can't even say I did that. Not
28 really, no. If you would like to describe it for me and
1 ask me questions about it, I'd be okay to do that. I mean,
2 subject to checking it, but I can't be --
3 MR. THOMPSON: Well, no.
4 MR. STAUFT: You don't want to do that.
5 MR. THOMPSON: No, no. If you want us to take an
6 undertaking and consider it, and get back to you with any
7 specific questions, we'd be happy to do that. But he
8 hasn't had a chance to review it, really.
9 MR. CASS: Yeah. Well, it would be better that we
10 wait and ask the questions after you've read the evidence,
11 Mr. Stauft.
12 MR. STAUFT: That's probably a good plan. Yes.
13 MR. THOMPSON: I can't understand why you would want
14 to do that.
15 MR. CASS: Well, unfortunately we had made the
16 assumption that you would have --
17 MR. STAUFT: Sorry, normally I would have. I read
18 everybody else's. Just a transportation problem with the
20 MR. CASS: All right. I think that finishes it for
21 us, then. Thank you, Mr. Stauft.
22 MR. STAUFT: Okay.
23 MS. SEBALJ: Thank you, Mr. Cass.
24 Mr. Brown, did you have any questions?
25 MR. BROWN: Yes.
26 CROSS-EXAMINATION BY MR. BROWN:
27 MR. BROWN: Mr. Stauft, my name is David Brown. I act
28 for a few developers and operators of gas-fired generators
1 here in Ontario.
2 I really only have questions in one area, and perhaps
3 the best way to come at them would be to ask you to turn to
4 appendix 2 of your evidence, where you go into some detail
5 about the four scenarios.
6 MR. STAUFT: Okay. I have that.
7 MR. BROWN: Yeah. And if you go down with me to the
8 second bullet point, you outline your assumptions with
9 respect to the amount of storage that would be held by the
10 notional customer in each one of these scenarios. And you
11 talk about storage space consistent with withdrawal
12 capacity equal to 1.2 percent of reserve space.
13 I don't know whether you've been at this proceeding
14 throughout the week, but one of the things that my clients
15 are interested in is the availability of storage
16 deliverability at a rate higher than 1.2 percent, up to 10
18 And my question is, in the process of putting these
19 scenarios together and conducting your inquiries of
20 available storage services in areas neighbouring Ontario,
21 were you able to form any view as to whether storage
22 providers in the immediate vicinity of Ontario offer
23 storage deliverability services at a rate of higher than
24 1.2 percent?
25 MR. STAUFT: I did not investigate that question, no.
26 I didn't go deeply enough into the tariffs of these -- of
27 the various possible companies to ascertain that.
28 I think it's variable. I mean, Mr. Reed was
1 indicating there's different services and there's a fair
2 amount of flexibility in some types of facilities to
3 accommodate the production of different types of services
4 out of any given set of facilities.
5 But I have not investigated what's out there, no.
6 MR. BROWN: Well, I'll ask you one other question,
7 then, just in terms of what your inquiries were, and what
8 they may have turned up.
9 In the course of your inquiries for preparing this
10 study, did you ascertain whether any of the storage
11 facilities in Ontario offered storage deliverability
12 services at a rate of greater than 1.2 percent?
13 MR. STAUFT: Again, I'm sorry, I didn't investigate
15 MR. BROWN: Well, those are my questions. Thank you
16 very much.
17 MR. STAUFT: Okay.
18 MS. SEBALJ: Thank you, Mr. Brown.
19 Mr. Moran?
20 MR. MORAN: No questions.
21 MS. SEBALJ: Mr. Aiken?
22 MR. AIKEN: No questions.
23 MS. SEBALJ: As I go down my list, is there anyone
24 else with questions -- oh. Are you not represented by this
26 MR. QUINN: We're a sponsoring party.
27 MR. THOMPSON: Dwayne, no.
28 MS. CAMPBELL: If only they had rules like that, but
2 MS. CAMPBELL: Mr. Quinn, I think maybe you should
3 talk to Mr. Thompson.
4 MS. SEBALJ: Thank you. And there's no one else in
5 the room, OPG, Ontario Energy Services, no other questions?
7 CROSS-EXAMINATION BY MS. SEBALJ:
8 MS. SEBALJ: We just have a couple of questions for
9 you, Mr. Stauft, and then you will be glad to know that you
10 can get out of here.
11 First question. Is there a scarcity of storage in
12 Ontario, in your opinion?
13 MR. STAUFT: There appears to be. Yes. I mean, the
14 NF -- the Natural Gas Forum, NGF report seems to suggest
15 that, and, you know, the observed market prices seem to
16 suggest that.
17 MS. SEBALJ: And is it possible that -- I maybe sort
18 of treading over ground that Mr. Leslie covered and I
19 certainly don't want to do that, but is it possible, then,
20 that the premium that you discuss in your evidence, that
21 exceeds the 10 percent threshold that you discuss, is a
22 scarcity premium rather than a market power premium?
23 MR. STAUFT: Well, I'm trying to think of how to
24 respond to that.
25 In a sense it is a scarcity premium, right. And a
26 market-power premium is kind of a scarcity premium as well.
27 To me, the question is, given that there's a scarcity,
28 right, so that the price is high relative to what you
1 expect would be seen under competitive conditions that kind
2 of reflects cost with a market return and all that stuff.
3 MS. SEBALJ: Yes.
4 MR. STAUFT: In a competitive market, what that would
5 signal is -- or what that would elicit is market entry, by
6 new people. They would see that they'd say holy smokes,
7 look at that, Union's earning an 80 percent return on their
8 storage assets. We should get into that market. And they
9 would build whatever capacity they needed to to do that.
10 The problem -- and that works fine for hot dog
11 stands or video stores or maybe things like cement plants
12 and stuff like that.
13 But with storage it may or may not be possible to do
14 that. I mean, it doesn't appear as if it is, for whatever
15 reason. There has not been large amounts of, significant
16 amounts of, new development over the last considerable
17 period, as I understand it.
18 You know, other witnesses have offered opinions on
19 how much potential there is. There's a wide range of that.
20 But there seems to be some problem, whether it's
21 availability of suitable reservoirs or regulatory issues
22 or, you know, market power issues around control of
23 transportation infrastructure, or just too much -- there's
24 just too much risk involved. It's hard to say. I don't
25 know what it is.
26 But, you know, yeah, there does seem to be a scarcity,
27 so there seems to be some kind of barrier to entry. And
28 the problem is it may be permanent, right. So you would
1 never -- you never will get this competitive response that
2 you would get in the video store business. And if there is
3 a shortage now, it will just persist. And if you allow the
4 utilities to charge market rates, they'll just continue to
5 collect that rent forever.
6 MS. SEBALJ: And so you're not convinced by the Market
7 Hub Partners and the Enbridge Inc. and the Tribute
8 Resources that that is evidence of attempted market entry?
9 MR. STAUFT: Well, it's attempted market entry, you
10 know, over a number of years, for the most part
11 unsuccessful, for very small, relatively small, volumes
12 relative to the infrastructure that's there now. And
13 there's 250 Bcf now, as I understand it. And we're
14 talking, you know, 1 Bcf here, 5 there, 6 there. Oh, in
15 ten years, we might have another 20 kind of thing.
16 That may be completely insufficient to -- it's hard to
17 tell. I mean, you can't really tell if there's a scarcity
18 or -- and the scarcity will depend on the price, and all --
19 you know, it's a complicated thing. It may or may not be
20 very big but there doesn't seem to be a lot of rapid or
21 effective market entry.
22 On a scale that would really pose a competitive threat
23 to the utilities.
24 MS. SEBALJ: And what is it that you're suggesting? I
25 guess I'm struggling with, one of the things that we could
26 have to facilitate market entry are market-based rates, and
27 I'm interested in the statement that you made just a moment
28 ago to say that it may be permanent.
1 What do you think we can do to ensure that it's not
2 permanent, to try and effect better market entry?
3 MR. STAUFT: Well, it may be permanent just because of
4 the geology, right? Or the costs involved in finding and
5 developing small pools.
6 MS. SEBALJ: But I guess if we assume that we've had
7 various bits of evidence on this, but I think it's at least
8 50 Bcf of potential storage?
9 MR. STAUFT: Right. That was one of the estimates,
11 MS. SEBALJ: Right. So if we assume for the purposes
12 of this question that there is storage to be developed?
13 MR. STAUFT: If you -- well, I mean, I haven't
14 quarrelled with the proposition that new developers of new
15 storage projects, particularly independent, non-affiliated
16 companies would be allowed to charge market-based rates.
17 I don't know what else you can do. I mean,
18 you know, unless the Board or the Province decide not to
19 exert any jurisdiction at all. If the market signals are
20 there and the economics are there, you expect these folks
21 to go ahead and do it.
22 MS. SEBALJ: Thank you.
23 I'm going to ask you a question somewhat along the
24 lines of the question I asked Mr. Reed earlier today. I
25 don't know if you were here, but in the FERC's recent
26 notice of proposed rule making related to market-based
28 MR. STAUFT: Mm-hm.
1 MS. SEBALJ: They've added a proposal, an addition of
2 what I'll call a second prong, to allow market-based rates
3 where there is a finding of market power but it's in the
4 public interest to allow market-based rates. And I'm
6 Do you agree with that sort of proposal?
7 MR. STAUFT: Okay. My understanding of what's
8 happened there is that Congress became, for whatever
9 reason, alarmed at the lack of development of incremental
10 storage, and passed an amendment to the Natural Gas Act
11 that in substance directed the Commission to allow
12 market-based rates for new storage developments even if the
13 proponents couldn't demonstrate a lack of market power.
14 Okay. So that's a statute. That is a directive,
15 something that the Commission has to do.
16 MS. SEBALJ: Yes, that's my understanding as well.
17 MR. STAUFT: Right. And so the -- that we've talked
18 about has two prongs on it. One is the Commission
19 coming up with regulations to explain how it's going to
20 meet that statutory obligation, and the other being then
21 saying, and by the way, while we're at it, we wanted to
22 look at our product market definition as well.
23 So the Commission didn't have any choice in that.
24 As a matter of policy, my view is that that would be a
25 bad idea, to basically mandate market-based rates in
26 contexts where there may be a significant risk that the
27 proponents are going to be able to exercise market power.
28 Now, having said that, as a practical matter it may be
1 that what you'll really see is, this will mostly apply to
2 new and independently owned storage projects in areas where
3 there's already a bunch of storage infrastructure. So that
4 as a practical matter, probably most of them would meet the
5 test that the Commission already applies, and actually be
6 able to demonstrate that if they had to, they could
7 demonstrate that they lacked market power, in any event.
8 So at a practical level it may not make any
10 As a matter of principle, I don't think that's a very
11 good idea, but that's just sort of a personal opinion, and,
12 as I say, at a practical level it may make very little
14 MS. SEBALJ: Thank you. Those are my questions, which
15 I think ends this portion. Thank you very much for your
16 assistance. Thank you, Mr. Thompson.
17 MR. THOMPSON: Thank you.
18 MS. SEBALJ: I believe that Enbridge is in a position
19 to begin. Is that correct?
20 MR. CASS: Be right with you. I couldn't hear
21 completely what you said.
22 MS. SEBALJ: Sorry, are you in a position to maybe get
23 started for 45 minutes or so today? That would be great.
24 MS. SEBALJ: Let's just take five minutes to do the
26 Mr. Cass, whenever you're ready.
27 ENBRIDGE INC. – PANEL 2:
28 DAVID McKEOWN;
1 JIM GRANT;
2 RICK SMEAD;
3 MR. CASS: Thank you. I will start by introducing the
4 panel to everyone, starting with the person furthest away
5 from me; that's Mr. David McKeown of View Communications
6 Inc. He's responsible for the report filed by the company
7 on regulatory forbearance in Canadian telecommunications
9 Next to him is Jim Grant, who's already appeared at
10 previous Technical Conferences in this proceeding. In this
11 context he's responsible for the company's evidence on
12 storage regulation at Exhibit E, tab 1, schedule 1. The
13 third witness is Mr. Mr. Rick Smead, of Navigant
14 Consulting. Mr. Smead is responsible for Navigant's report
15 on the competitiveness of the natural gas storage market.
16 Now, because we've not yet filed curricula vitae for
17 Mr. McKeown or Mr. Smead, I'm going to ask them both
18 just very briefly to give a synopsis of their background
19 for the benefit of the parties. Mr. Smead?
20 MR. SMEAD: Sure. I am a director with Navigant
21 Consulting in our upstream and mid-stream natural gas
22 practice. Up until 2004, just two years ago, I'd spent
23 over 30 years in the natural gas business, the last 15 of
24 which were in management positions with multiple pipelines.
25 I was an officer of ANR Pipeline, ANR Storage,
26 Tennessee Gas Pipeline, Southern Natural Gas, El Paso
27 Natural Gas, Colorado Interstate Gas Company, Wyoming
28 Interstate Company. Probably some more, I forget. The way
1 companies trade around, there are a lot of them.
2 I was also generally responsible for regulatory areas
3 and the interaction of regulatory areas with commercial
4 operations in vice president and senior vice president
5 roles in the various companies.
6 I was also very active in the Interstate Natural Gas
7 Association of America, the pipeline trade association, and
8 the relevance of that here is that I was chairman of
9 one of the task forces that led to the commission -- the
10 FERC's statement of policy on alternative rate designs that
11 has been at issue in a number of witnesses' evidence.
12 MR. CASS: Thank you, Mr. Smead. Mr. McKeown?
13 MR. McKEOWN: I have 27 years' experience in
14 regulatory matters, policy development, and intercarrier
15 negotiations in the telecommunications industry in Canada.
16 I am the principal of Yew Communications Inc., which
17 provides telecommunications consulting services in
18 areas dealing with business planning, competitive entry,
19 intercarrier relations, regulation, government policy.
20 Clients include cable companies, competitive local exchange
21 carriers, long distance companies and wireless companies.
22 Prior to View Communications in 1998, I was vice-president
23 regulatory at Rogers Cable, and prior to that, at Unitel, I
24 held various regulatory positions.
25 I commenced my career at the Ontario Telephone Service
26 Commission, which was a provincial regulatory agency
27 responsible for the regulation of the independent telephone
28 companies in Canada.
1 I participated in CRTC -- many CRTC proceeding,
2 including those involving competition-related issues and
3 forbearance-related issues.
4 MR. CASS: Thank you, Mr. McKeown. The panel has no
5 further introductory statements to make.
6 MS. SEBALJ: Right. Thank you, Mr. Cass.
7 MS. CAMPBELL: Mr. Cass, do you intend on filing the
9 MR. CASS: Yes.
10 CROSS-EXAMINATION BY MS. CAMPBELL:
11 MS. CAMPBELL: Good. Thank you.
12 The first question that I have, I guess, Mr. Grant,
13 you'll be dealing with it. I'm going to be looking at your
14 Exhibit E, tab 1, schedule 1. It's pages 9 and 10, and
15 it's paragraph 28. And it generally deals with
16 transactional services.
17 MR. GRANT: Yes, I have that.
18 MS. CAMPBELL: Yeah. And I think the essence of your
19 position is found at the top of page 10 which says:
20 "The Board should forbear from regulating
21 transactional storage services effective in the
22 2007 test year."
23 Excuse me. It's choking me up.
24 I have a handful -- you see, that's an energy joke.
25 It's late in the day.
26 The transactional storage services, I was wondering,
27 Mr. Grant, if you could confirm that the different
28 transactional storage services that EGD sells on the market
1 are longer-term, day-ahead and intra-day?
2 MR. GRANT: These are essentially short-term releases
3 of our capabilities of our storage system insofar as it
4 relates to storage.
5 And those releases are made into the market at
6 market-based prices today. They could be on a daily or
7 monthly basis, or perhaps somewhat longer-term.
8 However, they're only released into the market once
9 all utility customers' needs are satisfied. They generally
10 involve off-peak types of services, parkings and loans and
11 that sort of thing.
12 MS. CAMPBELL: Can you give me a range of the terms
13 and storage volumes for each of those service that you just
15 MR. GRANT: I'm sorry? A range of?
16 MS. CAMPBELL: A range of terms and storage volumes?
17 MR. GRANT: I could undertake give you that. That's
18 not something that I have with me, but I can undertake to
19 do that, if you wish. That evidence is produced pretty
20 much every year in our main rates cases so I would draw on
21 that evidentiary base.
22 MS. CAMPBELL: Certainly. So I'll accept that as an
24 I was also wondering if you could rate the services in
25 terms of sales volumes -- excuse me, choking up again --
26 sales volume from the highest to the lowest? Thank you
27 very much.
28 MS. SEBALJ: That's EGD Undertaking No. 46.
1 EGD UNDERTAKING NO. 46: TO PROVIDE RANGE OF THE TERMS
2 AND STORAGE VOLUMES FOR OFF-PEAK TYPE OF SERVICES,
3 PARKINGS AND LOANS
4 MS. CAMPBELL: And I think the next question -- sorry.
5 I'll let you finish.
6 MR. GRANT: Yes.
7 MS. SEBALJ: Are you done?
8 MS. CAMPBELL: The next question is probably also for
9 you, Mr. Grant. It's on page 14. It's paragraph 43.
10 MR. GRANT: Yes.
11 MS. CAMPBELL: And the second sentence is what I would
12 like to discuss with you. And the sentence is:
13 "In 2006, Ontario faces a situation where there
14 will be no significant new storage developed
15 unless economic deregulation occurs for all newly
16 developed gas storage, regardless of the
17 corporate entity that develops it."
18 And then you go on to make a statement about prudent
19 companies, et cetera.
20 I guess my first question is what rate of return would
21 be required for EGD to develop new storage?
22 MR. GRANT: Well, I have not done a calculation. And
23 to do such a calculation, one would have to do a thorough
24 analysis of the risks and the opportunities associated with
25 storage expansion.
26 As a working assumption for this proceeding, evidence
27 has been filed earlier -- or, I'm sorry, evidence has been
28 led earlier that talks about a minimum of a 20 percent
1 return, and that's not a bad working assumption. Minimum,
3 MS. CAMPBELL: Thank you. Is EGD planning to buy
4 storage space from its affiliated storage provider?
5 MR. GRANT: No.
6 MS. CAMPBELL: Can you tell me what criteria EGD will
7 use in deciding whether to develop its own storage space?
8 Will that be strictly the rate of return or other factors?
9 MR. GRANT: That's only one of the factors that one
10 would consider. Obviously, another one would be the
11 regulatory environment, and that's why we're here in this
13 So that's a key element that one would have to
15 But beyond that, and there was some discussion
16 earlier, there are also many other factors that you have to
17 consider in that business. And I list some of them in my
18 evidence. But they relate to geology, and the geophysical
19 characteristics of whatever it is that you have found, not
20 everything that it is found, every pinnacle reef, is
21 appropriate to be developed into a storage reef. So there
22 is lots of analysis that would have to be done on that.
23 And then there are other factors to consider, not the
24 least of which is landowner issues, location, those sorts
25 of things.
26 MS. CAMPBELL: And my final question, probably, for
27 you, Mr. Grant, is, I'm wondering if you could describe how
28 EGD -- how storage that EGD has contracted for in New York
1 at Stagecoach is utilized and what market it serves?
2 MR. GRANT: Yes. My understanding of that is, and I'll
3 give you a high-level answer here. It's done
4 through Mr. Charleson's group. But my understanding is
5 that that proposal is brought forward in our 2005 rates
6 case, I believe. And it essentially involves a service
7 that is akin to a peaking service off the pipeline. So
8 it's like a 10-day storage service. It involves an
9 intermediary, Constellation Energy. And so what we,
10 essentially, do is strike a deal there where there's gas
11 that's injected into that pool, in New York, and in return,
12 through the deal with Constellation, and essentially a
13 secondary market deal here, we get 10 days of service in
14 the wintertime delivered into the CDA.
15 So it's a very nice deal. It makes economic sense.
16 And we have been able to put that in place.
17 That, I believe that the expiry on that deal is
18 September of this year.
19 MS. CAMPBELL: Thank you. Now I'm going to turn to
20 the Navigant report. Ask one of the first things I want to
21 ask you Mr. Smead, is that it's indicated in the report
22 that you had reviewed the EEA study which was dated October
23 28th, 2004, and you're undoubtedly aware that they have
24 filed an updated and expanded study?
25 MR. SMEAD: Yes.
26 MS. CAMPBELL: I believe it's dated April 28th, 2006,
27 and was filed on May 1st. Have you reviewed that?
28 MR. SMEAD: Yes. Yes, I have. And all of us involved
1 in this have, of course, because we were filing
2 simultaneously in this case, we had to use the older
4 MS. CAMPBELL: Yes.
5 MR. SMEAD: All of our -- well, actually, go ahead and
6 ask your question. Yes, I have reviewed it.
7 MS. CAMPBELL: Oh, you're anticipating me, aren't you?
8 In reviewing that report, have any of your conclusions
10 MR. SMEAD: No.
11 MS. CAMPBELL: And do you support the difference in
12 the new report in which they hive off the infranchise? Are
13 you aware of that? Do you support that?
14 MR. SMEAD: Yes, yes. Yes. The fundamental
15 conclusions and analysis that underlay the conclusion that
16 that the market was generally competitive, we endorse and
17 affirm, based upon our own analysis. But, frankly, are
18 much more comfortable with the new formulation from the
19 later –- or from the current testimony.
20 MS. CAMPBELL: Okay. And why are you more
22 MR. SMEAD: Because it keeps the utility rate issue
23 less central to the debate about the generally competitive
24 market as Dawn. And that's really where we think the focus
25 ought to be.
26 MS. CAMPBELL: Thank you.
27 Sorry. I had to take this out of my binder and I
28 mixed some pages up. I apologize for the delay.
1 MS. CAMPBELL: Ah. I have it. If I could ask you to
2 go to page 5 of your report, sir.
3 MR. SMEAD: I have it.
4 MS. CAMPBELL: There's a discussion about pipelines.
5 MR. SMEAD: Yes.
6 MS. CAMPBELL: And it's immediately above
7 "Determination of the Relevant Market" and your statement
9 "If the pipelines regularly operate at capacity
10 and cannot reliably” –- sorry.
11 “Physical connections may not be useful to
12 Ontario users to access gas storage facilities if
13 the pipelines regularly operate at capacity and
14 can't reliably provide transportation for Ontario
15 gas to and from the storage facilities located
16 outside the province."
17 And then you talked about the EEA study analyzing the
18 question, and concluding that:
19 “While some of the pipelines do often operate at
20 or near full capacity, gas can still be
21 transmitted between storage fields located
22 outside Ontario and Dawn through alternative
23 pipeline routes."
24 And then the statement below that:
25 “Navigant Consulting has not made its own study
26 of these conditions on the pipelines but does not
27 have information to indicate that the EEA study
28 conclusions are incorrect."
1 Do you know if EGD, your client, conducted an
2 independent study regarding capacity on the pipelines?
3 MR. SMEAD: No, and actually, to clarify our statement
4 there, in essence there are enough different ways that gas
5 can move around in the market that are -- the success of
6 which is indicated by what happens with prices, that we
7 were satisfied that the EEA analysis had, in fact,
8 appropriately reflected the way gas would move.
9 I'm not aware of any independent study performed by
10 EGD along those lines.
11 MS. CAMPBELL: All right. Now, when you were listing
12 your experience for Mr. Cass.
13 MR. SMEAD: Yes.
14 MS. CAMPBELL: It sounded as if you had a significant
15 knowledge of pipelines in the area.
16 MR. SMEAD: Yes.
17 MS. CAMPBELL: Based upon your knowledge, what do you
18 know about the capacity?
19 MR. SMEAD: The straightforward haul firm capacities
20 may or may not be fully contracted. I think Ms. McConihe's
21 study that she got from Ben Schlesinger Associates
22 indicating that the capacity was fully contracted, I don't
23 have any reason to believe that that is not true.
24 The general industry model is that capacity is not
25 built unless the placed under firm contracts.
26 The way gas actually moves, though, is through a
27 variety of uses of that capacity, so that whether it's
28 through capacity released through buy/sell transactions,
1 through displacement transactions, what the FERC did when
2 they created unbundled pipeline transportation capacity in
3 1993 was simply take the control of the capacity out of the
4 hands of the pipelines and put it in the hands of the
6 But beyond that, the shippers who hold those firm
7 contracts then become the providers of service to the
9 Whether the totality of all of the vehicles for moving
10 gas, displacement, released capacity, interruptible
11 capacity, purchases and sales across capacity held by
12 somebody else, whether or not all those are working to
13 alleviate capacity constraints between two points can
14 really only be demonstrated based upon whether the price
15 differentials are experiencing a so-called blowout.
16 If capacity gets constrained, there's a lot of
17 experience in the industry now with -- well, one of the
18 worst being California, which unfortunately I got to
19 experience at El Paso. New England in January of 2004.
20 The Gulf coast from Texas to Louisiana after the hurricanes
21 this last fall. The Rocky Mountains in the late ‘90s.
22 Situations where capacity constraints on pipelines became
23 real so that, no matter how many creative commercial
24 transactions happened, there was just no way to get gas
25 from point A to point B.
26 In all of those cases, the price differentials between
27 the two ends of the pipelines blew out.
28 In California, the prices at the California border
1 went up to about $60. In New England, the prices went up
2 to $75 momentarily. In the producing regions in the Gulf
3 and the Rockies, producer prices went down. The market
4 price didn't necessarily go up, but the differential across
5 the pipeline went way up.
6 The history at Dawn, and my experience with ANR, with
7 Tennessee, with dealing with that part of the country, has
8 been that -- I know at ANR we considered Dawn to be
9 probably one of the two or three most competitive points in
10 North America, completely fluid the ANR system, with Union,
11 flowing back and forth with ANR, with ANR storage, with it
12 being very competitive into our own markets, and our
13 wanting to be very competitive into its markets.
14 And so we watched, carefully watched, the performance
15 of price basis differentials across the border over time,
16 how they behaved in the winter, and so forth, to see
17 whether enough value was being created and what it took to
18 get gas from Michigan to Ontario, to justify major pipeline
19 expansions. And basically, what we saw was the same price
20 differential experience that is indicated in the EA study,
21 that it was pretty stable and never got into the multi-
22 dollar range. It was just a fluctuating matter of dimes.
23 And so what that indicates is that the creativity in
24 the industry, the robust, very flexible response of the
25 industry to commercially moving gas from where it is to
26 where it needs to be, is getting around any potential
27 bottlenecks regardless of who holds the capacity.
28 And that certainly appears to be the case now, and has
1 been pretty continuously.
2 MR. SMITH: Sound to me like you miss not being the
3 one to do the big report, Mr. Smead?
4 MR. SMEAD: Excuse me? I'm sorry...
5 MS. CAMPBELL: What you were talking about was
6 historical. Let's talk about today. How would you move
7 the gas from the US to Ontario today?
8 MR. SMEAD: Ah. Today, it really hasn't changed.
9 The market -- well, for example, the storage on the various
10 US pipelines that own major storage operations that have
11 been identified -- I think there are about five of them,
12 ANR, ANR Columbia, or Nisource, really, Dominion, National
13 Fuel, Tennessee -- their storage, their firm storage is
14 held about 25 percent by marketers and producers, meaning
15 that these are market participants who find ways to move
16 gas around.
17 Sometimes they do it with buy/sell transactions.
18 Sometimes they'll do it with drop-off transactions where
19 gas coming down from Canada will actually get dropped off
20 somewhere else, and the requirement that was supposed
21 to be served in the United States gets served out of US
23 So I can't really tell which things would necessarily
24 be used now. But unless basis started moving a lot, all I
25 can say is that whatever they're -- that the totality of
26 what they're doing is a success, and that the market will
27 continue to do that.
28 MS. CAMPBELL: My real question, I guess, was how
1 you're going to get out, and who is going to give you
2 capacity. So are you talking about using a marketer right
4 MR. SMEAD: Marketers are one of the vehicles for
5 doing that. Anyone who holds the capacity, who
6 contractually holds capacity, can participate in the
7 market. They can sell their capacity as released capacity.
8 They can sell gas. It's just a very dynamic market, with
9 all of the people who have contractual rights playing a
10 role in it.
11 So it doesn't necessarily require the use of a
12 marketer. Generally those entities who have gas to sell,
13 be they producers or marketers, tend to be the most
14 aggressive and creative in finding ways around constraints.
15 So they are a major engine in how the market works.
16 MS. CAMPBELL: Thank you the next thing I'd like to
17 ask you about, moving on the your paper, the determination
18 of the relevant geographical marker.
19 MR. SMEAD: Yes.
20 MS. CAMPBELL: I'm corrected again. You didn't
21 perform -– you, being Navigant -- didn't perform any
22 quantitative or qualitative analysis of the geographic
23 market, you relied on what EEA did?
24 MR. SMEAD: That's correct. We, as a large consulting
25 firm, we would have loved to have done a brand new ab
26 initio analysis but --
27 MS. CAMPBELL: You know what? I got that impression.
28 MR. SMEAD: We would have loved that, but Jim didn't
1 have enough money.
2 MS. CAMPBELL: That's the reason they need
3 market-based ratings, so they can afford you.
4 MR. SMEAD: That's right. Now, the fact is that,
5 frankly, we reviewed the old EEA study, and are also very
6 familiar with the -- EEA's work. And they've been a --
7 [Technical difficulties]
8 MS. CAMPBELL: Do you know, that's a different kind of
9 God. Remember yesterday there was thunder yesterday?
10 Today --
11 MR. SMEAD: And they didn't even place me under oath.
12 This is tough.
13 MS. CAMPBELL: Don't do that. Mr. Cass is sweating
14 when you say that.
15 MR. SMEAD: No, this, honestly, we reviewed the EEA
16 study, and really couldn't say that we could add much it
17 to. It comes down to, obvious, in comparing the -- for
18 instance, Ms. McConihe's work, with EEA's work, it all
19 comes down to whether you believe the markets can
20 communicate with each over. And if they can, then the
21 relevant geographic market is larger, and we believe we
22 can, and we believe that the price basis differentials
23 demonstrate that they do.
24 MS. CAMPBELL: Carrying on from that, and I guess the
25 next question becomes self-evident.
26 You make reference in your report to the HHI
28 MR. SMEAD: Yes.
1 MS. CAMPBELL: And again, that was something that's
2 done by EEA, and you rely upon it?
3 MR. SMEAD: Yeah. We reviewed it and, to some extent,
4 duplicated it but endorsed it.
5 MS. CAMPBELL: So your calculator came out to the same
7 MR. SMEAD: Our economist did, yeah.
8 MS. CAMPBELL: Your economist, okay.
9 MR. SMEAD: I didn't do that part of it.
10 MS. CAMPBELL: Okay. All right. And I take it,
11 again, EGD hasn't conducted an independent study of market
12 shares or concentration?
13 MR. SMEAD: I don't know. Mr. Grant would have told
14 answer that.
15 MR. GRANT: We have not.
16 MS. CAMPBELL: You know, if he can't afford you, he
17 couldn’t afford to have that one either.
18 So you're relying on the accuracy of what EEA did.
19 MR. SMEAD: Yeah, and we were able to confirm that the
20 numbers that they used were reasonable. It all comes down
21 which ones you use. And which ones you use is a function
22 of the communication between the markets
23 MS. CAMPBELL: The next reference in your report that
24 I'd like to discuss with you is on page 12. Paragraph 2.
25 And it's at the very end of the paragraph.
26 And first of all, when you -- I should have asked this
27 first. It's the beginning of the paragraph. There's a
1 "Having reviewed and tested the validity of the
2 EEA analysis with respect to Union Gas."
3 What was the testing of the validity that's referred
4 to there?
5 MR. SMEAD: Oh, just reviewing the calculation, the
6 theories and this is really -- I can't say -- the testing
7 involved making sure that we agreed with the calculations
8 and with the theory.
9 MS. CAMPBELL: Okay. Thank you. Now going down to
10 the bottom. The statement is:
11 "If Enbridge Gas Distribution were to attempt to
12 raise its prices for storage artificially, beyond
13 price increases dictated by cost pressures, it
14 would suffer a serious enough erosion of its
15 market their the price increase would become
17 And then it states:
18 "This is the definition of market power."
19 Can you tell me, does your conclusion apply to EGD's
20 bundled customers?
21 MR. SMEAD: It could. It doesn't necessarily need to.
22 This -- in the case of the bundled on-system, or
23 infranchise utility customers, I think there's a question
24 there. They don't have a lot of choices, and that's, I
25 think, the reason that the proposal is in the posture that
26 it's in.
27 There -- an argument could be made that as they evolve
28 with more choices, with more separation among their
1 services or something down the road, there are distribution
2 systems in the United States where that kind of -- sort of
3 fragmented service, unbundled service and choice is being
5 But I'd say that this -- this conclusion primarily
6 relates to the broader market at Dawn. And the extent to
7 which it would relate to existing bundled, infranchise
8 customers, I would want to withhold that until there's more
9 evolution in that market.
10 MS. CAMPBELL: All right. So, in essence, would you
11 agree with me that the bundled customers, the infranchise
12 bundled customers, are basically captive?
13 MR. SMEAD: Yes. They are physically reliant upon
14 the utility that serves them, and don't have the same
15 degree of choice that a market participant at Dawn does.
16 That's correct.
17 MS. CAMPBELL: Right. And so really, that last
18 statement about raising prices and suffering an erosion of
19 market share couldn't really apply to the captive
20 customers, could it?
21 MR. SMEAD: Probably not in the short termt, no.
22 MS. CAMPBELL: Okay. In the long term?
23 MR. SMEAD: Oh, eventually. One of the things that
24 you learn about natural gas, that I learned when I worked
25 for Washington Gas Light in the distribution business is
26 that natural gas is one of the few energy sources that is
27 completely replaceable. Over time, if you get expensive
28 enough, people can't do without electricity, and they can't
1 do without gasoline, but they can sure dump a 100 percent
2 of their natural gas use.
3 MS. CAMPBELL: You just cheered up this room
5 MR. SMEAD: Yeah. So over time, no, it is very
6 price-sensitive. It takes the time that it takes for
7 people to make appliance decisions and everything else.
8 So the industry is very sensitive to that.
9 MS. CAMPBELL: And the next question I have, I think,
10 is likely addressed to you, Mr. Grant.
11 Does EGDI have any operational control over Vector?
12 MR. GRANT: No.
13 MS. CAMPBELL: Does EI have any operational control
14 over Vector?
15 MR. GRANT: Enbridge Inc.?
16 MS. CAMPBELL: Yes.
17 MR. GRANT: I don't know the answer to that. I would
18 have to check.
19 MS. CAMPBELL: Could I ask for an undertaking, Mr.
21 MR. GRANT: Yes.
22 MS. CAMPBELL: Mr. Cass?
23 MS. SEBALJ: It's EGD --
24 MS. CAMPBELL: No, does Enbridge Inc. have any
25 operational control?
26 MS. SEBALJ: Right, no, I was just naming the
28 EGD UNDERTAKING NO. 47: TO ADVISE WHETHER ENBRIDGE
1 INC. HAVE ANY OPERATION CONTROL OVER VECTOR
2 MS. CAMPBELL: You're so good. You're so fast. And I
3 believe Ms. Duguay has a question.
4 MS. SEBALJ: It's operational control over Vector;
6 MS. CAMPBELL: Right. But it turns out I was supposed
7 to say Vector and Alliance.
8 MR. GRANT: That's fine. I will look into both.
9 MS. CAMPBELL: Is the answer the same?
10 MR. GRANT: I will look into both.
11 MS. CAMPBELL: Thank you.
12 MS. DUGUAY: I have what I believe is a quick question
13 of a clarification nature on paragraph 28 of your evidence,
14 Mr. Grant. That is, on page 10, the top of page 10.
15 MR. GRANT: Yes.
16 MS. DUGUAY: And just to put it into context, the
17 evidence states here that:
18 "The Board should forbear from regulating
19 transactional storage service effective in the
20 2007 test year."
21 MR. GRANT: Yes.
22 MS. DUGUAY: And it goes on to say that:
23 "The consequential outcome of this is that all
24 revenues, relevant costs, net income, and risks
25 associated with this activity should be excluded
26 from the Board's rate-making process."
27 MR. GRANT: Yes.
28 MS. DUGUAY: So my question is, could you please
1 define what is meant by "relevant costs."
2 MR. GRANT: Yes. The term "relevant costs" here, in
3 my view, relates to those costs that the Board typically,
4 year in and year out, ascribes to these particular
6 MS. DUGUAY: Would that include, for example, a rate
7 of return on the assets that are being utilized for
8 transactional service, depreciation, and associated O&M?
9 Is that what you were thinking about here -- or?
10 MR. GRANT: I think it's fair that you would have to
11 take a look at those elements as well. So, in other words,
12 all of the elements related to a cost-of-service type of
13 calculation, and that would include those elements as well
14 as these.
15 MS. DUGUAY: Right. And what about net income?
16 MR. GRANT: Yes. Net income would be included from
17 regulation as well.
18 MS. DUGUAY: Okay. Okay. Those are my questions.
19 Thank you.
20 MS. CAMPBELL: I don't have any questions for you,
21 Mr. McKeown. Thank you. Those are my questions for the
23 MS. SEBALJ: Thank you. Given that it's 5:25, unless
24 anyone has a very quick question or two... Mr. Moran?
25 Mr. Moran's flagging me down. So is Mr. Smith. It's a
26 race to the table.
28 Mr. Moran won.
1 MS. SEBALJ: Both of you are not wanting to be here
2 tomorrow morning, I'm getting the impression.
3 MR. MORAN: I can't be here.
4 CROSS-EXAMINATION BY MR. MORAN:
5 MR. MORAN: I have, actually, a follow-up question
6 from the last one that was just put to you about the
7 implementation of forbearing from regulation.
8 And at page 10 of 15 of the evidence, you indicate:
9 "The consequential outcome of this is that all
10 Revenues, relevant costs, net income, and risks
11 associated with this activity should be excluded
12 from the Board's rate-making process."
13 I guess the question I have is, there are assets that
14 are in rate base at the moment; those are the assets,
15 presumably, that you've been talking about. As part of the
16 implementation process, would those assets be removed from
17 rate base?
18 MR. GRANT: Well, I think -- recall what we're talking
19 about here. We have the assets, and they're all in rate
20 base. At certain times of the year, all of those assets
21 are used or useful for purposes of delivering storage
22 services to our infranchise customers.
23 There are certain times of the year when some
24 component of it is not used or useful for that specific
25 purpose, and is released into the marketplace.
26 So you would have to go through that kind of a
27 calculation to understand how much, how long that release
28 was happening, and work up the arithmetic around that.
1 So it's not a question of identifying a specific piece
2 of the storage asset and removing it. It's an allocation
3 process related to the activities that underpin the
4 transactional storage services.
5 MR. MORAN: So you're contemplating some kind of a
6 notional reduction in rate case?
7 MR. GRANT: That's correct. It would be notional.
8 MR. MORAN: And would that be done on a forecast basis
9 or on an actual basis?
10 MR. GRANT: Well, I think the process here would go
11 something like this.
12 The Board in this proceeding has a central question in
13 front of it, as to whether the market is competitive,
14 sufficiently competitive, to protect the public
16 Assuming that the Board concluded that there was, for
17 this set of services, then I think the logical thing to do
18 would be to take the information from the last time that we
19 filed information with the Board, which would have been for
20 the 2006 test year, and utilize that information, and then
21 make it effective on January 1, 2007.
22 MR. MORAN: All right. And in terms of working
23 definitions, I have two questions.
24 The first one is, when it comes to the storage service
25 that will continue to be offered to infranchise customers,
26 what's the working definition for infranchise customers?
27 MR. GRANT: Well, I think in our proposal here, our
28 exemption -- or proposal for an exemption from this finding
1 of forbearance, we're basically talking about every single
2 existing infranchise customer.
3 I do believe there is one customer who has chosen an
4 unbundled rate today, unbundled storage rate, so we'd have
5 to think about that one customer, but other than that it's
6 virtually everyone else.
7 MR. MORAN: Right. So every customer connected to
8 your system.
9 MR. GRANT: Correct.
10 MR. MORAN: And you said every existing. Would that
11 also include every future customer connected to your
13 MR. GRANT: No.
14 MR. MORAN: So every new customer who connects to your
15 system would not have access to the storage services that
16 you have proposed should be available by way of
17 exception to forbearance?
18 MR. GRANT: Well, clearly this is a transitional issue
19 that one would have to deal with. But one way of
20 approaching this would be -- and I'm not suggesting that
21 this is the only way or even the best way -- but one way
22 would be to simply think about it as a portfolio of storage
23 costs. So it's really a mix of historic costs, the
24 cost-of-service storage, plus any new storage services that
25 are acquired for infranchise customers.
26 And they would be at market.
27 So what you would do is roll all of those costs into a
28 bundle, if you will, and then allocate those out amongst
1 the classes.
2 So what you, in effect, get, incremental customers
3 get a large piece of cost-based storage and a little piece
4 of market-based storage that is acquired at the margin.
5 And, in fact, every customer would get that. And
6 there would be lots of discussion and debate as to the
7 different customer classes and who gets what and all
8 of these things, but it's certainly -- the mechanism is
9 there for the Board to deal with.
10 MR. MORAN: And do you see that debate happening in
11 this hearing?
12 MR. GRANT: No, I don't.
13 MR. MORAN: All right. So there's a vacant lot next to
14 my house, and somebody builds a house and wants gas
15 service. They would be a new customer, right?
16 MR. GRANT: Yes.
17 MR. MORAN: But they wouldn't fall within the
18 exception that you've carved out because they were a new
20 MR. GRANT: They would be a new customer, and they
21 would be entitled to the system average costs for storage.
22 MR. MORAN: Right.
23 MR. GRANT: And those system average costs are a mix,
24 as I said, of cost-based storage that is determined based
25 on today plus any new storage that is acquired. And that
26 also, by the way, includes our 20 Bcf contract with Union.
27 So it's already, in effect, a mix of different sources
28 for storage in the base.
1 MR. MORAN: And for a new gas-fired generator, as a
2 new customer, infranchise?
3 MR. GRANT: Up to 1.2 percent deliverability.
4 MR. MORAN: All right. And then you're coming
5 to my next question T definition of the actual product that
6 we're talking about that's the subject of the exception.
7 That's limited to 1.2 percent deliverability storage;
9 MR. GRANT: Yes. Yes. So the unique
10 Characteristics -- and I won't repeat my evidence. It's
11 all here in the NGEIR proceeding. But essentially our
12 evidence is indicating that anything above 1.2 is unique,
13 ask that would be priced at market.
14 MR. MORAN: All right. So, for the new customers that
15 are coming along, as they come in and there's an
16 incremental storage requirement to meet that incremental
17 need, if I understand how this exception works, that
18 incremental need would be met through market -- what you
19 call market-based storage?
20 MR. GRANT: Yes.
21 MR. MORAN: Non-cost-based; right?
22 MR. GRANT: Yes.
23 MR. MORAN: But that would be spread over the entire
24 rate class so that everybody is starting to pay
25 non-cost-based storage for that incremental load that is
26 created by incremental customers?
27 MR. GRANT: That's correct. And so, over a long
28 period of time, as I indicate in my evidence, the overall
1 cost of storage within the utility's rates approaches the
2 competitive market price. It would take a while. But it
3 would gradually, over time, approach that.
4 MR. MORAN: Okay. Thank you. Those are my questions.
5 PROCEDURAL MATTERS:
6 MS. SEBALJ: Thank you, Mr. Moran. Let's call it a
7 day. No. I just got the hand wave. I'm good. I'm good
8 to close.
9 MS. CAMPBELL: Okay. Good to close.
10 MS. SEBALJ: So let's resume tomorrow at -- sorry? Is
11 there something that you want on the record?
12 MS. CAMPBELL: Actually, I was delegated to ask this
13 on behalf of Julie Girvan. She wanted to indicate that CCC
14 would likely have ten minutes of questions for this panel,
15 and probably the same for Union tomorrow, in case Union
16 wanted to get a handle on time tonight.
17 MS. SEBALJ: Well, and that's not a bad idea. For
18 those left in the room, Mister -- who's up? Enbridge. Is
19 Union in the room?
20 MR. PACKER: We may have five or ten minutes of
22 MS. SEBALJ: Mr. Smith?
23 MR. SMITH: Three minutes if they read the written
25 MS. SEBALJ: Mr. Brown?
26 MR. BROWN: 5 minutes.
27 MS. SEBALJ: Mr. Aiken?
28 MR. AIKEN: Not for Enbridge, and 5 to 10 for Union.
1 MS. SEBALJ: Mr. Wightman?
2 MR. WIGHTMAN: At the most 5 minutes for each.
3 MS. SEBALJ: Mr. Thompson?
4 MR. THOMPSON: Half an hour for Enbridge, and maybe a
5 little bit longer for Union, just to teach Mr. Leslie a
7 MS. SEBALJ: Mr. Gruenbauer.
8 MR. GRUENBAUER: I suspect 5 minutes, perhaps, with
9 Enbridge, and something closer to 15 with Union.
10 MS. SEBALJ: Thank you.
11 MR. GRUENBACHER: Thank you.
12 MS. SEBALJ: Mr. Hemming, are you in the room?
13 Mr. Howe?
14 MR. HOWE: No questions, thanks.
15 MS. SEBALJ: And GMI is not here.
16 Mr. Brown, for Union?
17 MR. BROWN: About 15 minutes.
18 MS. SEBALJ: Mr. Smith for Union?
19 MR. SMITH: Same three minutes, same questions.
20 MS. SEBALJ: And Union for Union -- no, that's not
21 going to work.
22 Board hearing team?
23 MR. MORAN: Board hearing team has one more thing that
24 we also have to deal with.
25 MS. SEBALJ: But your time for Union?
26 MS. CAMPBELL: About an hour.
27 MS. SEBALJ: Can I just finish this? Sorry.
28 MR. DeVELLIS: I'm here for School Energy Coalition,
1 so I may have five or ten minutes for each of Enbridge and
3 MS. SEBALJ: Thank you. And then we have Julie, 10
4 for each. All right. Thank you for that, and over to
6 MS. CAMPBELL: Yeah, you might recall that yesterday
7 there were undertakings that arose out of the APPrO panel.
8 There had been questions of the APPrO panel to redo a model
9 that they had done, and there was some discussion between
10 APPrO's counsel and the hearing team, and EGDI to discuss
11 the format of the undertaking. It was agreed the do it off
12 line. And we now have the form of the undertaking. And so
13 what we'd like to do is read it into the record, so --
14 because the parties who agreed to it in the room, to make
15 sure that there is no dispute on the framing of it, and it
16 will take a couple of minutes.
17 MS. SEBALJ: Had we given this a number or does it
18 need a number?
19 MS. DUGUAY: I don't believe that we did, but that
20 would be subject to check.
21 MS. SEBALJ: Okay.
22 MS. DUGUAY: We don't have a copy of the transcript
23 with us today.
24 MS. SEBALJ: I'll look while you're reading.
25 MS. DUGUAY: Okay.
26 So the undertaking would read as follows --
27 MS. SEBALJ: Sorry, we're still on the record, can you
28 just -–
1 MS. CAMPBELL: We're reading an undertaking into the
2 record. Want me to read it?
3 MS. DUGUAY: Please reproduce the example on page 20
4 of APPrO's evidence with EGD's proposed Rate 125 under two
6 The first scenario would consist of using Union's
7 proposed six additional nomination windows, and the second
8 scenario would consist of using APPrO's proposed 24
9 nomination window.
10 In addition, please assume the following assumption:
11 (a), that the status quo would be maintained with
12 respect to the hourly flow rate;
13 (b) that capacity would be available from TransCanada
14 in the aforementioned nomination windows, that is, the ten
15 noms and the 24 nomination windows; and
16 (c), that the default balancing service under Rate 125
17 are fully utilized.
18 MS. SEBALJ: Thank you. Mr. Moran, did you have a
20 MR. MORAN: No, I think it is APPrO number 7, the next
22 MS. SEBALJ: So you're in agreement to this
24 MR. MORAN: That reflects what we were talking about.
25 MS. SEBALJ: Thank you. See you tomorrow at 8:30.
26 --- Whereupon the hearing adjourned at 5:38 p.m.