FILE NO.: EB-2005-0001
DATE: August 29, 2005
BEFORE: Pamela Nowina Presiding Member
Paul Sommerville Member
Cynthia Chaplin Member
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 an Application by Enbridge Gas
Distribution Inc. for an Order or Orders approving or
fixing just and reasonable rates and other charges for the
sale, distribution, transmission and storage of gas
commencing January 1, 2006.
Hearing held at 2300 Yonge Street,
25th Floor, West Hearing Room,
Toronto, Ontario, on Monday,
August 29, 2005, commencing at 9:00 a.m.
B E F O R E:
PAMELA NOWINA PRESIDING MEMBER
PAUL SOMMERVILLE MEMBER
CYNTHIA CHAPLIN MEMBER
A P P E A R A N C E S
MICHAEL MILLAR Board Counsel
RICHARD BATTISTA Board Staff
COLIN SCHUCH Board Staff
FRED CASS Enbridge Gas Distribution
MURRAY KLIPPENSTEIN Pollution Probe
ROBERT WARREN Consumers Council of Canada
ALAN ROSS TransCanada PipeLines
JOHN DE VELLIS Vulnerable Energy Consumers
JAY SHEPHERD School Energy Coalition
BRIAN DINGWALL Canadian Manufacturers &
Exporters, HVAC Coalition
PETER THOMPSON Industrial Gas Users
EVANGELIA KRIARIS Direct Energy
ELIZABETH DEMARCO Advocates For Fair and
Superior Energy Management,
TransAlta Cogeneration LP,
TransAlta Energy Corp.,
TransCanada Energy Corp.
VALERIE YOUNG Ontario Association of
NOLA RUZYCKI Ontario Energy Savings Corp
TOM ADAMS Energy Probe
I N D E X O F P R O C E E D I N G S
Description Page No.
Enbridge Gas Distribution Inc. Panel 7 1
Toth, Pienaar; Sworn, Mees, Brown; Previously Sworn
Examination by Ms. Persad 1
Cross-examination by Mr. De Vellis 27
Cross-examination by Mr. Shepherd 99
E X H I B I T S
Description Page No.
EXHIBIT NO. K11.1: EI BUDGETS AND ALLOCATIONS 80
TO EGD, 2005 AND 2006
EXHIBIT NO. K11.2: COMPARISON OF 2004 CAM REPORT 161
TO 2006 RECOMMENDED RCAM CHANGES
U N D E R T A K I N G S
Description Page No.
UNDERTAKING NO. J11.1: TO PROVIDE PRINTOUTS OF ALL 64
TEMPLATES USED BY THE EMPLOYEES IN THE TIME STUDY
UNDERTAKING NO. J11.2: TO PROVIDE A DEPARTMENTAL 66
ALLOCATION TO SERVICE
UNDERTAKING NO. J11.3: ON A BEST EFFORTS BASIS, 93
TO PROVIDE COPIES OF THE RESPONSES FROM SURVEY
PARTICIPANTS IN THE SURVEYS CONDUCTED IN
JANUARY/FEBRUARY, 2004, AND SEPTEMBER, 2004
UNDERTAKING NO. J11.4: PERCENTAGE OF MR. LETWIN'S 148
FULLY-LOADED COSTS ALLOCATED TO EGD, ALONG WITH
UNDERTAKING NO. J11.5: TO PRODUCE THE EXTERNAL 154
CONSULTANT’S REPORT RELATING TO THE ALLOCATION
OF THE COSTS OF DIRECTORS’ AND OFFICERS’ INSURANCE
UNDERTAKING NO. J11.6: TO PROVIDE A COPY OF THE 156
INDEPENDENT AON STUDY WHICH WAS REVIEWED BY DELOITTE
UNDERTAKING NO. J11.7: BREAK DOWN OF CALCULATION 164
1 Monday, August 29, 2005
2 --- Upon commencing at 9:00 a.m.
3 MS. NOWINA: Please be seated. Good morning everyone.
4 Today is the eleventh day of the hearing of applications
5 EB-2005-0001 and EB-2005-0437 submitted by Enbridge Gas
6 Distribution. This morning we will begin the examination
7 of the third panel on corporate cost allocation. We will
8 aim to take a break at 10:30, and we'll firmly break for
9 lunch at 12 o'clock.
10 Are there any preliminary matters?
11 MS. PERSAD: None from me.
12 MS. NOWINA: Anyone else? No preliminary matters.
13 Ms. Persad, would you like to introduce your panel?
14 MS. PERSAD: Yes, thank you. This morning we have on
15 the panel Mr. Gabor Toth, a senior manager with Deloitte
16 Inc., and Mr. Andre Pienaar, partner with Deloitte Inc.,
17 and then Mr. Mike Mees and Mr. David Brown, who are --
18 appeared on panel 1 and were introduced at that time.
19 Could I ask that Mr. Toth and Mr. Pienaar be sworn in?
20 MS. NOWINA: Certainly.
21 ENBRIDGE GAS DISTRIBUTION INC. PANEL 7:
22 Gabor Toth; Sworn
23 Andre Pienaar; Sworn
24 Mike Mees; Previously Sworn
25 David Brown; Previously Sworn
26 MS. NOWINA: You may proceed, Ms. Persad.
27 EXAMINATION BY MS. PERSAD:
28 MS. PERSAD: Thank you. Mr. Pienaar, I understand
1 that in addition to the evidence that the previous panels
2 spoke to, Deloitte's evaluative report in relation to this
3 issue of corporate cost allocations is filed at Exhibit A6,
4 tab 10, schedule 2. And there are related interrogatories
5 that I won't endeavour to list, but, Mr. Pienaar, can you
6 confirm, on behalf of yourself and Mr. Toth, that this
7 evidence was prepared by you or under your direction.
8 MR. PIENAAR: Yes.
9 MS. PERSAD: And is that evidence accurate, to the
10 best of your knowledge and belief?
11 MR. PIENAAR: Yes.
12 MS. PERSAD: So if I could start with you, Mr.
13 Pienaar, to go through your qualifications, your resume, I
14 understand, is filed at Exhibit A6, tab 10, schedule 2,
15 appendix 1 to that evaluative report?
16 MR. PIENAAR: That is correct.
17 MS. PERSAD: I am just going to take you through some
18 of the more relevant aspects of your education and
19 professional qualifications. I understand that you have a
20 bachelor of commerce - and forgive my pronunciation - from
21 the University of Witwatersrand from the Republic of South
22 Africa; is that right?
23 MR. PIENAAR: That's correct.
24 MS. PERSAD: And a bachelor of accounting from that
25 same university?
26 MR. PIENAAR: That is correct.
27 MS. PERSAD: You are a chartered accountant in South
1 MR. PIENAAR: Yes.
2 MS. PERSAD: And a certified management consultant in
3 Canada; is that right?
4 MR. PIENAAR: Yes.
5 MS. PERSAD: I'm just going to highlight some of your
6 more relevant selected assignments. And in relation to
7 that, I understand that you have directed and worked on a
8 full range of financial operations, improvement and
9 performance measurement engagements, including costing and
10 cost monitoring studies in regulated industries, and you
11 have practised with Deloitte Inc. for 17 years; is that
13 MR. PIENAAR: Yes.
14 MS. PERSAD: So in addition to the current engagement
15 and the previous engagements that would have led to your
16 testimony in this proceeding, I understand that you acted
17 as the project partner on two separate projects to review
18 inter-affiliate technology cost allocations regarding
19 services provided by Enbridge Gas Distribution to Gazifère
20 in Quebec; is that right?
21 MR. PIENAAR: Yes, that is correct.
22 MS. PERSAD: As well, you directed the establishment
23 of a regulatory monitoring mechanism and ongoing annual
24 review of the oil industry on behalf of the National Energy
25 Council in South Africa?
26 MR. PIENAAR: That is correct.
27 MS. PERSAD: And I won't list all of those, what you
28 did in that project. It's listed in your resume. And the
1 last -- actually, the second last project I will highlight
2 is that you directed the review of a complex industry
3 proposal to the Minister of Mineral and Energy affairs in
4 South Africa to deregulate a significant component of the
5 oil industry and monitor the segmented profits of only the
6 manufacturing segment of that industry?
7 MR. PIENAAR: That is correct.
8 MS. PERSAD: And, finally, you led a study for the
9 Ministry of Economics and Tourism to evaluate the cost
10 allocations and build-up of export prices for the pricing
11 quota regulated rock lobster industry in South Africa?
12 MR. PIENAAR: That is correct.
13 MS. PERSAD: And have you ever been qualified before
14 as an expert witness in any regulatory proceedings?
15 MR. PIENAAR: Yes. I was qualified by the Régie de
16 l'Energie in Quebec in the rate cases involving Gazifère.
17 MS. PERSAD: Thank you. Madam Chairman, I request
18 that the Board accept Mr. Pienaar as an expert qualified to
19 provide opinion evidence in the area of cost allocations in
20 a regulatory environment.
21 MS. NOWINA: Thank you. Any comments to that?
22 MR. SHEPHERD: Madam Chair, we're not objecting to Mr.
23 Pienaar's expertise, but we will have some questions about
24 the extent of that expertise.
25 MS. NOWINA: Fine. We will accept that. Ms. Persad.
26 MS. PERSAD: Thank you. And, Mr. Toth, if I could
27 turn to you, and your resume is filed under that same
28 appendix at that same exhibit.
1 I understand that you have a bachelor of commerce from
2 Queen's University
3 MR. TOTH: Yes.
4 MS. PERSAD: And you are a chartered accountant in
6 MR. TOTH: Yes.
7 MS. PERSAD: I understand that you have practised with
8 Deloitte for over 11 years?
9 MR. TOTH: Yes.
10 MS. PERSAD: And in that capacity, you have managed
11 and designed the implementation of a full range of
12 financial modelling, operations improvement and financial
13 process re-engineering and performance measurement
15 MR. TOTH: Yes.
16 MS. PERSAD: So in addition to the current assignment
17 regarding Enbridge Gas Distribution, you were involved with
18 developing a global process for activity-based planning
19 using SAP activity-based costing modules for a large
20 financial institution?
21 MR. TOTH: Yes.
22 MS. PERSAD: And the related specifics in your resume.
23 And you prepared a business case for establishing shared
24 service operations for two independently managed oil and
25 gas companies?
26 MR. TOTH: Yes.
27 MS. PERSAD: And then two others I will highlight on
28 the second page, that you were a leader of a finance
1 organization re-design project for centralizing the key
2 governance and attestation activities within a large
3 financial services company?
4 MR. TOTH: Yes.
5 MS. PERSAD: And, finally, the last one I will
6 highlight is that you were the leader of a finance team
7 tasked with re-designing processes, determining business
8 needs and identifying system requirements for a SAP fit-gap
10 MR. TOTH: Yes.
11 MS. PERSAD: And, Mr. Toth, have you ever been
12 qualified before as an expert witness in any regulatory
14 MR. TOTH: No.
15 MS. PERSAD: Madam Chair, I request that the Board
16 accept Mr. Toth as an expert qualified to provide opinion
17 evidence in the area of cost analysis and cost allocations.
18 MS. NOWINA: Any comments from any parties?
19 MR. SHEPHERD: Madam Chair, same comment as with
20 respect to Mr. Pienaar.
21 MS. NOWINA: Thank you. We will accept that, Ms.
23 MS. PERSAD: Thank you. Mr. Pienaar, could you please
24 explain the nature of the engagement that led to you
25 providing testimony in this proceeding?
26 MR. PIENAAR: Yes. We were retained by Enbridge Gas
27 Distribution in March of 2004 to evaluate their cost
28 allocation methodology, the CAM methodology, on the basis
1 of a prior decision of the OEB in RP-2002-0133.
2 Following that, the settlement on the 2005 rate case,
3 we were then retained by EGD to assist them with the
4 development of the new cost allocation methodology; namely,
5 the RCAM.
6 The stated objectives of the development, of the new
7 methodology, were to address, firstly, the recommendations
8 contained in our 2004 CAM report, and, secondly, to address
9 the regulatory requirements on the OEB, as set out in the
10 Affiliate Relationship Code, or the ARC, and as reflected
11 in regulatory precedent of the -- of -- in Canada,
12 including the OEB decisions in EBRO 4934 with respect to
13 the three-prong test.
14 We were then subsequently asked to evaluate the RCAM
15 itself and to prepare an evaluative report for presentation
16 to the OEB in the 2006 rate case.
17 MS. PERSAD: And Mr. Pienaar, what was your personal
18 involvement in this engagement?
19 MR. PIENAAR: I was the supervising partner for the
20 2004 evaluation of CAM, and for the development of the
21 RCAM, and for the preparation of the RCAM evaluative
22 report, which I co-authored together with Mr. Toth.
23 MS. PERSAD: And Mr. Toth, what was your personal
24 involvement in the engagement?
25 MR. TOTH: I was the project manager for the RCAM
26 development. I was managing the Deloitte and Enbridge
27 resources on the project, and was responsible for the daily
28 interactions with EGD and EI - specifically, with Mr. Mees
1 and Mr. Brown, respectively.
2 I was also, as Mr. Pienaar mentioned, co-author of the
3 evaluative report.
4 MR. SHEPHERD: Madam Chair, can I interrupt for a
5 second - I'm sorry. We're having some difficulty hearing
6 because of the air-conditioning. I wonder if the witnesses
7 can speak right into the microphones?
8 MR. TOTH: Sorry.
9 MS. NOWINA: I will turn up the volume, as well. Let
10 us know if you still with have a problem, Mr. Shepherd.
11 MS. PERSAD: And Mr. Pienaar, what role did Deloitte
12 play in the development of the regulatory cost-allocation
13 methodology, or “RCAM”?
14 MR. PIENAAR: I referred to the engagement letters
15 which were filed in the IGUA IR 65. We were appointed as
16 the overall project manager, and led the joint team of
17 EI/EGD and Deloitte that developed RCAM, firstly.
18 We also led the development and implementation of the
19 time study that was required -- that is required under
20 RCAM, and also the electronic allocation models that are
21 required to calculate the numbers for -- that result from
23 We, further, advised and supported EGD in the
24 development of the detailed intercorporate service-level
25 agreements required in RCAM. And ultimately, we calculated
26 the cost - using the electronic model that I referred to -
27 to be allocated to EGD in 2006, in accordance with the
1 MS. PERSAD: And what role, specifically, did Deloitte
2 play in the determination of the services for that model?
3 MR. TOTH: I know this process was actually discussed
4 at length on panel 1 and, partially, on panel 2, but I
5 think it’s worth adding a few additional points.
6 Firstly, in the development of the process, we believe
7 that it's very important to cover 100 percent of the
8 services. Because we did want to cover and capture 100
9 percent of the time being spent by the individuals at EI
10 providing the services, we believed it important to capture
11 100 percent of the services.
12 We also wanted to maintain transparency of the
13 service, and wanted to provide detailed examples in those
15 And it's with that mind-set that we went forward and
16 developed the services.
17 It was Deloitte that conducted the initial reviews.
18 It was Deloitte that drafted the initial descriptions of
19 the services, which included a compilation of the interview
20 notes, consolidations, consistency among the languages, et
21 cetera. It also -- we did follow-up interviews around the
22 interviews for validation and clarification. And, within
23 each one of those steps there was multiple iterations, as
25 Because of the nature of the services and how they
26 were described, there was many departments contributing a
27 portion to a particular service. So we wanted to make sure
28 that there was consistency and clarity, and, again,
1 transparency in the service, and we spent, probably, about
2 two months -- so we spent considerable time on the services
3 because it was important to everything else that followed,
4 including the time study, including the allocators and
5 allocations, et cetera.
6 They were then sent to EGD for verification and
7 agreement, prior to any inclusion in the time study. So it
8 was, first -- had to be agreed and vetted by EGD, prior to
9 being used to capture any time information. And there was
10 further adjustments, made after it was received back from
12 MS. PERSAD: And could you also explain how the costs
13 would have been determined for those services.
14 MR. TOTH: Yes, absolutely.
15 I’d like to, Madam Chair, direct you to appendix --
16 or - sorry - Schedule A6, tab 10, schedule 2, appendix 3,
17 page 9. It's in the Deloitte evaluative report. There is
18 a graphic there that tries to demonstrate how the costs
19 were developed, and I think it’s very important that we go
20 through this with the aid of a picture.
21 MS. NOWINA: Maybe you could give us a moment to find
23 MR. TOTH: Yes.
24 MR. SOMMERVILLE: What was the page reference?
25 MR. TOTH: It is appendix 3, page 9. The evaluative.
26 MR. TOTH: So, essentially, as you can see from the
27 diagram, there’s -- essentially, there’s two main steps to
28 the allocation. First, it was starting off from the
1 budgeted -- from the actual budget and budgeted cost-
2 centres, and the first step is to allocate it to the
3 services. And then, once the services were defined, it was
4 then the allocation of the services to the affiliate --
5 EGD, in particular, in this case.
6 We did start with the 2005 budget, and we adjusted it
7 for inflation. We used -- I think it was two percent.
8 However, there were other adjustments that were made with
9 known information. Specifically, I think an example was
10 around insurance: so we adjusted insurance because we had
11 information that was better than a two-percent inflation
13 And it was with that -- where we started. And as much
14 as I said, at a high level, there’s two main steps, what we
15 wanted to do was, we wanted to look at the nature of the
16 individual costs in the budget.
17 So we, first, started with general expenses, and we
18 believe that there was a lot of general expenses that need
19 to be first allocated to the departments. There’s examples
20 on page 9 around business taxes, rent, employee benefits,
21 and employee stock options. It is these types of expenses
22 that are allocable to individuals, that exist at EI.
23 Therefore, we found it appropriate, from an allocation
24 perspective, to allocate it to the departments, first.
25 I think it’s important to highlight this, because I
26 think some of the comments made on panel 1 and panel 2
27 around the comparability of the information on previous
28 tables that were provided -- the department costs that have
1 been provided in a lot of the IRs, and in the evaluative
2 report, are on a loaded basis. There’s approximately $28
3 million of loadings to departments, prior to allocation to
4 services and affiliates. And it's on this basis that it's
5 different from any other analysis prior to the RCAM
7 There is other general expenses that we believe more
8 appropriate to allocate to services and to affiliates,
9 specifically, and those are also listed on page 10. An
10 example of an allocation of a general expense to a service
11 is something like corporate secretarial legal fees, where,
12 upon investigation of those fees, we found that it was
13 primarily for investor services, so we allocated that
14 specific cost to a service.
15 In addition, there were some general expenses that we
16 believed, with the information, could be allocated directly
17 to an affiliate. An, example given on page 10, is director
18 fees and expenses. We put that, specifically, to the
20 We then, also, at that point, had, as I mentioned,
21 fully-loaded department costs and loaded those into the
22 services. And this was done, primarily, on the time study
23 that was conducted. And again, wanted to stress the
24 importance of the level of effort that went into
25 development of the services, because that was what was
26 driving a majority of the allocations.
27 In addition, you will see there was another bucket of
28 budgeted cost-centres, called “direct charges.” And
1 although some of the -- although the name says “direct
2 charges”, upon further investigation, when we went through
3 the nature of the costs, we believed it was appropriate to
4 allocate them to the - some to services and some,
5 specifically, to the affiliate.
6 Once the services were identified, we then looked at
7 the various services and said, Well, some of these are
8 required by EGD, and some of them are required as support
9 services in the provision of the primary services. A
10 common example is help-desk services. Help-desk services
11 are needed by the individuals at EI to provide the primary
12 services that were listed.
13 Therefore, we loaded these support services into the
14 primary services, getting a fully-allocated and a fully-
15 loaded primary service cost. That's the true costs of
16 providing that service.
17 At this point, some costs were -- sorry, some services
18 were also rejected. For example, reservoir engineering was
19 not needed, so although it was a service listed, it was
20 neither a primary service nor a support service, and
21 therefore was not included in any allocations to EGD.
22 It was at that point, when we had the services, that
23 they were allocated to the -- allocated to EGD partially on
24 time that we could -- that we captured individuals,
25 identified specific activities and specific time they had
26 providing a service to EGD, and then the rest of the
27 portion that was indivisible on other allocators.
28 A couple of other points worth mentioning here. One
1 is we wanted to ensure that the allocation process and
2 methodology was unidirectional. What I mean by that is we
3 didn't want to get caught in any circular references in the
4 allocation models.
5 So, for example, you have a HR department providing
6 overall HR services to a corporation, including IT. You
7 also have IT providing help desk services, et cetera,
8 providing services to everybody, including HR. So we
9 didn't want HR allocating to IT and IT allocating back to
10 HR and getting it back and forth. So we wanted to make
11 sure that it was unidirectional; hence, this is the way
12 that methodology worked out.
13 In addition, it is also worth noting that there was no
14 number calculated through this methodology until all of the
15 allocations and -- all the allocators and all the steps
16 were first derived through costing principles. We sat down
17 and first developed the methodology. We agreed on what the
18 allocators were on principle, based on causality, effort,
19 et cetera. Then we ran the numbers, and it was only at
20 that time that we took the numbers with the service
21 descriptions to EGD.
22 Once EGD then examined the services with the costs, we
23 also provided costs by department, again adhering to our
24 transparency. We also provided the time study information,
25 with each individual that provided time, direct or
26 indirect, to EGD, and we also provided quantity and quality
27 measures to EGD.
28 It was at that time further adjustments were made, and
1 during the evaluative reporting process, which is in
2 appendix 6.
3 MS. PERSAD: And, briefly, could you just explain how
4 the time study was conducted and what your involvement was
5 in that?
6 MR. TOTH: Okay. If I could, Madam Chair, also ask
7 you to turn to appendix 4 of the same evaluative report,
8 page 6, tab 10, schedule 2, appendix 4.
9 MS. NOWINA: Thank you. We have it.
10 MR. TOTH: Okay. Again, it is worth noting that it is
11 Deloitte that managed and conducted the time study. We
12 managed the development process. We managed the creation
13 of the actual time study tool. And, again, it is important
14 to mention that we wanted to capture 100 percent of the
15 time of individuals providing services at EI, whether it is
16 for EGD direct, direct to other, or for everybody or all.
17 And it was in that nature that we built the survey
18 tool. We built an electronic survey tool, and in it we
19 developed specific controls; i.e., it wouldn't allow you to
20 submit your time or wouldn't allow you to move throughout
21 the process of capturing your time and tracking your time
22 unless 100 percent of the time was captured. It also
23 required that you indicate whether or not you're a full-
24 time or part-time individual and whether or not you used
25 the corporate jet. So those specific controls were built
26 into the time allocation -- or, sorry, the time capture
28 We -- in this capture study, we asked each individual
1 to identify the time they provided in provisioning for a
2 particular service or the services that they identified,
3 and we embedded in this time tool the actual service
4 descriptions so that they could clearly identify which
5 service they were providing. And there was examples
6 provided there.
7 And we also then asked them, for each particular
8 service, what time they could attribute specifically to
9 EGD, specifically to other affiliates, i.e., not including
10 EGD, and then those -- that time that they deemed
11 indivisible or to the benefit of all.
12 We provided instructions on how to conduct the time
13 study, which is listed in appendix 4, so we -- you know,
14 with particular matters such as management time, general
15 administrative time, project time, those types of
16 components and instructions were included.
17 We then consolidated the data, reviewed it at a
18 departmental level, and we did notice some anomalies or
19 some things that seemed odd. And so we conducted a
20 follow-up and what we found was that there were cases where
21 as much as we provided the instructions on the time study,
22 that there were some misunderstandings on how to complete
23 it. It was also based on our knowledge of initial
24 descriptions -- sorry, initial interviews and the
25 development of the service descriptions, that we knew that
26 there was some misallocation of time.
27 So we did follow-up interviews, verified that the
28 changes needed to be made and those changes were made.
1 The other point that's key to highlight is that the
2 time that they were including was based on the prior 12
3 months, so it was a 12-month period, an annual period. So
4 it was based on historical effort. We did, then, take that
5 information, correct the data and we asked the department
6 managers if they knew of any future instances or future
7 events that were going to be incurred in 2006 that would
8 warrant changes to individuals' time; meaning as much as it
9 was on a historical basis, this was a forward-looking
10 model, as we're here for the 2006 rate case.
11 And there was one example that I will give. It's
12 around rate regulated entity support. There was
13 significant time. One was about -- from the controller's
14 department, around the development of RCAM itself, and
15 there was a belief that in 2006 there wouldn't be full
16 development, but more just maintenance of the RCAM
17 methodology. Therefore, there was an adjustment made
18 downward on the time to a particular service.
19 We then also provided these time details to each of
20 the service recipients for transparency, as I mentioned
21 before. Overall, there were 129 individuals that completed
22 the time study.
23 MS. PERSAD: Mr. Pienaar, if I could turn to you, how
24 were the allocators determined after the services were
26 MR. PIENAAR: A detailed discussion of the allocators
27 and the rationale for the selection is contained in RCAM,
28 in Exhibit A6, tab 10, schedule 2 in appendix 3, and the
1 definitions are in an extract separately listed in that
2 same document in appendix 5. But I will just take you
3 through three quick stages of our selection.
4 Firstly, we allocated direct costs directly to EGD,
5 and that's because we regard EGD as a stand-alone utility.
6 And to the extent that the rate costs can be identified, we
7 allocated them directly to EGD.
8 Secondly, we believe that effort and usage are the two
9 primary drivers which are rooted in causality, and we
10 therefore used time and volumetrics as allocators wherever
11 possible or reasonable. And that is because we believe
12 that these are -- these two allocators, time and
13 volumetrics, are the best measures of those two cross-
14 drivers, being effort and usage.
15 Thirdly, where time and volumetrics were neither
16 available or relevant, we then sought an appropriate
17 measure of size and complexity as a proxy for, firstly the
18 likely relative effort that would be spent by EI in the
19 delivery of the service, and, secondly, the likely usage of
20 the service by EGD, the recipient.
21 Now, where there was no link at all to causal drivers,
22 then we would seek an appropriate measure or discuss the
23 appropriate measures that relate to relative benefit. But
24 we primarily focused on causality, and ended up having to
25 do not significant amount related to relative benefit, on
26 the basis that we selected that.
27 The secondary allocators we used, primarily - so I
28 mentioned time and volumetrics, because they are linked to
1 effort and usage, the two primary causal drivers - but the
2 secondary allocators that we then had to use were headcount
3 and capital employee. They were derivatives of those two
5 MS. PERSAD: And with respect to the use of estimated
6 time as an allocator, the intervenor sponsor witness, Mr.
7 Johnson, suggests that this may be problematic because of
8 the high growth potential for EI.
9 Do you have any comment about this conclusion?
10 MR. PIENAAR: Yes, I have four comments. Firstly, we
11 surveyed thirteen regulated entities, very specifically,
12 about time estimates. Ten out of those 13 regulated
13 utilities, in Canada, that responded, used time-estimates,
14 based on historic data, to measure relative effort.
15 Secondly, in EBRO 493494, in section 5.5.3(3), and I
17 “... provides more direct links than certain
18 other cost drivers. Time-docketing is
19 intrinsically historic. It's a record of the
20 time you have spent.”
21 Our time study approach, on the other hand, is
22 designed to accommodate adjustments for all known growth
23 factors or future events, through -- as Mr. Toth explained,
24 through the discussion process that occurs after the time
25 is actually calculated, to take account of known events.
26 Of course, it's not possible or reasonable to make
27 speculative adjustments for unknown future events, or
28 unknown growth, and so we do not take account of that.
1 MS. PERSAD: And I understand that you -- Deloitte
2 participated in evaluating the 2004 cost-allocation
3 methodology. And could you just explain the key
4 differences between the RCAM and the previous CAM.
5 MR. PIENAAR: Right.
6 I’ll go through, Madam Chair, five key differences
7 between those two.
8 Firstly, RCAM is a service-based methodology and,
9 therefore, can be easily evaluated against the regulatory
10 precedents of the OEB, namely, the three-prong test, and
11 the relevant requirements of the Affiliate Relationship
12 Code. CAM was not. CAM was a departmental-costing
13 methodology, which was very difficult to evaluate, as is
14 evidenced in our commentary in 2004.
15 Secondly, RCAM is a highly-transparent,
16 demand-approved methodology, in that the services that are
17 required by are determined by EGD. EGD determines what it
18 wishes to purchase from -- or receive as a service from
19 EGD. CAM was not. It was a cost-push methodology.
20 RCAM has been set up -- this is the third pint. RCAM
21 has been set up to view the needs of EGD as a stand-alone
22 entity. CAM was not. CAM was very specifically set up to
23 embrace an integrated-company philosophy stated in the CAM
25 Fourthly, RCAM is a multi-step allocation process,
26 which is designed to load support costs to the services
27 that consume those support costs, as you will have heard
28 through the process that Mr. Toth explained. CAM was not.
1 It embraced a single-step process, designed primarily to
2 simplify the transfer of EI costs to its affiliate.
3 Finally, RCAM embraces the need to use time and
4 volumetrics, wherever possible. CAM did not. Effort and
5 usage, in fact, were not highlighted as primary cost
7 Those would be the five key differences
8 MS. PERSAD: And a point about the CAM, Mr. Brown, if
9 I could turn to you. I understand that the CAM allocates
10 certain of the Enbridge Inc. costs directly back to
11 Enbridge Inc., itself, such that Enbridge Inc. retains some
12 portion of those costs. Does the RCAM take this into
14 MR. BROWN: Absolutely. As I made clear, on panel 1,
15 last Thursday, Enbridge Inc. is included in the “other
16 affiliates” time category and, therefore, retains the costs
17 associated with the direct allocation of time.
18 As well, it’s also included in the “all affiliates” --
19 or, as we're referring to, here, the “indivisible time”
20 category, which would equate to a significant additional
21 amount of corporate costs being retained in Enbridge Inc.
22 Because all the allocators applied to the indivisible
23 categories - such as usage, headcount, capital employ, just
24 to name a few - have an Enbridge Inc. component.
25 MS. PERSAD: Mr. Pienaar, how did Deloitte go about
26 evaluating the RCAM, such that it could be satisfied that
27 the RCAM complies with the Board's requirements for costing
28 and charging corporate services?
1 MR. PIENAAR: Our evaluation of RCAM was criteria-
2 based. And the criteria against which we evaluated RCAM,
3 and the accompanying intercorporate service agreements and
4 -- in our evaluation to see that it meets the regulatory
5 requirements -- were based on three things. Firstly, our
6 criteria were drawn from all of the recommendations that we
7 had drawn in the 2004 CAM report. In so doing, we were
8 sure to address all of the regulatory precedents and
9 principles that were addressed in that RCAM report -- sorry
10 - I apologize - correction: in the CAM report. So all the
11 regulatory principles that were addressed in the CAM report
12 were, then, addressed in that way.
13 Secondly, the other set of criteria were drawn from
14 EBR 0493494, in which the OEB three-prong test for certain
15 criteria were laid out.
16 And finally, the requirements for regulatory cost
17 allocations as set out in the Affiliate Relationship Code
18 was also -- formed the basis of our criteria.
19 We evaluated, through our report, each group of those
20 criteria, when we were evaluating the appropriateness of
21 the methodology.
22 MS. PERSAD: And at a high level, what would be the
23 key findings?
24 MR. PIENAAR: Firstly, we were satisfied that RCAM
25 meets the requirements that were set out in our CAM report,
26 which included the requirements emanating from the amended
27 ARC and the regulatory precedent. We found that RCAM
28 generated -- an initial generation of the model, as it was
1 set up, generated an allocable amount of $23.04 million.
2 However, on a further review and application of the three-
3 prong test to each individual primary service, we then
4 identified a need to make a further adjustment, totalling
5 1.73 million, because certain services did not pass either
6 the cost-incurrence test or the cost-benefit test. And
7 then we, therefore, on that basis, recommended an
8 allocation of 21.31 million, after making adjustment for
9 that 1.73 million I recommended.
10 These results are set out in Exhibit A6, tab 10,
11 schedule 2, on page 15 to 18.
12 MS. PERSAD: Now, I understand that Deloitte
13 recommended much less than 21.3 million to be included for
14 rate recovery in their 2005 rates case. It was 13.5
15 million, at that time. How can you explain the large
16 increase in your recommendation in 2006?
17 MR. PIENAAR: I think it is important to note that our
18 recommendation for the 2005 rate case was not based on a
19 developed methodology. It was a - it was merely an interim
20 calculation, used in the absence of an appropriate
21 methodology. Because the appropriate methodology was not
22 available to actually evaluate the 2005 rate case
24 In so doing, we applied what I now believe to be
25 overly-conservative -- well, even at the time, we knew we
26 were applying very conservative and arbitrary adjustments,
27 because the CAM was not set up -- the CAM methodology was
28 not set up in such a way as to produce the supporting
1 documentation that we needed to substantiate the results
2 against the requirements of ARC in the OEB three-prong
3 test. Hence, we had to develop a calculation to -- as a
4 proxy for that, and because that documentation was not --
5 wasn't available for substantiation, we had to make some
6 very arbitrary adjustments to some of the allocators. We
7 simply divided them by two in some cases.
8 MS. PERSAD: And if you had that additional
9 information, would you have expected your recommendation to
10 be any different?
11 MR. PIENAAR: Oh, most certainly. Most certainly. I
12 think it would be obvious to any reader of our 2004 CAM
13 report that we anticipated that EGD would recover a higher
14 amount if they were able to address the recommendations
15 that were contained in that report.
16 For this reason, I believe that the amount that is --
17 that is currently referred to in the 2004 report as being
18 our recommendation is actually a red herring and it is not
19 a starting point for any reasonable discussion in relation
20 to the 2006 rate case, because we believe that the 2006
21 cost allocation should stand on its merits on the basis of
22 the criteria we set up for evaluation and which are
23 contained in the OEB's regulation and promulgation.
24 MS. PERSAD: And two final questions. Firstly, Mr.
25 Johnson concludes in his evidence that the total charges
26 from Enbridge Inc. to Enbridge Gas Distribution should not
27 exceed $14.25 million, which represents a 5 percent
28 increase over the amount included in the 2005 rates,
1 excluding insurance, plus the projected insurance costs.
2 Do you have any comments on those conclusions?
3 MR. PIENAAR: Yes, I have, I think, four comments on
4 that. Firstly, as I have just indicated, our evaluation
5 was based on a criteria-based evaluation, very clearly.
6 Mr. Johnson's macro-level inflation factoring is based on
7 an invalid base, because the amount we recommended in CAM,
8 as I have just suggested, was based on incomplete
9 information and basically, therefore, is incorrect. So
10 basically his starting point is wrong.
11 Secondly, Mr. Johnson's conclusions are not drawn from
12 a detailed evaluation of the regulatory basis underlying
13 the costing principles or the actual design of the
14 methodology, nor is it based on a service-by-service
15 evaluation against any regulatory criteria. And his
16 opinion is, therefore, in our opinion, not supported by OEB
17 decisions, regulatory precedents or the requirements of
19 MS. PERSAD: And, finally, Mr. Toth, Mr. Shepherd,
20 with the Schools, filed an Exhibit K9.5 last week that
21 derives hourly rates for certain of the corporate services.
22 Do you have any comments to make with respect to that
24 MR. TOTH: Yes, a couple of observations, Madam Chair.
25 One is, if I was to actually look at the last column and
26 compare it to the second last column of the report of the
27 table, i.e., FTEs required versus FTEs provided, one could
28 conclude that the operational models, in terms of how the
1 shared services operations are set up, is actually
2 providing significant efficiencies.
3 Second, upon further investigation of the calculations
4 here, if one were to actually include the FTEs involved in
5 providing the support services, the average cost of FTE
6 would actually reduce by approximately $100,000.
7 And, thirdly, if I was to review the services that are
8 highlighted here, the -- one would expect that senior level
9 individuals would actually be involved in the provision of
10 those services and, therefore, the number of costs per FTE
11 on a fully-loaded basis would be reasonable.
12 MS. PERSAD: Thank you. Those are all my questions.
13 MS. NOWINA: Thank you, Ms. Persad. Can I get a sense
14 from the other parties of who would like to cross-examine
15 this panel, how much time they might take, and if you have
16 decided amongst yourselves what order you would like to go
18 MR. De VELLIS: Good morning, Madam Chair, yes. I
19 will be going first. I estimate approximately two hours.
20 MS. NOWINA: Thank you, Mr. De Vellis.
21 MR. SHEPHERD: Madam Chair, I will be following Mr. De
22 Vellis and I estimate 90 minutes, a real 90 minutes, today.
23 MS. NOWINA: Thank you, Mr. Shepherd.
24 MR. THOMPSON: I believe I follow Mr. Shepherd, Madam
25 Chair, and I would expect 45 minutes.
26 MS. NOWINA: Mr. Thompson, thank you.
27 MR. DINGWALL: I'm not sure where Mr. Warren fits in
28 the picture, but I have approximately half an hour to 45
1 minutes, depending of course on the condition of the horse
2 by the time I get to it.
3 MS. NOWINA: Thank you, Mr. Dingwall. Mr. Warren
4 isn't here, so I assume we will hear from him later.
5 MR. De VELLIS: Madam Chair, I heard from Mr. Warren.
6 We are cooperating and he will be leaving the examination
7 to us for this issue, so he won't be appearing.
8 MS. NOWINA: Thank you, Mr. De Vellis. You may
9 proceed, Mr. De Vellis.
10 MR. De VELLIS: Thank you, Madam Chair.
11 CROSS-EXAMINATION BY MR. De VELLIS:
12 MR. De VELLIS: Good morning, panel. I'm going to
13 start with the engagement letter that is -- was referred to
14 in the examination in-chief and is found at IGUA No. 65.
15 It's at tab 12 of our -- VECC's compendium, Exhibit K9.2.
16 I should indicate to the panel and to the Board that
17 our compendium, beginning at tab 10, contains excerpts from
18 interrogatory responses from various parties that relate to
19 corporate cost allocations, for ease of reference.
20 Now, Mr. Mees, the letter is from Deloitte and
21 directed to you. It's dated August 4th, 2004. Can you
22 tell me when Deloitte was first contacted regarding the new
23 methodology, the RCAM methodology?
24 [Witness panel confers]
25 MR. MEES: It was sometime in July. I believe it was
26 early July.
27 MR. De VELLIS: And who would have contacted Deloitte?
28 MR. MEES: The initial contact with Deloitte was
2 MR. De VELLIS: Yourself, okay. And did you have
3 meetings? Before this letter was sent, were there meetings
4 scheduled or held to discuss the methodology, the new
6 MR. MEES: To discuss the process that we would
8 MR. De VELLIS: Yes.
9 MR. MEES: Yes, there was, before this was finalized,
11 MR. De VELLIS: And what was -- can you give me a
12 sense of what the discussion was? First of all, who was
13 present in the meetings?
14 MR. MEES: Through the -- through July, basically, I
15 think the meetings involved the four of us here, primarily.
16 MR. De VELLIS: Approximately how many meetings would
17 have been held?
18 [Witness panel confers]
19 MR. MEES: Based on a quick discussion that we just
20 had here, we believe it was probably in excess of five
21 meetings, and in those meetings there was workshops that
22 were undertaken to nail down roles and responsibilities.
23 MR. De VELLIS: Workshops within those meetings, you
25 MR. MEES: Yes.
26 MR. De VELLIS: Was anybody from EI involved in the
28 MR. BROWN: Yes, I was.
1 MR. De VELLIS: Oh, pardon me. And can you give me a
2 sense of what the discussion was regarding the purpose of
3 developing a new methodology?
4 MR. MEES: Sorry, can you repeat that?
5 MR. De VELLIS: Well, what was Deloitte told was the
6 purpose of developing a new corporate cost-allocation
8 MR. MEES: The primary purpose was to develop a
9 methodology that met the Board's requirements. Essentially
10 what we wanted to do was develop a methodology that met the
11 findings of the initial Deloitte evaluative report.
12 MR. De VELLIS: But, more specifically, what issues
13 were discussed regarding the problems with the old
14 methodology and the reasons for doing a new methodology?
15 MR. PIENAAR: If I may respond, Madam Chair, one of
16 the underlying issues, as I mentioned before, was that the
17 old methodology did not automatically produce documentation
18 that was substantiable or easily substantiable or that
19 could -- the methodology itself could not actually be
20 easily evaluated against the OEB's requirements, as I’ve
22 We, therefore, had made multiple recommendations
23 around the fact that the method -- the -- Enbridge should
24 consider developing a methodology that actually would be
25 easy to evaluate and would actually match with the
26 requirements that are simply laid out in ARC. That was
27 underlying our entire CAM methodology -- was the prime
28 purpose. And that's the purpose with which Enbridge -- or
1 the spirit in which they came back to us and said, Well you
2 recommended these, you know, the need for a new methodology
3 that actually aligns to services; can you help us develop a
4 new methodology that aligns to services?
5 Because we -- if you recall, I mentioned that we
6 expected that if they did align a new methodology, they
7 would be able to more easily -- and it's actually words of
8 this nature, in our CAM report, they would more easily be
9 able to substantiate the allocation of their costs. And
10 for that reason, Enbridge came to us and said, Well, then,
11 we need -- we should -- if our costs are valid, so we need
12 a new methodology to be able to visibly reflect that those
13 costs are valid.
14 MR. De VELLIS: Mr. Pienaar, you are aware that
15 Enbridge - EGD or EI - were not at all happy with the $13.5
16 million recommendation from the 2004 evaluation; is that
17 fair to say?
18 MR. PIENAAR: I am aware and it's actually stated in
19 our RCAM preamble, that there were certain -- that EI did
20 not fully -- yes, they were not comfortable with the 13.5.
21 MR. De VELLIS: I will take that as a "yes". Okay.
22 And you were aware, also, that EI intended to keep using
23 the CAM methodology as a methodology they would charge EGD
25 MR. PIENAAR: At the time --
26 MR. De VELLIS: -- internally?
27 MR. PIENAAR: -- I apologize. Madam Chair, at the
28 time of these discussions, as we entered into this round of
1 discussions, that was not entirely clear. There was --
2 that was something that evolved as we moved through the
3 process, that this would be focused on the --meeting the
4 regulatory requirements of the OEB, but that the primary
5 CAM methodology which they have, which is largely -- they
6 would continue to use that for performance-evaluation
7 purposes within their own organization. That wasn't known
8 at the time that we -- that was developed.
9 MR. De VELLIS: Mr. Mees, were you aware that EI would
10 continue to use the CAM methodology as the methodology it
11 would charge, internally, to EGD?
12 MR. MEES: I think I was aware, yes.
13 MR. De VELLIS: You were aware. Would you have
14 conveyed that to Deloitte at the time?
15 MR. MEES: I'm not -- I'm not -- I wasn't hiding it
16 from Deloitte. It wasn't the primary purpose. The primary
17 purpose was to develop a methodology that met the Board's
19 MR. De VELLIS: I understand, but you said you weren't
20 going to hide it from them, and you were discussing the
21 methodology. Wouldn't that be something that would come up
22 during your discussions?
23 MR. MEES: I believe it did come up through those
25 MR. De VELLIS: All right. And would you agree with
26 me that, as far as EGD or EI are concerned, their incentive
27 was to recover as much of the CAM amount as possible, in
28 developing a new methodology?
1 MR. MEES: No. I would not agree with that. Our
2 primary purpose, here, was to do the right thing. We
3 wanted to make sure that we met the Board's requirements in
4 developing this methodology. All along, that's -- that was
5 our driving force. It wasn't to recover more or less. It
6 was just -- if we developed a methodology that meets the
7 Board requirements, that the service recipients -- you
8 know, the services are services that the service recipients
9 need, then, whatever falls out, falls out. But that was
10 our primary motivation.
11 MR. De VELLIS: Well, Mr. Mees, we’ve heard evidence
12 in different contexts in this proceeding that Enbridge --
13 or, Enbridge or Enbridge Inc.'s management attention is
14 guided by the incentives that it has, and -- in other
15 words, its actions are determined by incentive. So would
16 you agree with me that, in this case, it had a strong
17 incentive, if it was going to be charging EGD whatever the
18 count amount was, whether it was 22 million or 25 million,
19 to recover as much of that as possible, in rates?
20 MR. MEES: Well, I can't speak for all of EGD people,
21 but I can speak for myself. I was not driven that way, and
22 I was the primary person responsible for the development
23 within EGD. My incentive is not based on how much is
24 recovered. That's not my motivation. My motivation, as I
25 said, was to do the right thing to meet the requirements
26 so, essentially, we don't need to do this again.
27 MR. De VELLIS: I'm not asking about you,
28 specifically, Mr. Mees. I'm just asking from a company
1 perspective, if that was -- that would be an incentive for
2 the company.
3 MR. MEES: Yes, you know, we do -- the company does
4 want to make sure that it recovers the amount of costs for
5 the services that are being provided to it. And I think
6 that has been clear through the first two panels. That is
7 our motivation.
8 MR. De VELLIS: And in your various meetings with
9 Deloitte, that incentive would have become quite apparent
10 to them, would it not?
11 MR. MEES: I’ll let Deloitte answer that question.
12 MR. PIENAAR: Let me -- again, I think I'm repeating
13 an answer I've already given.
14 It did not come across to us that Enbridge, Madam
15 Chair, was interested in recovering as much as possible, as
16 is being suggested.
17 What came across to us is that Enbridge wishes to --
18 wished to recover as much as is justifiable. Hence, the
19 need to establish a methodology that was justifiable in
20 terms of the regulation.
21 MR. De VELLIS: Would you agree with me that, if the
22 2004 evaluation had led to a recommendation of 21 million,
23 there would never have been a RCAM methodology?
24 MR. PIENAAR: Madam Chair, I cannot speculate on that
25 answer. May I add?
26 Our CAM report did not only contain a number. It
27 contained an evaluation of the methodology. If you read
28 throughout the report, we advised at every single stage of
1 how the methodology did not actually match the regulatory
2 requirements. So there is a possibility that, even if it
3 was 21 million-odd, as you recommended, because our report
4 said that the methodology was still not appropriate,
5 Enbridge Inc. may well have still undertaken a further
6 development of a new methodology, to meet the requirements
7 of RCAM.
8 MR. De VELLIS: You spoke a little bit earlier in your
9 examination in-chief about the limitations you developed --
10 or identified in your CAM evaluation.
11 Can you turn to -- there is a copy of the CAM
12 evaluation at tab 5 of our -- VECC's compendium.
13 MR. MEES: We have that, here.
14 MR. De VELLIS: Thank you. At page 5, at the bottom
15 of page -- sorry at the bottom of page 4 of the report. It
16 says, at the last sentence on page 4:
17 “This type ...”
18 I’ll start from the sentence before:
19 “An activity-based costing analysis, on an
20 event-by-event basis, would also have been
21 required. This type of activity-based
22 information was not -- is not currently captured
23 by the accounting or costing systems of either EI
24 or EGD, as the ADR methodology did not intend to
25 focus on service- and activity-based cost.”
26 Now, when you say activity-based, do you mean cost
27 based on the amount of time spent on particular activities;
28 is that right?
1 MR. PIENAAR: Yes. Based on effort.
2 MR. De VELLIS: Okay.
3 MR. PIENAAR: Based on effort.
4 MR. De VELLIS: And if you could now turn to page 60
5 of the same report, in the second sentence at the top of
6 the page:
7 “We also recommended that, in the future, time-
8 based allocation should be based on documented
9 time support, unless an alternative approach can
10 be demonstrated to produce results that are not
11 materially different.”
12 Now, again, what you're identifying there is a lack of
13 time-based information relating to costs; is that right?
14 MR. PIENAAR: At the time that we undertook the 2004
15 CAM report, correct.
16 MR. De VELLIS: Okay. And what you -- underneath
17 there, you have table 7.2.2. You refer to various proxy
18 allocators. The first one is SCER, the financing -- or I
19 believe it was called first capital employed ratio.
20 MR. PIENAAR: Correct.
21 MR. De VELLIS: And it is now called the financing
22 capital employed ratio in the RCAM methodology?
23 MR. PIENAAR: Correct.
24 MR. De VELLIS: So the same proxy allocators, you used
25 this proxy allocator in CAM. Now, that was because you
26 didn't have the time-based information that you say you
27 needed; is that right?
28 MR. PIENAAR: No, that is not correct. We were not
1 using other allocators, other than time, or cases because
2 there was no time available. You can only use time in
3 cases where effort can be directly attributed to a cost
5 So this did not imply that the time methodology --
6 there is no methodology, really, where you have multiple
7 affiliates, that I believe they could be based purely on
8 time, because there is only certain cost objects that you
9 can actually attribute the amount of effort that you're
10 spending on that particular cost object. You would always
11 be left with a group of costs that multiple affiliates
12 benefit from but that can't be attributed directly.
13 I will give you an example. Take cash management. If
14 you are pooling your costs as a group of affiliates in a
15 cash management environment, there are going to be some
16 examples where -- sorry, I should say some activities where
17 I am speaking directly to the affiliate about the cash that
18 is coming in, When is the cash coming? What's happening?
19 That activity I know I'm spending time on EGD.
20 When cash needs to go back to EGD, I might have a
21 conversation again with EGD and discuss what -- the timing
22 of that, et cetera. I know exactly when the cash is coming
23 back. But the very purpose of actually doing it as a
24 shared service is because there are economies of scale.
25 Now, once the cash is in my hands, I've got cash from
26 multiple affiliates, and I'm now dealing with all of the
27 management related to that cash on behalf of the affiliates
28 I'm doing that for. So I'm negotiating with the bank. I
1 am, you know, moving monies around. I'm putting them in
2 budgets and so forth. There is no way that I know whose
3 $10 or $20 I'm actually dealing with at this particular
4 point in time, because it is actually a cash-pooling basis.
5 So there is a circumstance, always, in any
6 methodology, even when you are using time, that there is
7 going to be a significant -- and in every service,
8 individual service, where there is going to be a certain
9 amount of indivisible costs that do benefit the affiliate,
10 but you can't actually directly attribute the time. So you
11 always will need to use additional allocators in addition
12 to CAM.
13 MR. De VELLIS: Would there be any other regulator
14 affiliates using the RCAM methodology?
15 MR. PIENAAR: I will pass it over, the question, on to
17 MR. MEES: Not at this time. Just EGD. Right now, it
18 was designed specifically for EGD.
19 MR. De VELLIS: You mentioned the three-pronged test
20 that -- developed by the Board in 493-494. It's also
21 referred to at tab 1 of our compendium at the third page,
22 beginning at paragraph 571.
23 And we've also heard evidence today and in other days
24 about this stand-alone principle that was employed in the
25 RCAM methodology. There is nothing in the three-pronged
26 test that refers to a stand-alone principle, is there?
27 MR. PIENAAR: Madam Chair, if I could just have a few
28 minutes to just read the preamble running into the
1 three-prong test and in the preamble that follows?
2 MS. NOWINA: Certainly.
3 MR. PIENAAR: Madam Chair, on a quick scan, I don't
4 see the stand-alone principle as a set of terminology
5 actually specifically worded in the three components of the
6 three-prong test. I would, however, add that without the
7 opportunity to review the Affiliate Relationships Code and
8 some of the other regulatory precedents that we have
9 referred to where the stand-alone principle has been
10 discussed, it may well be aligned in there.
11 MR. De VELLIS: Well, you mentioned it in your
12 evaluation report, and you would know if it appeared
13 somewhere in either the regulatory precedent or the --
14 MR. PIENAAR: Yes. I do believe it appears in
15 regulatory precedent, but I can't put my finger on the
16 actual reference right now.
17 MR. De VELLIS: This is something that -- this is a
18 principle that Deloitte introduced into the methodology,
19 isn't it?
20 MR. PIENAAR: No, it was a principle that actually is
21 contained in the CAM report very clearly, a stand-alone
22 principle, and we -- as we said, we then adopted some of
23 those principles as part of the criteria in this particular
24 report, and, as I indicated, I am not sure of the reference
25 of the stand-alone principle in regulatory precedent in the
26 CAM report.
27 MR. De VELLIS: Well, the CAM report was a Deloitte
1 MR. PIENAAR: Correct. I'm just clarifying which
3 MR. De VELLIS: Well, my question was: It's a concept
4 that is introduced by Deloitte?
5 MR. PIENAAR: The concept was introduced by Deloitte,
6 and I believe it was on the basis of regulatory precedent.
7 MR. De VELLIS: Now, do you agree with me that one of
8 the main purposes of developing RCAM is to meet the onus of
9 proof on the company that services to operate the utility,
10 if they're procured from affiliates, are both required and
11 that the costs to the utility are at or below fair market
13 MR. PIENAAR: Could I ask you, Madam Chair, if I could
14 just ask to have the question repeated?
15 MR. De VELLIS: I beg your pardon. It was a little
16 disjointed. Do you agree that the purpose of the RCAM
17 methodology is to meet the company's onus of proof that
18 services that are procured from an affiliate are purchased,
19 in quotations, at or below fair market value?
20 MR. PIENAAR: If I could separate that question, if I
21 may, into two. Firstly, yes, do I believe the onus of
22 proof rests with the company? Yes, I do.
23 The second part of the question is related to whether
24 that onus of proof relates only to at or below fair market
25 value. I would suggest that ARC actually suggests that
26 cost-based -- a cost-plus methodology is also appropriate
27 where market-related prices are not available for the
28 particular services that are being acquired.
1 MR. De VELLIS: Are you referring to the lower of
2 costs or fair market value principle?
3 MR. PIENAAR: No. I'm referring to cost plus. If I'm
4 not mistaken, ARC refers to costs -- that are cost-based --
5 in other words a cost-plus methodology, cost plus rate of
6 return approach to cost allocations is appropriate where
7 market-based pricing is not available for the purchase of
8 the services being acquired.
9 MR. De VELLIS: In that case, it is a proxy for the
10 fair market value?
11 MR. PIENAAR: No. It does not use those words in ARC.
12 If I may just take a minute to confirm that?
13 If I may refer you to the Affiliate Relationship Code,
14 as amended, under the heading “Shared Core Corporate
15 Services”, 126.96.36.199, it reads:
16 “Despite sections 2.3.4 and 2.3.9 for shared
17 corporate services, fully-allocated cost-based
18 pricing, as defined under sections 2.3.10 and
19 2.3.11, may be applied between a utility and an
21 There is, in that section, no reference to proxies to
22 market-based price. It simply -- it says it is --
23 MR. De VELLIS: Well, whatever the standard, the onus
24 of proof is on the company to show that the costs are
25 reasonable, whether it is costs or fair market value.
26 MR. PIENAAR: Let me answer it this way.
27 In our report, Madame Chair, we very specifically
28 state that market price -- it's not possible to determine
1 ultimate market price unless you actually transact
2 externally. And we also describe that the nature of the
3 services that are being acquired are such that there are
4 very few cases where the services that Enbridge Gas is
5 acquiring from Enbridge Inc. are actually available in the
6 marketplace, at all, to be acquired. And even where they
7 are, while you can do benchmarks, benchmarks are highly
8 subjective, and until you actually do a final transaction,
9 you're not -- it's hard to evaluate whether you are,
10 actually, at below cost or -- sorry, below market price or
12 So the costs -- hence, I believe, that ARC allows
13 cost-based pricing. And, you know, on the basis of -- and
14 hence you need to -- we believe we need to read a few
15 things in conjunction with each other. Not only ARC but
16 the three-prong test. Because the three-prong test does
17 have a test that says -- it has a cross-benefit test, at
18 which point one needs to evaluate, Is there a benefit to
19 Enbridge Gas for the costs that they are paying, based on a
20 cross-based pricing.
21 By application of the prudence principle, if one
22 applies the prudence principle to that evaluation of the --
23 of that third prong, you come up with an answer that says,
24 This price is reasonable, on a cost-based pricing measure,
25 without, necessarily, direct reference to a market price,
26 which doesn't exist.
27 MR. De VELLIS: Mr. Pienaar, I actually wasn't asking
28 about the relative benefit of market-based pricing versus
1 cost-based pricing.
2 My question is, simply, whether you agree -- and
3 perhaps Mr. Mees could address this point -- whether you
4 agree that the onus is on the company to establish the
5 prudence of those costs that are sought to be recovered
6 from ratepayers.
7 MR. MEES: Yes, I would agree that it is on the
8 company. The company, as part of its rate case, must
9 provide evidence on what its costs are. And I think the
10 company has done that, in this case.
11 MR. De VELLIS: In the past, a primary mechanism for
12 establishing the prudence of those costs is to have a
13 comparison to past years. Do you agree with that?
14 MR. MEES: I would say that that’s one way to look at
15 it. You can look at history. In this case, history --
16 looking at history doesn't make total sense, because of the
17 differences. But that is one option.
18 MR. De VELLIS: For example, if you look at your O&M
19 budgets, there's various schedules -- ample references to
20 past years.
21 MR. MEES: Yes, there is. But there are also items
22 within this rate case - and I can't think of any at this
23 point - where history isn't important. It's a new activity
24 or something -- you know, in this case, a new methodology.
25 MR. De VELLIS: And neither the company or Deloitte's
26 has made any effort to try and assist us and the Board in
27 comparing this report with previous cost-allocation
1 MR. MEES: Sorry?
2 MR. PIENAAR: I don't believe that is correct. I
3 believe there are -- and my colleague is just looking up
4 the references in responses to the IR schedules that
5 actually showed some comparisons. We just need to take a
6 look at that. For example in VECC 86, item C2, we're just
7 referring to --
8 MR. De VELLIS: Well, we've put various comparisons
9 before previous panels and the answers that we've received
10 are just, comparisons aren't valid.
11 MR. TOTH: That's correct.
12 MR. De VELLIS: Okay.
13 MR. TOTH: Those comparisons were trying to compare
14 loaded department costs to unloaded department costs.
15 Therefore, you're not comparing apples to apples.
16 As I described in the methodology, the department
17 costs that exist, and the breakdown that exists by service,
18 is on a loaded basis, and prior reports were on an unloaded
19 basis. Therefore, the inability to compare. It's a
20 different methodology. The make-up is different. The
21 services are also different.
22 And trying to “backwards engineer” services, based on
23 different allocators and different information, is going to
24 lead to erroneous assumptions and conclusions.
25 MR. PIENAAR: Madam Chair, if I may also add to Mr.
26 Mees's response in response to the question relating to the
27 validity of history in assessing the validity of the
28 current application.
1 I would just recommend caution, to the extent that our
2 CAM report highlighted that the methodology that was used
3 was inappropriate, and a new methodology needed to be used.
4 Therefore, it's inferring that there was an underpricing of
5 the services, based on the approach that had been used to
6 that point in time.
7 So our position is that, for the first time, there is
8 now a methodology that can be evaluated against the Ontario
9 Energy Board's requirements, as contained in your
10 precedents and as contained in ARC. So history, to some
11 degree, now becomes, in my opinion, a little less relevant,
12 or almost not relevant. Because this is the first time you
13 now have a service-based methodology that you can actually
14 evaluate against your own regular regulations of the
15 Ontario Energy Board.
16 So with respect, Madam Chair, I think the starting
17 point is this methodology, not the history.
18 MR. De VELLIS: And that was the starting point for
19 your analysis, wasn't it, that the amounts previously
20 stated were under-reporting -- or, underpricing the
21 corporate costs allocated to EGD?
22 MR. PIENAAR: That wasn't the starting point for the
23 development of RCAM. There are schedules that highlight
24 some of those differences, for the purpose of clarifying
25 the degree of the underpricing, but that wasn't the
26 starting point of developing RCAM or doing our evaluative
28 MR. De VELLIS: Well, you just said that the CAM
1 methodology showed, in your opinion, that the company had
2 been undercharging EGD. So, if that’s what the CAM
3 methodology says, wouldn't that have been your starting
4 point in developing a new RCAM? Rather, if that’s your
5 opinion of the CAM methodology --
6 MR. PIENAAR: No. Neither the number that the CAM
7 report produced nor the methodology, itself, was the
8 starting point. The methodology was wrong. It wasn't
9 satisfactory -- sorry, Madam Chair. We didn't believe the
10 methodology was satisfactory, and we didn't believe the CAM
11 number, itself, was the starting point, because that number
12 was wrong, itself.
13 So we started fresh. We said, Let's go look at the
14 methodology, based on the principles that are contained in
15 ARC and the OEB’s regulations, and then let’s evaluate that
16 methodology to make sure it actually meets all of the
17 issues that we had, relating to the prior methodology in
18 the CAM report.
19 MR. De VELLIS: And --
20 MR. TOTH: I’m sorry, if I could add to that. As I
21 mentioned, before, all the services were determined, the
22 time study was determined, the methodology, itself, was
23 determined, the allocators were discussed and determined,
24 prior to any number being generated.
25 MR. BROWN: If I, also, might add, Madam Chair, it may
26 be worthwhile if we take a look at Schools Interrogatory
27 18. So if I could refer everyone to Exhibit 1, tab 18,
28 schedule 18.
1 MR. De VELLIS: It's at our tab 13.
2 MR. SOMMERVILLE: Did you say tab 13 or 14
3 MR. De VELLIS: It's at tab 13 of the VECC compendium.
4 MR. SOMMERVILLE: Thank you.
5 MR. BROWN: So I think what this shows is that we are
6 cognizant of the need to look back, and, in order to
7 recognize the new methodology, we answered this IR and
8 prepared a schedule that does apply the methodology going
9 back as best as we could. Granted we had to use a number
10 of assumptions that were really 2006 assumptions, because
11 we only had a time study for 2006, but, regardless, we
12 applied the methodology to the Enbridge budget, and I
13 believe this schedule is the most appropriate schedule to
14 look backwards from the 2006 amount for comparability to
15 prior years.
16 MR. De VELLIS: Mr. Pienaar, getting back to your
17 point about the CAM methodology, although you said that the
18 CAM methodology was flawed - and I believe you also said
19 that in your examination in-chief - and yet the RCAM
20 produced an amount that was almost identical to the CAM,
21 what was derived from the CAM methodology.
22 MR. PIENAAR: Yes. Let me clarify that. I did not
23 say that the CAM -- the dollar value that was produced out
24 of CAM was flawed. I said the methodology itself was
26 And that's linked to the fact that we then said that
27 costs that CAM produced was not substantiable. We could
28 not substantiate those costs, because the documentation
1 that CAM produced, we were not able to evaluate it, and we
2 were not able to evaluate that methodology easily against
3 the criteria.
4 So I wasn't addressing the number. I was addressing
5 the methodology. So when we redeveloped the methodology,
6 we now came up to a point which, to some degree, justified
7 exactly what Enbridge Inc. had always told us, that the
8 number was good. The number was good. It's the
9 methodology that was the problem.
10 We did -- I will repeat what Mr. Toth said. We
11 produced a methodology prior to looking at any numbers.
12 When it was finally completed, the models were completed,
13 we then ran the numbers and we came up to an amount which
14 you correctly stated was close to CAM. We then made
15 further adjustments for the three-prong test, as we said.
16 MR. TOTH: Sorry, if I could just add to that, as
17 well, there is actually a material difference between what
18 RCAM and CAM produces for 2006. The projection for CAM for
19 2006 was close to $25 million versus RCAM being $21
21 So as much as the methodology is different, so is the
23 MR. De VELLIS: So you didn't think that the amount
24 was wrong. You just didn't agree with the way that it was
26 So what you did was came up with a different way of
27 counting it to get to the same dollar figure?
28 MR. PIENAAR: That's because -- yes, that is correct,
1 because we were valuating it against 2004, and we were
2 evaluating against the set of criteria. The methodology
3 that was in application at that point in time was not easy
4 to evaluate. We had to re-cost.
5 MR. PIENAAR: In fact, if you look through our CAM
6 report, a complete portion -- sorry. We had to re -- as I
7 said to you, it was a calculation, not a methodology. We
8 had to re-cost the numbers produced out of CAM, because
9 they were department numbers. And this is important here,
10 because there are a number of schedules that are still
11 being delivered to us that are based on departmental costs,
12 whereas the new methodology is service-based costs.
13 So we had to attempt to convert the department costs
14 to service-based costs, and then we found that once we had
15 done that, there was a number of items we couldn't simply
16 -- as independent evaluators, we could not substantiate
17 those numbers. So we were not prepared to stand up in
18 front of the Board and say we stand behind those numbers.
19 Hence, we made the adjustments we made in CAM.
20 MR. TOTH: I would just also like to clarify one
21 point. The methodology was not developed to produce a
22 number, a target number. The methodology was built
23 bottoms-up, ground-up, based on allocation principles,
24 based on the nature of the cost, the causes of the cost and
25 how they're actually used. And the number that came out
26 was evaluated against the three-prong test, and we can now
27 substantiate that number, and, you know, hence, the
28 transparency; hence, the details. That's the way we built
1 it. It was not to a target number.
2 MR. De VELLIS: It just so happened that the number
3 that resulted was almost identical to a number that
4 resulted from the methodology which you say was flawed?
5 MR. TOTH: Absolutely. As I mentioned before,
6 actually, there is a significant material difference. CAM
7 produces $25 million and RCAM produces $21 million. The
8 numbers are not close. They are different numbers.
9 MR. De VELLIS: Madam Chair, I see it is almost 10:30.
10 Would you like to take the morning break?
11 MS. NOWINA: We can do that, Mr. De Vellis. So we
12 will break now and return at 10:45.
13 --- Recess taken at 10:28 a.m.
14 --- On resuming at 10:50 a.m.
15 MS. NOWINA: Please be seated.
16 Please proceed, Mr. De Vellis.
17 MR. De VELLIS: Thank you, Madam Chair.
18 Mr. Pienaar, can you tell me whether Deloitte has any
19 other consultation arrangements -- or, engagements, rather,
20 with EGD or EI?
21 MR. PIENAAR: Currently running, there may be a minor
23 MR. De VELLIS: You mentioned Gazifere
24 MR. PIENAAR: At the moment, nothing that I'm aware
26 MR. De VELLIS: In your examination in-chief, you
27 mentioned Gazifere. When was that?
28 MR. PIENAAR: That was in 2004 -- sorry, that was in
2 MR. De VELLIS: In the last two years, say, besides
3 Gazifere are there any others that you are aware of, with
4 either EGD or EI?
5 MR. PIENAAR: Are you referring to general engagements
7 MR. De VELLIS: Yes.
8 MR. PIENAAR: -- or cost allocation?
9 MR. De VELLIS: No, no, generally.
10 MR. PIENAAR: Not that -- well, not for Gazifere, but
11 within Enbridge, yes --
12 MR. De VELLIS: Yes.
13 MR. PIENAAR: -- there were other engagements.
14 MR. De VELLIS: Approximately how many?
15 MR. PIENAAR: If I'm not mistaken, there was one
16 engagement that I am aware of from -- with Enbridge Inc.,
17 in Calgary. And there was, potentially, two that I’m aware
18 of for Enbridge Gas. Separate engagements.
19 MR. De VELLIS: Would you know the total dollar value
20 of the retainers?
21 MR. PIENAAR: For the work that we did for Enbridge
22 Inc. - and that was about 24 months ago, perhaps a little
23 more - that was approximately in the 90,000 to 100,000.
24 For the work we did for Enbridge Gas -- was also about 24
25 or so months ago - around credit and collections, that was
26 - I think, also, in the $100,000 range.
27 The other work that we did, just recently, at Enbridge
28 Gas, was a $25,000 engagement.
1 MR. De VELLIS: Can you turn to IGUA Interrogatory No.
2 116. That's at tab 10 of our compendium. Sorry, it’s
3 Board Staff 116, but there is one at tab 10.
4 The interrogatory had to do with Deloitte's dual role
5 as both -- creating the methodology and reviewing it. And
6 on page 2, the response from the company is:
7 “The company does recognize that some intervenors
8 may be concerned by the appointment of Deloitte
9 to a dual role in the development of the RCAM and
10 independent assessment of the RCAM. The company
11 recognizes that Deloitte is a professional
12 organization with strong corporate ethics and
14 Now, how does that resolve -- I mean, whether or not
15 Deloitte is a professional organization with strong
16 corporate ethics, how does that resolve the obvious bias
17 that's created when an organization is -- or when anybody
18 is asked to review their own work?
19 MR. PIENAAR: Firstly, if I could just correct -- not
20 correct. If I could make a comment about the question. I
21 think it is a bit of a leading question to talk about
22 obvious bias. There are circumstances where companies do
23 work in this kind of environment, companies like ourselves.
24 So -- I mentioned before that the key for us was that
25 the evaluation of RCAM was criteria-based. And so I,
26 therefore, believe that the question of independence - how
27 independent were we? - is not actually the key question.
28 I think the key question is, you know, Did RCAM pass
1 the criteria, or didn't it? And we believe, as set out in
2 our evidence, that because the criteria -- the criteria
3 weren't entirely developed by ourselves. It’s based on
4 regulation -- precedent and regulations. So we believe it
5 passed that.
6 MR. De VELLIS: Well, another key question is the
7 impartiality of your review of the methodology.
8 MR. PIENAAR: I'm not sure if you're asking, Were we
10 MR. De VELLIS: No, I --
11 MR. PIENAAR: -- because there's a couple of forms of
12 independence, and we need to know what form of independence
13 we are talking about.
14 MR. De VELLIS: I'm talking about impartiality. So
15 don't you --
16 MR. PIENAAR: Are you asking whether we were
17 impartial, and whether there was undue influence placed
18 upon us by Enbridge Inc. and Enbridge Gas? Is that the
20 MR. De VELLIS: Well, that's also a good question.
21 But my question was, don't you agree that -- or is it your
22 position that there is no inherent bias when an
23 organization is asked to do -- to review their own work?
24 MR. PIENAAR: There is the potential for a bias. So
25 if the question is, Were we truly independent from that
26 point of view? I would say the answer is “no”: we were
27 not truly independent. At the end of the day, Enbridge
28 paid us to advise on the preparation of RCAM, and Enbridge
1 paid us to prepare an evaluative report. So we were not
2 independent from -- the very fact that we were paid by
3 Enbridge, and not by somebody else, already creates a link
4 -- I think if where you’re going.
5 Was there any undue pressure on us, in terms of or
6 opinions on the evaluative report? Absolutely not. We
7 made the opinions, and then, as we said, we actually
8 developed the RCAM --we led most of the development of the
9 RCAM. So it was --
10 MR. De VELLIS: Can you turn to, now, IGUA
11 Interrogatory No. 65. That is at tab 12 of our compendium.
12 First page of tab 12.
13 At the bottom, it says that the company estimates that
14 Enbridge Gas Distribution's internal costs were $66,750,
15 representing 320 hours of management time, that’s to
16 develop the RCAM methodology. In addition, Enbridge Inc.
17 corporate office incurred 2,755 hours of time, which it
18 estimates to be $385,700.
19 So the overwhelming majority of the time was spent
20 with Enbridge Inc.; is that right?
21 MR. MEES: Yes, it was. In fact, I believe I answered
22 this question the other day, that the reason why there was
23 more time from Enbridge Inc. was because they had to
24 complete the time study, primarily. So there was a lot of
25 individuals -- 129 people that completed the time study.
26 MR. De VELLIS: It's obvious from just looking at
27 those numbers, this was an EI-driven methodology -- that
28 they spent the most amount of time with Deloitte to develop
1 the methodology.
2 MR. PIENAAR: Well, let me answer that. We spent a
3 lot of our time working out of the offices of Enbridge
4 Inc., but there were never any -- I would say there were
5 never any meetings or workshops in development of this
6 methodology in which Enbridge Gas was not present. And I'm
7 talking about workshops -- obviously, we had independent
8 interviews, when we were gathering data for our evaluative
9 report. But in developing RCAM it was a joint exercise.
10 Also, I think in the -- as described in the process,
11 Madam Chair, that Mr. Toth mentioned, the primary work in
12 developing the intercorporate services agreement was
13 actually done with EGD. Because EGD was the buyer, and we
14 wanted to be sure that those intercorporate services --
15 that those services that were going to be purchased
16 actually were required and defined by Enbridge Gas, and not
17 by Enbridge Inc. So that was -- there was significant
18 input there.
19 MR. De VELLIS: But just looking at the numbers,
20 obviously, the vast majority of the time was spent by
21 Enbridge Inc.
22 MR. PIENAAR: We would have to -- I would assume that
23 we would have to look at the break down of those numbers as
24 -- referring back to Mr. Mees's answer, and that is that
25 129 people at Enbridge Inc. participated quite actively in
26 a couple of hours in preparing the time study, plus a
27 number of hours in further discussions, validation, and so
1 So a significant chunk of that time is simply around
2 people answering questions on the time study, not
3 developing, providing data. A significant amount of the
4 additional portion of time was -- would be involved in
5 interviewing. Again, a significant amount of interviews
6 would have occurred for us to gather data at Enbridge Inc.,
7 because that's where the 180 shared-services people
8 actually reside.
9 So that's not -- that hasn't got much to do with
10 development. It's got to do with participation and
11 providing data.
12 MR. De VELLIS: But this is supposed to be a demand
13 toll methodology; right?
14 MR. PIENAAR: Correct.
15 MR. De VELLIS: Okay. And yet you spent almost all of
16 your time with Enbridge Inc. for them to tell you what they
17 do and very little time with Enbridge Gas Distribution for
18 them to tell you what they need?
19 MR. PIENAAR: I think I mentioned that we spent a fair
20 amount of -- we spent the bulk of the time in the beginning
21 developing the inter-corporate services with Enbridge Gas,
22 which was the right place.
23 As causality was a key measure or a key driver for us
24 and time was a driver of costs, the understanding of the
25 effort that was being spent has got nothing to do with EGD.
26 We weren't looking at how much effort is being spent at
27 EGD. We're looking at how much effort is being spent at
28 EI, because we are doing a cost price methodology.
1 So it would be natural that we would spend a
2 significant amount of time at Enbridge Inc. to understand
3 that effort, so that we could validate the time study.
4 MR. De VELLIS: I'm going to turn now to the -- your
5 review of the methodology at Exhibit A6, tab 10, schedule
7 You referred to the flow chart earlier in your
8 examination in-chief. I think a better version of that is
9 found at page 15 of schedule 2.
10 MR. PIENAAR: Mm-hmm.
11 MR. De VELLIS: And this version shows the dollar
12 amounts that are allocated from the various costs?
13 MR. TOTH: Correct.
14 MR. De VELLIS: Et cetera. I will just orient
15 ourselves. The flow is from left to right, and costs of EI
16 corporate services are collected and allocated to services,
17 and the costed services are then allocated to the
19 MR. TOTH: Correct.
20 MR. De VELLIS: Okay. And if you look at the primary
21 services, then, about the middle of the box, you see all
22 the arrows in the various support costs that are loaded
23 onto the primary services; is that right?
24 MR. TOTH: Yes, there's general expenses. There's
25 loaded departments and direct -- some direct charges and
26 support services loaded into primary services to come up
27 with the fully-loaded primary service costs.
28 MR. De VELLIS: So the primary services box, that's a
1 fully-loaded cost?
2 MR. TOTH: Correct.
3 MR. De VELLIS: All of the support costs, general
4 expenses, departmental budgets, et cetera, are loaded into
5 that box?
6 MR. TOTH: For the services outside of any direct
7 charges made to an affiliate.
8 MR. De VELLIS: Right. There are some direct charges
9 that are allocated directly. I'm just asking about the
10 primary services.
11 MR. TOTH: Okay.
12 MR. De VELLIS: And then that primary service is --
13 box, which is already fully allocated -- fully loaded is
14 divided into 7A and 7B?
15 MR. TOTH: Correct.
16 MR. De VELLIS: In terms of the allocation to EGD.
17 And 7A is -- represents cost directly allocated on time,
18 and 7B represents costs allocated by other allocators?
19 MR. TOTH: Okay.
20 MR. De VELLIS: Okay. Now, I'm just going to ask
21 about 7A, firstly. That's the costs directly allocated
22 based on time. At appendix 4, you have the schedule 2, the
23 time estimation study, or a summary of it?
24 MR. TOTH: Correct. The one I outlined earlier this
25 morning, yes.
26 MR. De VELLIS: Yes. Could you turn to page 2?
27 MR. TOTH: Of appendix 4, the time --
28 MR. De VELLIS: Appendix 4.
1 MR. TOTH: Yes.
2 MR. De VELLIS: Leave the flow chart handy. I will be
3 referring to it. There it says -- right at the top of page
4 2 of appendix 4, it says:
5 "The total time is defined as all hours worked,
6 both overtime and regular work hours."
8 MR. TOTH: That's what it says.
9 MR. De VELLIS: So basically when someone is
10 estimating their time, it is all of their time, overtime,
11 all of the hours that they work on EGD's behalf?
12 MR. TOTH: Correct.
13 MR. De VELLIS: Now, in --
14 MR. TOTH: Sorry, just to clarify, it is total time
15 whether or not they worked for EGD specifically or to other
16 affiliates or to all. It's total time, period.
17 MR. De VELLIS: Okay. In the service level
18 agreements, you don't have to turn to them, but it says
19 that the hourly rates are computed on the basis of 2,080
20 hours per FTE. Is that your understanding?
21 MR. TOTH: Sorry, where were you referring to?
22 MR. De VELLIS: Well, in the service level agreement,
23 you can turn to them if you like, but basically the -- my
24 question is that the hourly rate used to determine what the
25 costs of that time is is based on a 2,080 hours per year?
26 MR. TOTH: Correct.
27 MR. De VELLIS: Per full-time employee?
28 MR. PIENAAR: If I'm not mistaken, just to correct the
1 way you have characterized that, I don't believe 2,080 was
2 used to calculate the actual transfer of the costs. It was
3 used by us in our evaluation as a measure to establish, on
4 a cost-benefit basis, the number of approximate FTEs at a
5 certain rate that would be relevant.
6 MR. De VELLIS: Well, how was the time calculated?
7 How was the hourly rate determined to determine the amount
8 that is included in 7A, 6.67 million, then?
9 MR. TOTH: The amount in 7A is not based on an hourly
10 amount. What it did was it took all of the -- the
11 allocation based on time, which was derived as a
12 percentage, and added up by service, and said, This is the
13 total. It was not based on an hourly rate.
14 MR. De VELLIS: Well, let's work this through using an
15 example. If you had an employee who you found worked 100
16 hours of his or her time that was found to be allocable to
17 the affiliates, how do you calculate the dollar amount of
18 that time?
19 MR. TOTH: Okay. So we determined the fully-loaded
20 departmental costs. We then -- from the departments, we
21 determined the number of individuals in that department.
22 We determined, through the time study, the percentage of
23 time that each individual was involved in providing a
24 service. And for that portion that they deemed it direct
25 for that service, we added up all the direct portions of
26 their time, across all the services, and came up with that
28 So it wasn't -- you can't -- it's misleading just to
1 look at the 100 hours. It’s all the time that they spent
2 in the year, on average, let's say, 2,080; if they only
3 spent 100 hours directly to that service, it would be 100
4 over 2,080 to that service.
5 And then, if they said, of that time to that service I
6 spent ten percent directly for EGD, it would be ten percent
7 of that 100 that would be allocated directly to EGD, based
8 on time. Therefore, it would be 10 over 2,080.
9 Now, obviously, there is multiple people in
10 departments, and there was averaging of those individuals,
11 based on the time-estimation study
12 MR. De VELLIS: I'm just not understanding how you get
13 -- I mean, you had to have built the total for the service
14 somehow. Wouldn't you base it on the individual employees?
15 MR. TOTH: It was actually -- it was built up by the
16 individual employees -- the 129 that participated in the
18 MR. De VELLIS: Right. And how do you get at the
19 amount per employee? If they're only using a percentage of
20 their time?
21 MR. PIENAAR: Let me explain it. It was not based on
22 individual -- in other words, there was no rate calculated,
23 we mentioned. The allocation was based on a percentage of
24 time that was spent on the service, so, if I explain it,
25 this way. There's a total department, which is -- the
26 basic budget is the department. The department has
27 certain cost units after load-ins. We then ask all the
28 people -- now, bear in mind, each department might be
1 providing three services, two services, four services. We
2 then asked the individuals in that department, How much of
3 your time do you spend on each of those four services?
4 The person says, I spent 20 percent on number 1, 50
5 percent on number 2, 30 percent on number 3 and none on
6 number 4. This is purely service-based. We add up all
7 those numbers. We come to a percentage that the entire
8 department spends on an individual service. And we apply
9 that entire percentage to the cost of that department, and
10 we come up with a certain -- each of those four services
11 gets a service-based cost. There's been no rate
12 calculations, no 2,080 hours: just simply based on your
14 We then ask the same people a second time, Now, take
15 service number 2, which we've now by percentage calculated
16 the dollar value for: how much, for that service, do you
17 spend on EGD? - and the services have been very well-
18 defined - and how much do you spend on other affiliates,
19 specifically, that you can say, I spend on those six
20 affiliates X amount of time.
21 And then there will be a remainder, which is, I spend
22 ten percent of my time on EGD for this service; I spend 40
23 percent on all these other affiliates; and the 50 percent
24 of this service, which we have established is of benefit to
25 all of the affiliates, but I don't know: it's not possible
26 for me to determine which affiliate I'm actually spending
27 it on at a point in time; we have to find an allocator to
28 share that.
1 That percentage, as a total for that service, is then
2 applied, so that it can get spread to EGD and the other
3 affiliates, and leave an indivisible amount that an
4 allocator can be applied to.
5 So, again, even at that point, with is now the last
6 thing I described as item 7A, there's been no 2,080 hours,
7 there's been no rate calculated. It’s taking a cost and
8 attributing it on a percentage of time that’s spent to the
9 service, percentage of time that’s spent on the affiliate.
10 And that's why I mentioned that the 2,080 only becomes
11 relevant when we are evaluating and saying, Now, well, that
12 represents X amount of the full-time equivalence, and
13 that's an after-the-event evaluation calculation, so
14 nothing to do with how the calculation works in RCAM.
15 Is that clear?
16 MR. De VELLIS: Is the -- was the time study -- was
17 there a survey given to the employees, or how was the time
18 study conducted?
19 MR. TOTH: Sorry? Can you repeat that.
20 MR. De VELLIS: Did they work off a template? How was
21 it --
22 MR. TOTH: So, as I explained this morning, there was
23 a survey tool used --
24 MR. De VELLIS: Okay.
25 MR. TOTH: -- that guided them through the completion
26 of percentage of time, capturing total time across the
27 services and then to affiliates.
28 MR. De VELLIS: Is that in evidence? The survey?
1 MR. TOTH: The model?
2 MR. De VELLIS: Yes.
3 MR. TOTH: The model, itself? The survey tool?
4 MR. De VELLIS: Yes.
5 MR. TOTH: I don't believe --
6 MR. De VELLIS: Okay.
7 MR. TOTH: -- the model is -- in itself, in evidence.
8 MR. De VELLIS: Can we get a copy of it?
9 MR. PIENAAR: Can I just add the direct answer to your
10 question is, yes, a template was used. So a template of
11 services was used when they were doing the service-based
12 allocation and a template was used when they were doing the
13 affiliate-based calculation.
14 MR. De VELLIS: Right.
15 MR. PIERAAR: So, templates were used and they could
16 choose, I do this amount of this service, that service, and
17 it was the services that we’d already developed: the
18 template was the list of services.
19 MR. De VELLIS: Can we get a copy of the template,
21 MR. MEES: Sorry, just to clarify. I just want to
22 clarify, because you’re asking -- do you want a copy of the
23 Excel model that was used, that was the tool? Or do you
24 want a copy of the --
25 MR. De VELLIS: The template given to employees or
26 filled out.
27 MR. MEES: Okay.
28 MR. De VELLIS: The printout.
1 MR. PIENAAR: Which -- it is an electronic tool. So,
2 we --
3 MR. MEES: Well, we can just print --
4 MR PIENAAR: -- would have to -- because it takes you
5 through a series of screens, as you're filling it in.
6 MR. De VELLIS: Okay. Can that be printed out?
7 MR. MEES: We can provide that, certainly.
8 MR. De VELLIS: Thank you.
9 MR. BATTISTA: That would be Undertaking J11.1.
10 MR. BATTISTA: For clarification, is that the
11 template, I guess, taking a department and allocating it
12 into the service? Or is it, having allocated into service,
13 it's a template to go from the service to the affiliate?
14 MR. TOTH: There's actually multiple steps.
15 Therefore, it would be multiple templates.
16 MR. BATTISTA: Multiple?
17 MR. PIENAAR: It's multiple.
18 MR. MEES: Essentially -- I’ll see if I can provide a
19 summary. It’s a -- the templates used in the time study --
20 all templates used by employees in the time study.
21 MR. BATTISTA: Okay.
22 MR. De VELLIS: And would you have --
23 MR. TOTH: Sorry, what was the reference, again?
24 MR. BATTISTA: J11.1.
25 UNDERTAKING NO. J11.1: TO PROVIDE PRINTOUTS OF ALL
26 TEMPLATES USED BY THE EMPLOYEES IN THE TIME STUDY
27 MR. TOTH: Thanks.
28 MR. De VELLIS: Would you have information showing the
1 consolidated results, showing the hours spent on each
3 MR. TOTH: I believe that may already be in evidence.
4 MR. PIENAAR: It’s -- I don't think, in evidence,
5 Madam Chair, is the actual hours spent, but I think the
6 percentages of each department’s spent by service, and the
7 percentage of each service spent by department, is in the
8 lead schedule of appendix 6, and then, of course, is
9 repeated throughout in each service, as it is broken down
10 through the whole of appendix 6 for each service.
11 MR. TOTH: Again just to clarify, we didn't ask them
12 to fill in their hours. We asked them to fill in
13 percentage of time. So they didn't fill in ten hours here,
14 20 hours there. It was, Ten percent of my time here, 20
15 percent of my time here, as examples.
16 MR. De VELLIS: So you wouldn't have any information
17 showing hours?
18 MR. PIENAAR: No.
19 MR. TOTH: No.
20 MR. PIENAAR: No, didn't get that.
21 MR. De VELLIS: Sorry what was the reference that you
22 made to appendix 6?
23 MR. PIENAAR: I’m sorry. It’s Exhibit 6, tab 10,
24 schedule 2, appendix 6. The -- in the introduction, page
25 2, there's a summary table. And then, as I say, each of
26 those lines in the summary table is repeated, throughout,
27 on every single service.
28 MR. De VELLIS: Oh, these are by primary service?
1 MR. PIENAAR: Correct.
2 MR. De VELLIS: Do you have a similar table by EI
4 MR. TOTH: We're just checking.
5 MR. MEES: We have not provided the percentages of
6 each department that are allocated to each service, no.
7 MR. De VELLIS: Can we get a table showing that
9 MR. MEES: Let me just make sure that it is available.
10 MR. MEES: Yes, certainly we can provide that.
11 MS. NOWINA: Thank you. What is the undertaking
13 MR. BATTISTA: That will be J11.2, “a departmental
14 allocation by service.”
15 MR. MEES: Pardon me, “a departmental allocation to
17 MR. BATTISTA: "To service".
18 UNDERTAKING NO. J11.2: TO PROVIDE A DEPARTMENTAL
19 ALLOCATION TO SERVICE
20 MR. De VELLIS: So the time study was a time-based
21 cost estimate for service; is that right?
22 MR. PIENAAR: Yes. Depending on which number you're
23 referring to on the table, yes, but when you're going --
24 MR. De VELLIS: Generally.
25 MR. PIENAAR: -- from department to service, it is a
26 percentage estimate of how 100 percent of your time is
28 MR. De VELLIS: It wasn't based on time dockets?
1 MR. PIENAAR: It was not based on time dockets.
2 MR. De VELLIS: Now, at page 1 of appendix 4, it says:
3 "It is anticipated that this study will be
4 performed on a periodic basis in order to
5 maintain a substantive basis for the allocations
6 derived using RCAM."
7 Sorry, the top of the page, second paragraph under
9 MR. TOTH: I see that, yes.
10 MR. De VELLIS: Does this mean that Deloitte does not
11 anticipate the study will be updated for each rate case or
12 test period?
13 MR. TOTH: Actually --
14 MR. PIENAAR: I believe that further down, we referred
15 to this as likely to occur annually, but we suggested that
16 this would be periodic because we believed that it was the
17 core of Enbridge Inc. as to how often they wished to run
18 this time study. There may be reasons why they might want
19 to run it twice a year, for example. If there is a major
20 event, for example, coming down, divestiture or merger,
21 they may change their -- they may decide to run it at a
22 certain time of year. So we left it as periodic, rather
23 than being specific and saying it was annual.
24 To answer your question, we anticipated that it would
25 be run annually, at minimum. We had those discussions with
27 MR. De VELLIS: Mr. Mees, is there a plan that that
28 will be done for each rate case?
1 MR. MEES: It is anticipated that we will be -- on
2 every cost of service application, we will be running a
3 time study in advance of that.
4 MR. De VELLIS: In the middle of page 2 of appendix 4.
5 MR. TOTH: Sorry, what was the reference again?
6 MR. De VELLIS: It's still appendix 4, if you go to
7 page 2, in the middle of the paragraph starting with
8 "following the completion of the time estimation study".
9 MR. TOTH: Yes.
10 MR. De VELLIS: And perhaps you referred to this
11 already, but it says there a series of validation
12 interviews were conducted with department heads to ensure
13 that the individual time estimates and aggregate of time
14 estimates, et cetera, represent all available
15 forward-looking information.
16 MR. TOTH: Correct.
17 MR. De VELLIS: So does that mean that you didn't
18 review any time sheets or any quantitative information?
19 MR. PIENAAR: For the purpose of the time study, there
20 were areas where we absolutely needed to look at
21 quantitative data. For example, with regard to aviation,
22 we did detailed analysis of logs, of aircraft logs and so
23 forth, to develop our answers, but, as we mentioned in --
24 to you two questions before, we -- it was not based on time
25 docketing, and so we didn't refer to time-docketed
26 information across the board.
27 MR. De VELLIS: If you could turn back to the main
28 report, schedule A6, tab 10, schedule 2, page 11?
1 MR. SOMMERVILLE: Sorry, what was that reference, Mr.
2 De Vellis?
3 MR. De VELLIS: Exhibit A6, tab 10, schedule 2, page
5 MS. NOWINA: We have it.
6 MR. De VELLIS: There's two notes in the middle of the
7 page -- two paragraphs that begin with the word "note". I
8 will refer you to the second one. It says:
9 "It is also recommended that in the future time
10 studies and additional separate bucket be
11 included in the time model specifically to
12 identify time spent by EI departments servicing
13 EI itself. This would provide more granular
14 information for validating the allocation of EI
15 time between the other affiliates and the
16 indivisible time categories."
17 And earlier, when we looked at the report -- the CAM
18 evaluation, one of the, I guess, limitations that Deloitte
19 identified was that there wasn't enough activity-based
20 information, and now this seems to point to a similar lack
21 of information.
22 My question is: Why wasn't this information made
23 available or procured when you're developing the new
25 [Witness panel confers]
26 MR. PIENAAR: I think at the time that we conducted
27 the study, we had some discussions on this and we
28 determined that as the methodology was -- and the time
1 study was going to be used largely for Enbridge Gas and not
2 for all other affiliates, it was determined that we would
3 not -- at that point, we would not need to separate out all
4 of the other affiliates, and we included that in that other
5 affiliates bucket EI itself.
6 The costs are still allocated into that bucket and
7 ultimately distributed through the allocators, but at that
8 time we elected that it wasn't necessary. On reflection,
9 we felt it would be -- as we are describing here, added
10 enhancements going into the future, it would be an added
12 MR. De VELLIS: Isn't this a major limitation of the
13 study? Doesn't it call into question the whole indivisible
14 cost portion of the allocation?
15 MR. PIENAAR: No, absolutely not. It does not -- it's
16 not a major limitation, and it does not call into question
17 the indivisible allocation, largely because the significant
18 portion, as you are aware, of the time -- sorry, of the
19 allocation is based on time. That's clear. That is EGD's
20 time. Another significant portion is based on direct
21 charges, so that accounts for well over 50 percent already
22 of the allocation.
23 Then the only place that this becomes relevant is
24 through the portion that requires further allocators other
25 than time and direct. In that case, the allocators
26 themselves, the way the denominators are defined, actually
27 automatically excludes EI and -- as though it was being
28 allocated to EI.
1 So had the methodology, had each of the individual
2 departments -- sorry, each of the individual affiliates
3 listed, EI would have been one even under this methodology
4 as it was, because the allocators are dealing with it as
5 though -- as one group, but EI is one of the members of
6 that group. So, in fact, the allocators entirely deal with
7 the situation.
8 MR. De VELLIS: Well, if you go back to the table on
9 page 15, the same schedule, you see the box 7B. That's the
10 indivisible portion, and that is the amount of time spent
11 by EI employees servicing the affiliates, generally, as
12 opposed to EI itself. That's a third of the total, or
13 almost a third.
14 MR. PIENAAR: Can I just -- if I may, just to correct
15 that question. That includes the -- that is the portion
16 that is allocated to EGD, which excludes a portion by the
17 same allocator that would have been allocated to other
18 affiliates, as well as Enbridge. It's not excluding a
19 portion of the other affiliates, only. It’s including
20 other affiliates and Enbridge Inc., by definition, as I
21 mentioned, through the allocators.
22 MR. De VELLIS: Right. And what you've said at --
23 back in page 11, seems to identify a limitation in
24 identifying the time that’s spent servicing EI versus other
26 MR. PIENAAR: Yes. Our mandate was clearly not to
27 identify the cost that was attributed to EI. Our mandate
28 was to identify the -- individually, was to identify the
1 costs that should be allocated to EGD.
2 So we were satisfied that the allocators ensured that
3 costs were being allocated to EI, but we did not believe we
4 needed to know the actual amount that was being allocated
5 to EI, at the time, for the purposes of the methodology.
6 When we made the recommendation into the future, in
7 page 11, Madam Chair, we were simply recommending that this
8 would be of value, in terms of total transparency. It
9 wasn't affecting the methodology, or the basis of the
10 calculation; but it would be of value, in terms of
12 MR. De VELLIS: If you could turn up appendix 6 of the
13 evaluation -- Deloitte evaluation.
14 MR. MEES: Which page did you want us to turn up?
15 MR. De VELLIS: Page 2, appendix 6. We see at the
16 bottom of the -- column 9 - it's the fourth column from the
17 end - the “remaining indivisible costs” column. And, at
18 the bottom, it's -- $30,770,529 is the remaining
19 indivisible costs.
20 And -- well, this was pre-review, but of that, 8
21 million was allocated to EGD; is that right? I understand
22 it was then, subsequently, reduced by $1.4 million, did you
23 say? Well not that portion, but a portion of that would
24 have been reduced?
25 MR. TOTH: Correct.
26 MR. De VELLIS: Now, I apologize for flipping back and
27 forth, but if you can hold open, now, the flowchart at page
28 15 of schedule 2, the 30 million would be a portion of the
1 59 million shown at the middle of the page, under “primary
3 MR. BROWN: Correct.
4 MR. De VELLIS: And I asked you earlier if those are -
5 - the primary services are all fully-loaded costs. I mean,
6 all of the support costs are already loaded into that cost.
7 MR. TOTH: Correct.
8 MR. De VELLIS: Okay. If you would take, as an
9 example, that appendix 6, the “audit and accounting
10 advice”, in line -- row number 1, and you start with the
11 “fully-allocated services” multiplied by the “time-to-
12 service” in column 3 - 9 percent - and you end up with
14 And of that, the time directly allocated to EGD is 3
15 percent, and the direct costs to EGD is $16,000.
16 Now, in addition to the $16,000, EGD gets an indirect
17 allocation of $80,109. All right; correct?
18 MR. BROWN: Correct.
19 MR. MEES: Correct.
20 MR. De VELLIS: So for 3 percent of the time -- fully-
21 loaded time, is determined to be on behalf of EGD, and,
22 because EGD is taking that 3 percent, it's now responsible
23 for an additional $80,000 in indivisible costs.
24 MR. PIENAAR: If I may answer that. There is not a
25 link in the way you described that. They're not
26 responsible for the additional costs because of the 3
27 percent. The two items are totally de-linked.
28 The 3 percent is using one allocator. And that 3
1 percent -- when you use that allocator, 3 percent goes to
2 EGD, and 19 percent goes to all the other affiliates.
3 That's the first split. Then you're left with the
4 residual, after deducting from 515, you deduct the 16,000
5 that went to EGD, 99,000 went to others, and you’re left
6 with 400,000. Here's the key: of the 400,000, 20 percent
7 went to EGD, because of the fact we used FCER as the
8 allocator. 80% of 400,000 went to the other affiliates;
9 320,000 of that 400,000 was allocated to other affiliates.
10 MR. De VELLIS: Well, cost-causality is one of the
11 principles in the three-pronged test.
12 MR. PIENAAR: Correct.
13 MR. De VELLIS: Okay. And just getting back to the
14 CAM report, again, I referred to this already, but the
15 limitation that you identified was that there was not
16 enough information about activity-based cost. So you
17 relied to some extent on an allocator, and a proxy
18 allocator, such as the SCER.
19 MR. PIENAAR: Yes.
20 MR. De VELLIS: And now, here you are, again, relying
21 on a proxy allocator, in this case, the SCER.
22 MR. PIENAAR: I believe that -- Madam Chair I believe,
23 earlier on, I addressed this in some detail. I described
24 that we developed a service-based methodology, so that we
25 could actually identify the time that was spent directly to
27 I then, I believe, also suggested that, even though we
28 developed that methodology, and we have identified,
1 wherever possible, the time that is spent on affiliates -
2 which is the 3 percent and the 19 percent in this example -
3 - there’s a remainder of costs which benefits EGD, and
4 that's the key: that work is being done for all
5 affiliates, to benefit all affiliates. But it's not
6 possible to identify, very specifically, whether that time
7 is done for EGD versus whether it's done -- so you have to
8 move off the cost-causality -- or using time for cost
9 causality, and move to a surrogate driver, of complexity
10 and size, that says, If this organization is that much more
11 complex than -- if X organization is that much more complex
12 than Y organization, it is likely to consume that much more
14 So that's the link to causality. Or if this
15 organization is twice the size, as reflected by capital
16 employed -- or headcount, should I say, it is likely that
17 it will consume -- because the nature of the cost is driven
18 by the number of people that you have. So it's likely to
19 consume more of the cost.
20 So you are always left with the obligation, after
21 re-applying time, that there will be an indivisible portion
22 that needs to be divided amongst the affiliates who benefit
23 from it, and you have to find another allocator.
24 That is what -- that, by nature, is what cost
25 allocation is: Find the most appropriate allocator. And,
26 in that case, Madam Chair, we have -- as I said, we have
27 tended to use the best allocator relative to the very
28 nature of the services themselves. So if they related to
1 financing, we would use a financing capital employed ratio
2 adjust for that. If they weren't related to financing, we
3 wouldn't use a financing capital employed ratio. We would
4 use a different capital employed ratio. If the costs were
5 consumed largely because of the number of people in the
6 affiliates, we wouldn't use capital employed at all. We
7 would use a head count.
8 So I trust that that answers the question.
9 MR. De VELLIS: At page 11 of the main report, you
10 don't have to turn it up, but you make reference that:
11 "A detailed discussion of the allocators and the
12 rationale for the selection is contained in the
13 RCAM, appendix 3."
14 If you turn to appendix 3, page 12, beginning in the
15 top of the page under loading of support to primary
16 services -- primary service. It says:
17 "Although time estimates were also obtained for
18 determining the extent to which each of the
19 support services were considered to be directly
20 supporting the affiliates, no part of the support
21 service is allocated directly to any affiliate.
22 The full cost of each support service is loaded
23 into the primary services they support. The
24 fully-loaded costs of the primary service is then
25 allocated to the affiliate based on the time
26 estimates provided for the respective primary
28 Okay. So that part, the costs of the primary service
1 allocated based on time, is a fully-loaded cost. Then in
2 the next sentence you say:
3 "Similarly, the residual indivisible portion will
4 be allocated as determined for the residual of
5 the primary service."
6 If the first part is a fully-loaded cost and you've
7 determined the time, why do you need an indivisible --
8 remaining indivisible portion?
9 MR. TOTH: I think you may have misinterpreted this.
10 What this is implying is that support services are loaded
11 onto the primary services, and then the portion of the
12 support service in the primary service would be allocated
13 on the same basis as the primary services. If there was
14 time allocated directly, that same portion would be
15 allocated directly. If there was a portion that is
16 indivisible, it would be allocated on the same basis as the
17 primary service before the support costs.
18 So, in other words, all the costs are pooled together
19 and allocated on the same basis. The fully-loaded costs,
20 including the support services, would be allocated directly
21 on time where available, or indirectly on other allocated
22 as appropriate.
23 MR. De VELLIS: Getting back to my earlier question,
24 in the main report, it says appendix 3 has a rationale for
25 the allocators to use. And I am looking through appendix
26 3. I don't see a rationale for why the particular
27 allocators, SCER or ACER are used and why they meet the
28 cost causality test.
1 MR. TOTH: I was just going to refer you to appendix
2 3, starting at page 6, section 2.4, which talks about the
3 basis of allocation. So the purpose of each of the
4 allocators and why used is there.
5 MR. De VELLIS: Where, specifically?
6 MR. TOTH: It talks about primary cost drivers on page
7 7, referring to effort and referring to time and why time
8 is used. It goes further down to talk about usage and
9 specific volumetrics. It talks about the use of
10 indivisible costs around complexity and size. It gives
11 examples around head count, salaries, capital employed. It
12 talks about other allocators based on relative benefit.
13 So the rationale for why we would use specific
14 allocators are there.
15 MR. De VELLIS: Okay. If you turn to page 8, in the
16 middle of the page, it says:
17 "When direct/indirect costs cannot be attributed
18 to specific costs obviously on the basis of time
19 or volumetrics, a relatively small group of
20 allocators will be used. These include
21 derivations of head count, salaries and capital
23 MR. TOTH: Correct.
24 MR. De VELLIS: It doesn't say there why, for example,
25 capital employed is a good allocator, why it meets the cost
26 causality test.
27 MR. PIENAAR: Well, we believe that we have described
28 why you would be using it, because we talk about the fact
1 that, under complexity and size, where the costs of a
2 causal root in effort or usage and neither specific file
3 nor volumetrics can be associated and attributed,
4 allocators will be sought that reflect relative complexity.
5 So -- of the recipients to be used as a proxy for the
6 likely effort, and, hence, time required to service a cost
8 So it is saying we can't use time and we can't use
9 volumetrics, but we know that there is benefit, so we need
10 to find something that approximates that effort. So we're
11 using those allocators as proxies for that causality, and
12 then we go on to say:
13 "Where it becomes difficult to link causality,
14 relative benefit is considered in selecting the
16 What we know is that some portion of this cost needs
17 to be allocated to Enbridge Gas, because there's benefit
18 received for the work that's done. It's an issue of
19 finding the most appropriate allocator. We eliminated a
20 number of allocators and we focussed on these for the
21 reasons that we thought they were the best allocators.
22 MR. TOTH: Sorry, can I also refer you to VECC 88
23 where we outline some of the rationale for affiliate head
24 count, SCER, ACER, the rationale?
25 MR. De VELLIS: Are you referring to starting at page
26 2, VECC 88?
27 MR. TOTH: Beginning of where it says "Response".
28 MR. De VELLIS: Well, again, I mean, that's not my
1 question. My question is: Where is the explanation as to
2 why this particular allocator meets the cost causality
3 test, whether it is, in particular, the financing capital
4 employed ratio or the adjusted capital employed ratio?
5 MR. PIENAAR: The references that we provided you are
6 the references where we have provided our justification for
7 using the allocator.
8 MR. De VELLIS: I neglected to do this earlier, Madam
9 Chair, but I had provided a spreadsheet to the company and
10 to the Board, via e-mail. I have copies for Mr. Battista.
11 I wonder if they can be entered as an exhibit.
12 MR. BATTISTA: This will be characterized as Exhibit
13 K11.1, and it will be called “EI budgets and allocations to
14 EGD 2005 and 2006.”
15 EXHIBIT NO. K11.1: EI BUDGETS AND ALLOCATIONS TO EGD,
16 2005 AND 2006
17 MS. NOWINA: Do the panel and all the parties have a
18 copy of that?
19 MR. De VELLIS: I believe all of the witnesses --
20 MR. MEES: We have copies, here.
21 MR. De VELLIS: Now, if you could turn to -- this
22 table shows the total EI budgets for 2005 and 2006, and
23 then the allocations to EGD. And, in the last three
24 columns, the percent of the EI budget allocated to EGD, by
26 Now, I will ask you -- first, if you look at the EI
27 budget for 2006, total, versus the 2005 budget, it's
28 118,555,939, compared to 112,784,008, in 2005
1 Will you accept, subject to check, that that is a
2 growth of 5.12 percent?
3 MR. MEES: Subject to check, certainly.
4 MR. De VELLIS: And in the last - in column I, I see,
5 in 2005, 11.8 percent of EI's budget was allocated to EGD.
6 Will you accept that, subject to check?
7 MR. MEES: At the bottom of column I, the number is
8 11.8, yes, I can confirm that.
9 MR. De VELLIS: Yes. And in the proposed budget for
10 2006, the total EI budget allocated to EGD represents 18
11 percent of EI's budget? Do you accept that, subject to
13 MR. MEES: Yes, I can. And I believe Deloitte has
14 already discussed why they increased -- why the increase
16 MR. De VELLIS: Well, that wasn't going to be my
17 question. But the difference between 11.8 percent and 18
18 percent is 6.2 percent?
19 MR. MEES: I just want to make sure you're aware that
20 the 11.8 percent was calculated using the 2005 budget as
21 shown here, but that’s not what the original CAM report
22 from Deloitte was based upon. It was based upon the 2004
23 budget, escalated. So it's not the right number.
24 MR. De VELLIS: Well, in any case, the total allocated
25 to EI as a percentage of the Board-approved 2005 budget is
26 11.8 percent. Will you accept that, subject to check?
27 MR. MEES: I can accept the number is 11.8, but it’s
28 not using the right base, like I’ve indicated.
1 MR. De VELLIS: Well, isn't that the Board-approved
2 number, for 2005?
3 MR. MEES: The 13.3 is listed there as -- that should
4 be 13.5, but it's close enough.
5 MR. De VELLIS: Right.
6 MR. MEES: But what -- I'm trying to indicate that the
7 112 million -- the 112,784,000 is not the right number that
8 was used to calculate the $13.5 million.
9 MR. De VELLIS: No, I understand that. I'm just
10 talking about the results.
11 MR. TOTH: You're trying to calculate -- you're using
12 -- dividing the 13.5 -- or the 13.3, here, by 112.
13 MR. De VELLIS: Yes.
14 MR. TOTH: And so it does matter. It means that
15 percent is wrong.
16 MR. De VELLIS: Is $112,784,008 -- was that the EI
17 budget, in 2005?
18 MR. BROWN: Yes, it was.
19 MR. De VELLIS: Okay.
20 MR. BROWN: But that was not the basis for the 2005
21 rate application. It was the 2004 budget, escalated to
22 represent 2005. Just as, now, the 2006 number is based on
23 the prior year's budget, and escalated.
24 MR. De VELLIS: I'm just trying to get a sense of what
25 the actual numbers were, for 2005. The actual number was
27 MR. BROWN: That is correct. That is our 2005 budget.
28 MR. De VELLIS: Okay.
1 MR. BROWN: Correct.
2 MR. De VELLIS: And the actual amount allocated to
3 EGD, in 2005, was 13.5 million?
4 MR. BROWN: No. That is the amount that was approved
5 as part of the envelope for recovery.
6 MR. De VELLIS: That's right. Yes.
7 MR. BROWN: That is not the amount that was allocated,
8 in 2005.
9 MR. De VELLIS: The amount approved for recovery,
10 which EGD agreed to, was 13.5 million.
11 MR. MEES: Correct.
12 MR. De VELLIS: 13.5 million is approximately 11.8
13 percent of 112,784,000.
14 MR. MEES: Like I said, yes, I can agree to that. But
15 like I said, the basis was - the 2004 budget escalated,
16 which is, essentially, a 2005 estimate, similar to how we
17 have it this year - was significantly lower.
18 MR. De VELLIS: And the difference between the two is
19 approximately 6.2 percent. Between 18 percent and 11.8
21 MR. TOTH: We're struggling, because -- it's not
22 comparable. I don't know why you're trying to --
23 MR. De VELLIS: How do you mean it's not comparable?
24 MR. PIENAAR: What he's saying is that -- the answer
25 to the question, Is the difference between 18 and 11.8,
26 6.2? Absolutely. And that's easy. However, the 18
27 percent is not comparable to the 11.8 percent, because they
28 are --
1 MR. De VELLIS: I'm just talking about the total
3 MR. PIENAAR: Then your answer is right, 18 minus 11.8
4 is 6.2.
5 MR. De VELLIS: If you take the indivisible portion of
6 the primary services, represented by box 7B in the flow
7 chart - which is 6.64 million - and divide that by 118
8 million, that's 118,557,939. That comes to 5.6 percent.
9 MR. TOTH: Subject to check, okay.
10 MR. De VELLIS: The final question before the break,
11 Madam Chair.
12 Aren't you just adding back there the amounts -- using
13 a proxy allocator, the amount that, in CAM, you said you
14 shouldn't use, because you're using proxy allocators?
15 MR. PIENAAR: Well, I think -- I believe, Madam Chair,
16 that we’ve been through a very detailed exposition of how
17 we've actually established the basis of the methodology,
18 and I believe that what's being inferred is that we simply
19 filled the gap. We needed 6.2 so we falsely confirmed
20 an allocator that made 6.2 -- and I, actually, object to
22 I -- we, I think, have described exactly how we’ve
23 been through the process. It happens to come to the same
24 number, by coincidence. That was not the intention, and I
25 think the methodology actually stands on its own. And
26 these numbers, which happen to co-relate to the broad
27 dollar values, they co-relate. But that is not the -- what
28 we set out to actually achieve, at all.
1 MR. De VELLIS: Thank you.
2 Madam Chair, I see it’s just past 12:00.
3 MS. NOWINA: Mr. De Vellis, I assume you're not
4 finished your questioning yet.
5 MR. De VELLIS: Unfortunately, not.
6 MS. NOWINA: So I think you've had pretty close to
7 your two hours. How much time do you expect to take after
9 MR. De VELLIS: I suspect, about a half hour, or so.
10 Perhaps, a little bit longer.
11 MS. NOWINA: All right. As tight as you can make it,
12 would be appreciated.
13 We will break now until 1:15 p.m.
14 --- Luncheon recess taken at 12:00 p.m.
15 --- On resuming at 1:15 p.m.
16 MS. NOWINA: Please be seated. Are there any
17 preliminary matters before we begin? Mr. De Vellis.
18 MR. De VELLIS: Madam Chair, I see one of the
19 witnesses hasn't returned.
20 MS. NOWINA: Oh, I see Board's counsel isn't here,
21 either, so ...
22 MR. SOMMERVILLE: They were all in the same place.
23 MS. NOWINA: We will all take a deep breath.
24 MR. PIENAAR: Sorry, Madam Chair.
25 MS. NOWINA: I think you can go ahead, Mr. De Vellis.
26 MR. De VELLIS: Thank you, Madam Chair.
27 Panel, could you turn to VECC Interrogatory No. 93?
28 It's at tab 14 of our compendium.
1 I'm also going to refer for the next few questions to
2 the table at Exhibit A6, tab 10, schedule 2, appendix 6,
3 page 2.
4 MR. TOTH: Sorry, that last reference was appendix 6
6 MR. De VELLIS: Appendix 6, page 2.
7 MR. TOTH: Page 2. Is that the primary service
9 MR. De VELLIS: Yes. Now, I count nine of the 36
10 service items there are allocated on the basis of FCER in
11 terms of the indivisible portion allocated to EGD?
12 MR. TOTH: Yes, subject to check.
13 MR. De VELLIS: Okay. And I believe it's also nine of
14 the service items are allocated on the basis of ACER;
15 that's the adjusted capital employed ratio?
16 MR. TOTH: Subject to check.
17 MR. De VELLIS: And at VECC 93 you have, starting at
18 page 3 or on page 3, the calculations for those two ratios.
19 Can you tell me the main difference between the FCER and
20 the ACER?
21 MR. PIENAAR: If you refer to Board Staff 120, I
22 believe the differences are there.
23 MR. MILLAR: I'm wondering if I could just ask Mr.
24 Pienaar to move his microphone a little bit closer. I
25 understand the court reporter is having some difficulty
26 hearing you.
27 MR. PIENAAR: My apologies.
28 MR. De VELLIS: Sorry, where?
1 MR. PIENAAR: So I referred you to Board Staff 120.
2 It is laid out there the key differences of them. Would
3 you like me to verbalize that?
4 MR. De VELLIS: Yes. Well, the differences, as I
5 understand it, is that for the adjusted capital employed
6 ratio, the purchase premium is excluded.
7 MR. PIENAAR: Well, we --
8 MR. De VELLIS: The definition --
9 MR. PIENAAR: -- need to deal with the numerator
10 separately from the denominator. I will give you a quick
11 summary, if that would help.
12 MR. De VELLIS: Okay.
13 MR. PIENAAR: The formulas, as far as the numerators
14 are concerned, are the same. It's EGD's capital employed
15 without the purchase premium in both cases, as you can see
16 in -- I should take you also to VECC 93.
17 MR. De VELLIS: Yes.
18 MR. PIENAAR: Right. So the numerator is the same,
19 3.120 million. With regard to the denominator, the
20 difference in the formulas are as follows: With regard to
21 FCER, all minority investments - in other words, all
22 minority investments and equity investments - are included
23 in the denominator, and all purchase premiums of those are
24 effectively included in the denominators.
25 What that does is it makes the denominator base larger
26 than it would be in ACER, and, in ACER, the difference is
27 that the denominator has only the capital employed of those
28 minority investments or equity investments which are
1 actually owned and operated. In other words, they have
2 head counts, and they're owned and operated. And also in
3 ACER, they are -- the purchase premium is excluded from the
5 The primary difference in two denominators -- and,
6 sorry, the result is 26 percent, so it is a larger
7 percentage than the FCER.
8 The formulas have been defined specifically because we
9 only intend to use the FCER for those areas where the
10 activities or the services are involved or relate to
11 financial-related activities; whereas, when the allocator
12 is being used as a general allocator for non finance-
13 relating activities, then we would use -- and we believe
14 capital employed is the best ratio to use, we use ACER.
15 I would further point out that FCER at 20 percent and
16 ACER at 20 percent are probably the most conservative of
17 all the allocators that we are using.
18 MR. De VELLIS: In terms of the denominator for the
19 ACER, why is it reasonable for excluding the purchase
20 premium? Doesn't that provide an indication of the total
21 investment and, therefore, the activities of EI?
22 MR. PIENAAR: Yes, but we do not --as we are not
23 dealing with funding activities, we do not believe that we
24 need to include the purchase premium, because the purchase
25 premium would imply that you would be dealing with the cost
26 of funding of the entire acquisition cost of the -- of that
27 entity. And as we are using it where it is only owned and
28 operated, so using it as a surrogate for -- where there are
1 head counts, and we're not using it for financing
2 activities, we believe it is appropriate to exclude the
3 purchase premium from the denominator.
4 MR. De VELLIS: If you look at customer -- for
5 example, customer, industry and community relations, one of
6 the services that uses ACER as an allocator; is that right?
7 It's on -- just moving back to the summary table at
8 appendix 6, page 2.
9 MR. PIENAAR: Right.
10 MR. De VELLIS: Okay. Now, why is the amount of the
11 purchase premium - and whether the investment of minority
12 interests or not - a factor in determining costs for
13 industry representation with communities and others, which
14 is what that service does?
15 MR. PIENAAR: Well, including the purchase premium in
16 the denominator is the equivalent of using that formula for
17 -- if you were using the ACER formula to attribute to
18 specifically to an individual affiliate, it would be the
19 equivalent of including that purchase premium in the
20 numerator. So, in other words, we are decreasing the
21 amount of the denominator by excluding the purchase
22 premium, because, as I indicated before, we believe the
23 purchase premium is really a cost that is attributable to
24 Enbridge Inc. It's a cost of financing its investments.
25 Now, as we are using the allocator for activities
26 that are not related to the financing, we have excluded the
27 purchase premium.
28 MR. De VELLIS: Can you turn now to Exhibit A6, tab
1 10, schedule 2, appendix 2.
2 MR. PIENAAR: Appendix 2.
3 MR. De VELLIS: Page 7, under "Survey Findings."
4 I see you make reference to two surveys there. Is one
5 of them the survey that's also referred to in the 2004 CAM
7 MR. PIENAAR: That is correct. The first survey.
8 MR. De VELLIS: And then there was another survey
9 after that, for the RCAM report?
10 MR. PIENAAR: Yes.
11 MR. De VELLIS: Okay. When was the second -- I see.
12 That second one was done in September, 2004; is that right?
13 MR. PIENAAR: I beg your pardon?
14 MR. De VELLIS: The second survey was done in -- the
15 follow-up survey for the RCAM report --
16 MR. PIENAAR: That is correct.
17 MR. TOTH: September, 2004.
18 MR. De VELLIS: Okay. Are those two surveys in
20 MR. TOTH: The survey findings --
21 MR. De VELLIS: Well the survey itself, and the
22 findings, and/or.
23 MR. TOTH: The survey, itself, I don't believe is in
24 evidence, no.
25 MR. De VELLIS: Okay. Can we get a copy of the
26 surveys -- each of them?
27 MR. TOTH: Sorry, what, in particular, are you looking
28 for? The questions of the survey?
1 MR. De VELLIS: Well --
2 MR. TOTH: The results as part of the survey were held
3 as confidential.
4 MR. De VELLIS: Okay.
5 MR. TOTH: In discussing with each of the
6 organizations, they did not want to reveal specific
7 information, so we told them that we would hold their
8 responses in confidence. And, therefore, we can only
9 provide the summary findings.
10 MR. De VELLIS: Well, wouldn't the rules with respect
11 to -- these are regulated entities that were surveyed?
12 MR. PIENAAR: Yes, they're regulated.
13 MR. TOTH: Yes.
14 MR. De VELLIS: So wouldn't the rules regarding the
15 corporate cost allocation be a matter of public record?
16 MR. PIENAAR: They would be, as regulated entities.
17 However, we asked them to participate as a consulting firm,
18 and we indicated to them that we would not share their
19 individual information with the other utilities. So, on
20 the basis of that undertaking we gave to them is -- is why
21 we would hold that information confidential.
22 MR. De VELLIS: Can we be provided with the results
23 with individual identifiers removed?
24 MR. PIENAAR: Yes, it is possible. We could do that,
25 I would believe.
26 MR. TOTH: I just have a concern that, if there’s
27 specific responses to some of the questions that could
28 identify the individual companies, that that still might be
1 in conflict of what we committed to them.
2 MR. De VELLIS: Well, you could provide us with the
3 response, with anything that you feel is confidential
4 expunged, and then we could review it. And if we think
5 that, based on the context, it shouldn't be expunged, then
6 we could ask you about that.
7 MR. PIENAAR: I would suggest, Madam Chair, that we --
8 you know given our professional situation, we would have to
9 go back to each of the -- and, in the first instance, 15
10 utilities responded, and, in the second instance, 13
11 responded. We would have to - you know, as I say, from our
12 professional point of view - go back to each independent
13 company and ask them if they're comfortable that we share
14 that information in that way, and then we would have no
15 problem with it at all. I would just add that the
16 consolidated results of the first survey are included as an
17 appendix in CAM, and the results of the two surveys,
18 together, are included here, in item 5.1 of this survey.
19 The prior -- I would also add the primary purpose of
20 the second survey was to explore, in a little more depth,
21 the use of time and time estimates. That was the reason we
22 went back to the utilities to ask them to participate.
23 MR. De VELLIS: Okay. I'm not sure what the answer
24 was to my request.
25 MS. NOWINA: Mr. De Vellis, can I clarify what you're
26 looking for? You're looking for the individual responses
27 to the September, 2004, survey? Is that what you're
28 looking for?
1 MR. De VELLIS: To both surveys.
2 MS. NOWINA: To both surveys.
3 MR. De VELLIS: Yes.
4 MS. NOWINA: And the other one took place in --
5 MR. De VELLIS: February of 2004.
6 MR. PIENAAR: In 2004.
7 MS. NOWINA: February of the same year.
8 MR. PIENAAR: January/February of 2004.
9 MS. NOWINA: Do I understand the witness to be saying
10 that they would attempt to provide these, under best
12 MR. PIENAAR: What I was suggesting is that we would
13 need to go to -- go back and clarify with each one of the
14 participants, whether they are comfortable that we provided
15 this information. And then, to the extent that they are
16 comfortable, we have no problem in providing it. Because
17 we gave them an undertaking that we would deal with it
19 MS. NOWINA: Does that work for you, Mr. De Vellis?
20 MR. De VELLIS: That's fine. Thank you.
21 MS. NOWINA: Thank you. We need an undertaking
23 MR. BATTISTA: That will be undertaking J11.3.
24 UNDERTAKING NO. J11.3: ON A BEST EFFORTS BASIS, TO
25 PROVIDE COPIES OF THE RESPONSES FROM SURVEY
26 PARTICIPANTS IN THE SURVEYS CONDUCTED IN
27 JANUARY/FEBRUARY, 2004, AND SEPTEMBER, 2004
28 MR. De VELLIS: I apologize, Madam Chair.
1 If I could just refer you, now, to some of your
2 evidence with respect to the -- well, what you say is the
3 survey findings.
4 On the next page, on page 8, under “Key Regulatory
5 Principles and Practices”:
6 “In establishing ...”
7 The top of page 8:
8 “In establishing affiliate service charges, the
9 two most important principles are cost-causality
10 and transparency.”
11 Now, how is the Board to determine the value and cost-
12 causality of the indivisible remainder of the primary
13 services costs?
14 MR. PIENAAR: I think, again, we referred earlier to
15 this -- that we applied cost-causality to the extent that
16 it was possible to apply causality. And where we could not
17 apply it directly, in terms of effort and volumetrics --
18 or, should I say, effort and usage, we then found proxies,
19 based on size and complexity.
20 And we used formulas which we believe would be proxies
21 for cost-causality. And, as I described, I do not believe
22 that in every case you can -- well, I do not believe that
23 you can apply time to every single component of the service
25 MR. De VELLIS: And further down the page, under “Cost
26 Allocators in Use”, the last sentence of that paragraph:
27 “Three utilities indicated that they allocated
28 costs to affiliates based purely on time
1 estimates, and use a fully-loaded dollar-per-hour
3 So, it is possible to have a purely time-based
4 allocation model.
5 MR. PIENAAR: I can't comment on the quality of that
6 -- of those cost allocations.
7 I can agree that it describes that they use purely
8 time-based estimates. I can't make a judgment on the
9 quality of those.
10 What I can make a judgment on the quality, is the
11 sentence immediately prior to that, which says that time --
12 you know, headcount-based and financial metrics such as
13 capital employed are included in the majority of the
15 MR. De VELLIS: And on the next page, page 9, top of
16 the page, under “Regulatory Treatment of Time Estimation”,
17 it says:
18 “Respondents indicated that, in recent years,
19 their respective regulators had been much more
20 critical of their time-estimation methodology.
21 Regulators have rigorously questioned the
22 validity of time estimates, especially when the
23 costs filed for recovery were significantly
24 different, relative to past years.”
25 Doesn't that imply that time-based methodology is more
26 amenable to regulatory scrutiny?
27 MR. PIENAAR: Can you repeat your question, please?
28 Just the last part of your question.
1 MR. De VELLIS: Doesn't that imply that a time-
2 based methodology is more amenable to regulatory scrutiny?
3 MR. PIENAAR: You know, I don't mean to be evasive,
4 but I would need to understand what you mean by time-based
5 methodology As opposed to a service-based methodology. As
6 you can see, service-based methodology is very complex in
7 its implementation, so I'm not sure what the components of
8 a time-based methodology would be where the time is not
9 directly attributable, other than by guesswork, for
10 indivisible costs.
11 MR. De VELLIS: Well, I guess it refers back to my
12 earlier question, where I pointed out that your survey
13 findings found that three utilities indicated that the
14 allocated costs to affiliates is based purely on time
15 estimates and use a fully-loaded dollar per hour charge,
16 and then there is an indication that the regulators have
17 rigorously questioned the validity of time estimates.
18 Now, that indicates to me that it's easier for
19 regulators to vigorously test an allocation model that is
20 based on -- purely on time estimates as opposed to the use
21 of allocators, proxy allocators.
22 MR. PIENAAR: My observation would be that under the
23 “cost allocators in use” item, that is three out of fifteen
24 utilities that have indicated that, and that the regulatory
25 treatment of time estimation is in relation to time
26 docketing, not in relation to other allocators. So it's
27 time estimation versus some form of more regular time
28 docketing and in an IR ...
1 [Witness panel confers]
2 MR. PIENAAR: -- related to time docketing. I will
3 just describe it to you. I talked about, in that context,
4 time estimation versus time docketing. Time docketing
5 itself, as I said, is not contemplated by any of the -- on
6 a -- we're talking about Enbridge Inc. on a clocking-in
7 mechanism as you would expect in a factory floor. Time
8 docketing on the basis of a lawyer and accounting, where
9 maybe once every two weeks or one week you are actually
10 doing a time estimation, is something that could be
12 We discussed the effect of cost of that and the effect
13 of benefits that we would get out of that with Enbridge Gas
14 and over doing time estimation on an annual basis.
15 So we decided to -- that the time estimation on an
16 annual basis was...
17 MR. De VELLIS: You say it is contemplated, but there
18 is no -- it wasn't included in the model and there is no
19 plans to do --
20 MR. PIENAAR: There were debates in workshops as to
21 what form of time docketing -- in our workshops, what form
22 of time docketing, what was the benefit for the various
23 mechanisms for time docketing.
24 I think, as I am implying, is that the word "time
25 docketing" is a bit of a misnomer, because docketing in its
26 strict sense means clocking in and out either through a
27 time clock as you come in, whereas everything else is
28 actually time estimation. We -- as consultants, we fill in
1 a time sheet every two weeks. This is an estimation of
2 what I did with my time for two weeks.
3 So then it just becomes a period of how short or long
4 should the historic estimation period be? And we
5 considered the various options and we elected that the
6 benefit that we would get over a short period of time
7 estimation was not significant enough to have Enbridge
8 change all their internal human resource systems to
9 accommodate that at this point in time, and that time
10 estimation on an annual basis, based on a very detailed
11 survey, as we described the process, would actually be very
12 -- provide a very similar result to a short period time
14 MR. TOTH: Actually, if I could just add, the
15 distinction that Mr. Pienaar was making is actually in
16 School Energy Interrogatory No. 20, section C, where he
17 distinguishes docketing.
18 MR. De VELLIS: I will just point out, finally - this
19 is my last question, Madam Chair - two sentences down on
20 the same paragraph on page 9:
21 "Of the respondents who estimate time, half
22 indicated that they verified their time estimates
23 with reporting documentation such as project work
24 logs, time sheets and personal calendars."
25 MR. PIENAAR: Could you direct me again to that
26 paragraph on page 9?
27 MR. De VELLIS: The top of page 9, same paragraph that
28 I just had referred you to, two sentences down -- or one
1 sentence down.
2 MR. PIENAAR: What's the question again? Is there a
4 MR. De VELLIS: Well, is there any reason that EI
5 couldn't employ the same methodology?
6 MR. BROWN: If I could add, we did. I assisted many,
7 many people in understanding how to prepare the time study,
8 and my instructions were always to refer back to any
9 supportable documentation that they had. Myself,
10 personally, I have quite a detailed calendar I was able to
11 refer to, and I certainly can state that many, many people
12 referred to all evidence of where they spent their time in
13 the prior year.
14 MR. De VELLIS: Well --
15 MR. BROWN: We don't keep time sheets, but we do have
17 MR. De VELLIS: Thank you. Those are my questions,
18 Madam Chair. Thank you, panel. Thank you, Madam Chair.
19 MS. NOWINA: Thank you, Mr. De Vellis. Mr. Shepherd,
20 before you begin, maybe you could keep in mind that we
21 would like to break around 2:30 for our afternoon break.
22 MR. SHEPHERD: 2:30? Okay, will do.
23 CROSS-EXAMINATION BY MR. SHEPHERD:
24 MR. SHEPHERD: Mr. Pienaar, I wonder if you could turn
25 to tab 10 of the VECC materials, which is the company's
26 response to Board Staff Interrogatory No. 116? Do you see
27 that? Actually, it is about two or three pages in. Do you
28 have that -- or you can go directly to the exhibit, if you
1 like, I-1, 116. That may be easier.
2 MR. MEES: We have this now.
3 MR. SHEPHERD: Yes, thanks. So I think this says -
4 and correct me if I'm wrong - that one of the key reasons
5 why it was appropriate to use Deloitte to design the RCAM
6 system, and then review their own work, was, and I'm
7 quoting from this:
8 "In completing the evaluative report on the CAM
9 methodology, Deloitte had, in the company's
10 opinion, gained the respect of the intervenors
11 with the quality, professionalism and
12 thoroughness of the report."
13 Now, my question is: When you did that evaluation
14 last year, Mr. Pienaar, it wasn't you and Mr. Toth, was it?
15 In fact, the key player last year, the lead on the file,
16 was John Brown; right? No relation to David Brown who is
17 testifying today.
18 MR. PIENAAR: The project lead was myself. John Brown
19 was a sub-contractor and operated as a sub-contractor to
21 MR. SHEPHERD: Oh, well, that's not what your report
22 says from last year. So why don't we turn to your report
23 from last year? That's at -- you will find that at tab 5
24 of the VECC materials. If you look at page 3, it says, and
25 I'm quoting, in the second full paragraph:
26 "The review was completed by a team of Deloitte
27 consulting practitioners reporting to Mr. Andre
28 Pienaar, under the direction of John Brown of
1 J.T. Brown Consulting."
2 And it goes on to say -- I'm skipping a sentence:
3 "Mr. Pienaar, who assisted Mr. Brown, had
4 responsibility for ensuring that the review and
5 all supporting work met Deloitte's standards.”
6 So, you worked for Mr. Brown; right?
7 MR. PIENAAR: That is not true. I paid Mr. Brown --
8 that is not true. I paid Mr. Brown a fee for being
9 involved in our project. The sentence goes on to read
11 "Mr. Brown had responsibility for ensuring that
12 the review and all supporting work met Deloitte's
14 In other words, I had the final call on everything
15 that Mr. Brown did and submitted as to whether it met our
16 standards as a firm, or not.
17 MR. SHEPHERD: When it says that you assisted Mr.
18 Brown, then, that's wrong; right?
19 MR. PIENAAR: No. I assisted Mr. Brown. There’s no
20 doubt. We worked together as a team. But, ultimately, he
21 reported to me as a sub-contractor, and I was paying his
23 MR. SHEPHERD: And where it says it was under the
24 direction of John Brown, that's wrong, too?
25 MR. PIENAAR: I -- no, I didn't say that’s wrong.
26 MR. SHEPHERD: Well, who was directing the project?
27 Was it Mr. Brown or you?
28 MR. PIENAAR: I think you have to read the paragraph
1 in its context. It says the review was completed by a team
2 of Deloitte consulting practitioners reporting to me. Mr.
3 Brown was a member of that team. He directed the
4 consulting resources on the ground, because he was -- we
5 anticipated that, if that went to the rate case, that Mr.
6 Brown would act as the expert witness for that rate case.
7 MR. SHEPHERD: And John Brown is a former Deloitte
8 partner, who has his own independent consulting practice?
9 MR. PIENAAR: He's a former Deloitte partner from ten
10 years -- 10, 15 years ago.
11 MR. SHEPHERD: And he has his own independent
12 consulting practice.
13 MR. PIENAAR: Yes, he does.
14 MR. SHEPHERD: And his specialty is cost allocation
15 for rate-regulated companies, isn't it?
16 MR. PIENAAR: That is correct.
17 MR. SHEPHERD: And when you did the work last year, it
18 was Mr. Brown who was the expert. It was Mr. Brown who had
19 the extensive experience testifying before regulatory
20 tribunals on cost allocation, isn't that right?
21 MR. PIENAAR: We employ sub-contractors for various
22 reasons, Mr. Shepherd -- or should I say, Madam Chair. We
23 generally employ sub-contractors for two reasons: either
24 because we do not believe we have the skills on the ground
25 in our own firm; or we employ sub-contractors because the
26 skills that we have are actually committed to other
27 clients, at that particular point in time.
28 In the case of the CAM report, I was unavailable to be
1 pro-actively involved, to the extent that I'm involved on
2 this particular project. And, because we knew Mr. Brown
3 very well, have worked with him before, it was appropriate
4 for us to employ a sub-contractor to actually lead that
5 particular project.
6 As you all know, sub-contractors are expensive, and if
7 we can avoid having sub-contractors on our teams, where our
8 skills are available, we would use them instead of those.
9 MR. SHEPHERD: I put it --
10 MR. PIENAAR: Does that answer the question?
11 MR. SHEPHERD: I put it to you (a), that doesn't
12 answer my question, but (b), I put it to you that Mr. Brown
13 has far more experience in this area than you do; isn't
14 that correct? We have his CV here; we can look at it. Do
15 you want to?
16 MR. PIENAAR: Mr. Brown has far more experience in
17 cost allocations with regulated utilities, in Canada, than
18 I do.
19 MR. SHEPHERD: Isn't it true that -- coming back to
20 the quote from I 1, 116, isn't it true that, to the extent
21 that anyone had gained the respect of the intervenors, it
22 was Mr. Brown, wasn't it?
23 MR. PIENAAR: I can't answer that.
24 MR. SHEPHERD: You don't know.
25 MR. PIENAAR: I can't answer it. I wouldn't know. I
26 wouldn't want to put words in your mouth.
27 MR. SHEPHERD: You had no contacts with the
28 interveners. You don't know whether that was the case.
1 MR. PIENAAR: It's not that I had no contact with the
2 intervenors. I don't know the answer to the intervenors'
3 opinion. It's their prerogative to have their opinion. I
4 don't know what that answer is.
5 MR. SHEPHERD: Mr. Mees, you wrote the interrogatory
6 response. What did you mean by gaining the respect of the
7 intervenors? Were you referring to Mr. Brown?
8 MR. MEES: No. I was referring to the report, in
10 MR. SHEPHERD: Okay.
11 MR. MEES: It wasn't just isolated to Mr. Brown. That
12 is my -- those are my words, there.
13 MR. SHEPHERD: Mr. Mees, still with you. Given the
14 goal of building on that respect, which comes from this
15 interrogatory response, I guess I'm surprised that you
16 didn't include Mr. Brown on your team this year. Why is
18 MR. MEES: I indicated this the other day. We wanted
19 to continue with what came out of the original CAM review,
20 and we hired Deloitte for that. It was up to Deloitte to
21 come up with the resources necessary.
22 MR. SHEPHERD: And you never look at who’s behind the
23 Deloitte team, that's doing your work? Or any consulting
24 group that’s doing your work?
25 MR. MEES: Certainly, you do. And when we went over
26 the team, there was -- I had full confidence in Mr. Pienaar
27 and Mr. Toth.
28 MR. SHEPHERD: Mr. Pienaar, you talked about this this
1 morning, and I guess I’m just going to come back to it for
2 a second. When you were retained to develop RCAM, EI’s --
3 Enbridge Inc.'s purpose in doing so was to increase the
4 amount that it was allowed to charge EGD; right?
5 MR. PIENAAR: If I can rephrase it. It was their
6 objective to substantiate the costs that they believe were
7 justifiably chargeable to EGD.
8 MR. SHEPHERD: And you're actually in that business,
9 of achieving results for your clients; right?
10 MR. PIENAAR: In the operational work that I do, that
11 is correct.
12 MR. SHEPHERD: And, in fact, I'm going to read you
13 something from the first page of the Deloitte Consulting
14 website -- you work for Deloitte Consulting; right?
15 MR. PIENAAR: I do.
16 MR. THOMPSON: All right. And so it says, and I
18 “The first step to achieving great results ...”
19 I love this.
20 “... is determining where you want to go. The
21 next is finding the right partner to help you get
22 there. Deloitte might be that partner.”
23 Where they wanted to go was a higher amount
24 recoverable from EGD ratepayers; right?
25 MR. PIENAAR: Again, I rephrase your insinuation, that
26 where they wanted to go was to justify the costs that were
27 justifiable, and they wanted to have an appropriate
28 methodology to do that.
1 We do -- our approach to different projects that
2 would, of course, fall under different sets of
3 philosophies, and what that’s referring to is general
4 operational consulting. We do not regard this as
5 operational improvement consulting, at all. This is
6 regulatory cost allocation consulting.
7 And so I wouldn't, necessarily, capture that -- that's
8 a generic advertising piece on the front.
9 MR. SHEPHERD: So, when you do consulting work like
10 this, it's not goal-oriented?
11 MR. PIENAAR: When we do consulting work like this --
12 I think I explained before it was criteria-based
14 MR. SHEPHERD: Well, no, I'm not talking about the
15 evaluation, now. I'm talking about the design of the new
17 MR. PIENAAR: We were asked -- given our professional
18 integrity, we were asked to develop a new methodology that
19 would justify, Madam Chair, the costs that would -- that
20 should be justified in accordance with the OEB's
21 regulation, as I mentioned before, and based on the ARC.
22 We believe we brought a very professional team to the
23 project, that focused on providing the justifiable answer
24 and a justifiable methodology based on - and I repeat - a
25 criteria-based evaluation, and a methodology that was
26 purely designed to meet the requirements that the OEB,
27 itself, has laid out.
28 MR. SHEPHERD: The thing I don't understand - and,
1 obviously, Mr. De Vellis didn't understand, this morning -
2 is, you already told them the right amount: 13.5 million.
3 Why would they need to give you another million dollars,
4 unless they wanted you to increase it?
5 MR. PIENAAR: Mr. Shepherd -- sorry, Madam Chair, we
6 did not tell them the right amount. That's absolutely
8 What we told them was that, based on the methodology
9 they had in place two years ago, that it was totally
10 inappropriate for measurement against any level of criteria
11 that regulatory precedent demanded, that the most we could
12 professionally justify was 13.5 million. That's what we
13 told them. And we then were asked to, based on those
14 recommendations, develop a methodology that would provide a
15 number that would be justifiable in the context of
16 regulation. That's what we did, and we came up with a
17 different answer
18 MR. SHEPHERD: I heard you talk with Mr. De Vellis,
19 this morning, about the meetings you had with Mr. Mees and
20 his group, and all that stuff. And I guess, just looking
21 at it from outside, it looks like either Enbridge Inc. came
22 to you and said, Is there any way we can get this number
23 higher? Or, alternatively, you came to them and said, Look
24 at, we proposed this number, but if you hire us to do a
25 more detailed review, we expect to come up with a higher
26 number. I don't mean either of those to be pejorative; I'm
27 just trying to get a sense of what happened. Which one was
1 MR. PIENAAR: I can't determine what it looks like to
2 you from your position, Mr. Shepherd. And Madam Chair, our
3 integrity is being challenged, as a professional firm, and
4 I do object. I don't know what it looks like from Mr.
5 Shepherd's position. But I think we have done a fair
6 amount of explanation this morning, as to the basis on
7 which we did this evaluation, based on criteria. No
8 advance targets or numbers. We only, in fact, started
9 calculating the numbers, as Mr. Toth, my colleague,
10 indicated, way down the track of the development and the
11 time study. So we had no idea where it was going or could
12 come out -- who knows what number it could come out. Twice
13 the amount could come out of this.
14 Our objective was not a target number. Our objective
15 was a justifiable methodology. And if we are challenged on
16 the justifiability of the methodology, on its merits,
17 that's a different story. But I would ask that our
18 integrity is not challenged, as to what are our objectives
20 MR. SHEPHERD: Well, I’ll ask you just a simple
21 question. Did they ever say to you, Is there any way we
22 can get this number higher, or anything like that?
23 MR. PIENAAR: No. They did not say -- I mean, let me
24 just -- they did not say to us, You’re being employed
25 because we want this number to be higher. They did not say
26 that. That wasn't part of the criteria.
27 MR. SHEPHERD: That's not what I asked you. I asked
28 you: Did they say anything like, Is there any way we can
1 get this number higher? Yes or no?
2 MR. PIENAAR: So did they say: Is there any way we
3 can get this number higher? The answer is no.
4 MR. SHEPHERD: And did you say anything like, We
5 propose this number, but if you hire us to do a more
6 detailed review, we expect to come up with a higher number?
7 MR. PIENAAR: I think, as I indicated this morning,
8 Madam Chair, that any person who has any knowledge of cost
9 allocation and who would read our actual CAM report would
10 know that we were suggesting that if an appropriate
11 methodology was used, the number would be higher than 13.5
12 million. It is obvious. It's in our report.
13 MR. SHEPHERD: So the answer is yes?
14 MR. PIENAAR: The answer is if the methodology was
15 appropriately designed in accordance with the regulatory
16 requirements, there would -- it would be easier - to use
17 our words in our report - easier to substantiate the cost
19 MR. SHEPHERD: You said this morning, according to my
20 notes -- and you were referring to CAM now, the old
21 methodology. And I'm just referring to my notes and I
22 think this is accurately set down, what you said. You
23 said: The number was good. The methodology was wrong.
24 Now, that was incorrect; right? You mis-spoke
25 yourself this morning?
26 MR. PIENAAR: I will reserve the right to say whether
27 I mis-spoke myself, because I would like to see the
28 transcript, if I may, because I do not believe that I
1 inferred that the number was fine and the methodology was
2 wrong. I said the -- the number -- I will stop there.
3 MR. SHEPHERD: Let me put it another way, then. If
4 the transcript says the number was good, the methodology
5 was wrong, that's not correct, is it?
6 MR. PIENAAR: The number was good, based on the
7 calculation that we undertook at that point in time, and
8 I've given all of the rationale for the calculation. So
9 the number was sound based on the six or seven allocators
10 that we actually used where we divided by -- in one case, I
11 think we divided by two, and then we took 60 percent of the
12 division by two. The number is fine, in terms of the
14 MR. SHEPHERD: So now I am a little confused, because
15 I thought you said at another point this morning that you
16 don't actually know what the right number is. You didn't
17 actually know what the right number was last year, because
18 you had insufficient data in which -- on which to give a
19 useful opinion; right?
20 MR. PIENAAR: Again, I didn't use the words that you
21 just described. I did not say we did not have enough data
22 to issue a useful opinion.
23 I said that we did not have enough data to
24 substantiate the amount that Enbridge was applying for in
25 its 2005 rate case, so we could not -- we didn't have
26 enough data to substantiate that number that they were
27 asking for.
28 MR. SHEPHERD: Well, but you were asked about the 13.5
1 number from last year and you said that is not a good
2 number; right?
3 MR. PIENAAR: That is correct.
4 MR. SHEPHERD: And yet in your report last year - I'm
5 reading from it - it says:
6 "The corporate costs for 2005 after implementing
7 both our general and specific short-term
8 recommendations for 2005 should be 13.4 million."
9 MR. PIENAAR: That is correct.
10 MR. SHEPHERD: That was not a useful number?
11 MR. PIENAAR: I think I just explained it, Madam
12 Chair. The number was 13.5 based on the evaluation that we
13 did at that point in time, based on the lack of information
14 we had, based on our inability to substantiate it. The
15 number 13.5 at that point in time, based on those factors,
16 was absolutely fine. Does that answer your question?
17 MR. SHEPHERD: No, because I thought you just said
18 anybody reading your report would understand that that is
19 not a good number; that if you actually did a proper
20 review, it would have been higher.
21 MR. PIENAAR: Again, Madam Chair, with all due
22 respect, I think Mr. Shepherd is attempting to put words in
23 my mouth, which -- or at least interpreting the words that
24 I'm saying in a different way. What I said is that anybody
25 who read our report would -- it's easy to tell that we
26 indicated that the number of 13.5 million would be higher
27 if an appropriate methodology was used that met the
28 regulatory requirements, which CAM did not.
1 MR. SHEPHERD: Okay. But the 13.5 was a good number
2 for last year?
3 MR. PIENAAR: The 13.5 was not -- was a good number,
4 based on the information we had available to us at that
5 point in time, which was an inappropriate methodology.
6 MR. SHEPHERD: I'm going to move to another area, and
7 I'm waiting for the sigh of relief here. Let me ask you,
8 Deloitte has a large and very respected global transfer
9 pricing practice; right?
10 MR. PIENAAR: We have a transfer pricing practice.
11 It's a practice that is run out of a different part of our
12 business, and so I can't tell you the relative size of the
14 MR. SHEPHERD: The transfer pricing is the study of
15 how much the tax authorities in various companies --
16 countries will allow related companies to charge each other
17 for goods and services; right?
18 MR. PIENAAR: Yes, I do understand that.
19 MR. SHEPHERD: And the basic principle of transfer
20 pricing in that context is fair market value; right? I'm
21 over-simplifying, but that is basically it?
22 MR. PIENAAR: I accept that that is your opinion.
23 MR. SHEPHERD: Well, no. You're the witness. I can't
25 MR. PIENAAR: Well, I'm not an expert in cross-border
26 transfer pricing, so I would ask that you call a tax expert
27 out of our firm to come and join me on the stand and we can
28 perhaps have a discussion on that, Mr. Shepherd.
1 MR. SHEPHERD: Okay. So then it's obvious you're not
2 a part of the Deloitte transfer pricing practice, are you?
3 MR. PIENAAR: I am not.
4 MR. SHEPHERD: Mr. Toth, you're not either?
5 MR. TOTH: No.
6 MR. SHEPHERD: And neither of you has any experience
7 in transfer pricing?
8 MR. PIENAAR: The transfer pricing that you're
9 referring to, which I think is cross-border transfer
10 pricing, the answer is we do not do work in that specific
12 MR. SHEPHERD: But the cost allocation work you do,
13 that's just a type of transfer pricing, isn't it?
14 MR. PIENAAR: Well, no. The answer is no. The cost
15 allocation work we did for this particular exercise was
16 cost plus transfer pricing -- sorry, a cost plus allocation
17 mechanism, which worked with factors of causality and
18 allocators to allocate existing costs to -- from one cost
19 entity or one entity, Enbridge Inc., to another.
20 It would -- the complexities of cross-border transfer
21 pricing that you're referring to are different and is not
22 exactly what we dealt with. So I don't think you can align
23 those two as though they necessarily are the same.
24 MR. SHEPHERD: Well, you know, that raises an
25 interesting point. You talked with Mr. De Vellis this
26 morning, and he asked you what I thought was a set-up
27 question, which is that: Isn't it true that the amount EI
28 is allowed to charge EGD is the lower of cost and fair
1 market value? And I think you said "no"; right? Its cost
2 is what they're allowed to charge; right?
3 MR. PIENAAR: Its cost plus.
4 MR. SHEPHERD: Cost plus. It is more than cost?
5 MR. PIENAAR: Yes. There is a return on -- there is a
6 return on investment that is entitled to be included in the
7 cost, as well.
8 MR. SHEPHERD: And fair market value is not relevant
9 to that?
10 MR. PIENAAR: Is not relevant -- can I ask you to
11 clarify the question? Is not relevant to what?
12 MR. SHEPHERD: To what EI is allowed to charge.
13 MR. PIENAAR: It is not, because ARC allows Enbridge
14 Inc. to transfer costs or to allocate costs on the basis of
15 a cost-based methodology. It does not -- it is not
16 required by regulation to base it on market price.
17 MR. SHEPHERD: And that's the basis on which you did
18 your -- designed RCAM and did your report; right?
19 MR. PIENAAR: That's correct.
20 MR. SHEPHERD: Now, we had Mr. Player, on Thursday,
21 asked exactly the same question: Is the amount EI is
22 allowed to charge the lower of cost and fair market value?
23 And his answer was not complicated. He said, yes,
25 MS. PERSAD: Madam Chair, I'm just wondering if Mr.
26 Shepherd would have a transcript reference for that.
27 MR. SHEPHERD: I don't have my transcripts with me,
28 Madam Chair, but I think we all remember what was said.
1 MR. PIENAAR: I unfortunately, Madam Chair, was not
2 present in those hearings, and so I can't make any comment
3 on what Mr. Player may or may not have said.
4 MR. SHEPHERD: I will be happy to provide a transcript
5 reference at the break and follow it up after the break.
6 MS. NOWINA: Fine, Mr. Shepherd.
7 MR. SHEPHERD: Just before we get away from transfer
8 pricing, you didn't enlist the services of any of your
9 transfer pricing people in doing this study, did you?
10 MR. PIENAAR: We did not.
11 MR. SHEPHERD: I just want to follow up briefly on the
12 actual scope of what you did.
13 You didn't look at the appropriateness of the total
14 costs incurred by EI, did you?
15 MR. PIENAAR: By inference, we referred -- we actually
16 evaluated the costs that EI incurs, because the three-prong
17 test, as you well know, the third prong of that test is a
18 cost benefit analysis, and so by service, because our
19 methodology is service-based methodology, we end up having
20 a price -- or a cost, should I say, for every service. And
21 to the extent that we believe that that cost is justifiable
22 and is prudent, based on EGD as a stand-alone entity --
23 once we have satisfied our self that that is prudent, then
24 by inference we have validated the source data, which would
25 be EI's budget.
26 MR. SHEPHERD: Well, that's a little bit confusing. I
27 thought that you, essentially, accepted their costs as
28 correct. You didn't actually look at their costs, right,
1 in -- the underlying costs that you allocated, did you?
2 MR. PIENAAR: Our mandate did not include any
3 valuation of the cost base, directly, of Enbridge Inc. As
4 I indicated, we did that by inference, to the extent that
5 it was relevant to this cost allocation. By evaluating
6 every service, we have effectively evaluated that cost base
7 -- those items in the cost base that are relevant to EGD.
8 MR. SHEPHERD: You didn't look, for example, at
9 whether Mr. Letwin is paid more than the market for a
10 person of his calibre; right?
11 MR. PIENAAR: I have access to the market-based data
12 and the salary base data of all of the executives of
13 Enbridge Inc., as well as of EGD. And they -- in my
14 estimation, they appeared to be within a range that is
15 acceptable for executives for an organization of that
17 MR. SHEPHERD: So did you do that with all of the
18 salaries included in the EI costs?
19 MR. PIENAAR: We did not.
20 MR. SHEPHERD: Which ones did you do it for?
21 MR. PIENAAR: As I said, we did not undertake a
22 detailed evaluation of the EI cost base.
23 MR. SHEPHERD: So, sorry, I thought you just told us
24 that you had formed an opinion as to the appropriateness of
25 Mr. Letwin's salary, yes? I don't even know what it is it,
26 I'm just asking. You formed an opinion that it was okay;
28 MR. PIENAAR: I looked at the data, and I formed an
1 opinion that it was within the range of acceptability.
2 MR. SHEPHERD: And who else’s salary did you do that
4 MR. PIENAAR: I looked at the top five executives of
5 EI, and I think it was the top five executives of EGD --
6 not, specifically, to form an opinion, but specifically
7 because I was looking at relative costs in relation to the
8 overall costs that ultimately ended up in each EGD service
9 charge. I was interested to know whether those costs were
10 -- whether -- what the range of salaries were for VPs and
11 senior VPs in EI.
12 MR. SHEPHERD: Okay, now this is a surprise to me, as
13 you can see by the look on my face, because I didn't see
14 that investigation anywhere in your report. Your report
15 tells us everything you did as part of this process, and it
16 doesn't refer to that, at all.
17 So I wonder if you could show me, in your report,
18 where it tells us about that investigation.
19 MR. PIENAAR: As I indicated, it wasn't an
20 investigation, but -- and it’s not included in our report.
21 MR. SHEPHERD: All right. I guess your view is that
22 -- I mean, aside from those particular five salaries, you
23 didn't look at any of the underlying costs, to see whether
24 they were wasteful, whether they could have been done more
25 cheaply -- anything like that; right?
26 MR. PIENAAR: That's not true. We looked -- again, I
27 would refer you to the fact that we referred to the
28 ultimate cost, that flowed through to Enbridge Gas. We
1 looked at those costs, service by service. Where we
2 thought it was -- the numbers justified -- because it was -
3 - it would be getting close to, you know, an evaluation for
4 us, we looked at salaries -- market-based salaries for
5 people that would be working in those kinds of departments,
6 to -- ultimately, to come up with a decision on the cost-
7 benefit for certain services.
8 MR. SHEPHERD: I just asked you whether you compared
9 anybody else’s salaries but the top five, and you said
10 “no”: now, you're saying “yes.”
11 MR. PIENAAR: Well, again, perhaps if you -- I said I
12 looked at external -- I just said now -- I said I looked at
13 internal salaries of the people that I described, and then
14 what I’ve just said to you, now, is that I looked at
15 external surveys - not of Enbridge Gas and Enbridge Inc.
16 people - external salary surveys to evaluate the numbers
17 that flowed through to Enbridge Gas.
18 MR. SHEPHERD: So, you didn't look at the underlying
19 costs. You looked at the results to EGD; right?
20 MR. PIENAAR: Correct. I looked at -- I applied I
21 applied my view on how to evaluate the cost-benefit test,
22 which is the third test of the three-prong test.
23 MR. SHEPHERD: And what you were assessing there is,
24 essentially, whether EGD was paying more than a market
25 value; right?
26 MR. PIENAAR: Whether it was paying a reasonable
27 price. Whether -- in other words, whether there was a
28 cost-benefit for EGD.
1 MR. SHEPHERD: And there would be a cost - a positive
2 cost-benefit, if buying the service from EI was cheaper -
3 or the same, I suppose; but cheaper, I guess -- than either
4 doing it themselves, or buying it, externally; right?
5 MR. PIENAAR: Correct.
6 MR. SHEPHERD: Okay. So if that value -- the, sort
7 of, cost-benefit break-point, if you like, was $2 million,
8 then, as long as EI was doing it for $2 million or less,
9 you were happy; right?
10 MR. PIENAAR: In concept, yes.
11 MR. SHEPHERD: And you didn't look at what the
12 component of that $2 million was. You didn't look
13 underneath it and see, was that $2 million an intelligently
14 spent-cost, or was it wasteful, did you?
15 MR. PIENAAR: I can't -- no, we did not do -- we
16 looked at it from -- we looked -- let me start again.
17 We did a cost-benefit analysis which said: is this
18 cost a reasonable cost, in the context of the detailed
19 service descriptions that we assisted EGD in developing.
20 In other words, we looked at the nature of the services
21 that were being purchased, we applied our knowledge and we
22 made a judgment as to whether we believed that the cost
23 that was being incurred was reasonable in relation to what
24 we understand fair-market rates would be. As I said, we
25 referred that -- I think we referred to it as the external
26 salary survey, in one place. I referred to other members
27 of my own organization to guide us in certain areas, for
28 example, in the capital accessing and finance, as to what
1 would be appropriate salaries, and so forth.
2 And so we made a judgment as to whether those costs
3 were reasonable for the service that was actually being
5 MR. SHEPHERD: So, in that example, the $2 million
6 costs to EGD, if EI's hard cost to deliver the service was
7 a million, but they decided to pay a consulting fee to some
8 other affiliate of another $800,000, that would be okay by
9 you, because you weren't looking at the underlying costs,
10 only at whether the price was less than the 2 million that
11 you would normally have to pay; right?
12 MR. PIENAAR: Well firstly, I don't know whether it
13 would be okay by me. I’d have to see what they actually
14 paid for those services.
15 But the point is this: I looked at what EGD was
16 paying for the service that they were receiving. And they
17 would be receiving cash management service, or, you know,
18 legal advice service, and I looked at that service in
19 isolation. And if that appeared to me to be a justifiable
20 number, then I would have accepted the cost as passing the
21 cost-benefit test, given that, at that point in time - as
22 you, I am sure, are aware - you have already been through
23 the cost-incurrence test and the cost-allocated test,
24 before you get to needing to evaluate the cost-benefit
26 MR. SHEPHERD: So I just -- I’ll take one at random:
27 investor services. This is 1,645,000 in costs. You don't
28 need to turn it up. I’ll just -- it's a conceptual
2 That 1,645,000 includes some CEOs’ time. You didn't
3 look, specifically, at whether the cost of the CEO's time
4 for that was reasonable: you looked at whether the
5 1,645,000 was reasonable; right?
6 MR. PIENAAR: Well, what we did is that every cost
7 that we receive -- that EGD receives is made up of a -- of
8 costs that flow from specific departments. So the CEOs
9 would be one department that the investor services -- that
10 that would come from. There would be services -- costs
11 that would be flowing from the treasury department, and so
12 on. So each of those items would flow through and make up
13 an ultimate service cost.
14 The -- the answer to your question is, we evaluated
15 the ultimate cost that EGD paid for, because we thought
16 that that is what is relevant to the ratepayer. What has
17 EGD paid? Is that justifiable to the ratepayer? Yes or
18 no. And if we believed it was, we passed the -- we let it
19 pass the test.
20 MR. SHEPHERD: I wonder if you can turn to Exhibit I,
21 tab 18, schedule 19. If it's easier for you you can find
22 this at tab 13 of Mr. De Vellis's material, or if not, you
23 might want to -- it's your preference.
24 MR. MEES: Which page, Mr. Shepherd?
25 MR. SHEPHERD: Sorry, this is Exhibit I, tab 18,
26 schedule 19, and I'm starting on page 4. Do you have that?
27 MR. TOTH: Sorry, could you repeat that reference?
28 MR. SHEPHERD: What did you want me to repeat?
1 [Witness panel confers]
2 MR. PIENAAR: We do have it.
3 MR. SHEPHERD: Thank you. So take a look at page 4,
4 and I will just -- let's start with board of directors'
5 support. That's the one that comes to mind. There's a
6 figure there of 665,203. Do you see that?
7 MR. TOTH: Yes.
8 MR. SHEPHERD: And you reached a conclusion that that
9 was a reasonable number; right?
10 MR. TOTH: Correct.
11 MR. SHEPHERD: There's another figure there of 91,811
12 for the CEO. You've not at any time reached a conclusion
13 that that is a reasonable number, have you?
14 MR. TOTH: Not specifically, no.
15 MR. SHEPHERD: No. Now, can you move to page 9, then?
16 Do you see that, total EI departmental allocations to EGD?
17 MR. TOTH: Yes.
18 MR. SHEPHERD: Let's just look at the CEO line.
19 There's an amount of $866,142, plus support, allocated to
20 EGD by EI for the CEO.
21 Have you at any time reached a conclusion as to
22 whether that is a reasonable number?
23 MR. TOTH: Not specifically, but, yes, through the
24 validation of each service individually and the components
25 that make up the services.
26 MR. SHEPHERD: Well, okay. So that's interesting. So
27 the overall costs of 665,230 for board of directors'
28 support, for example, you're happy with that, because it
1 would cost more to support their own board; right?
2 MR. TOTH: Correct.
3 MR. SHEPHERD: But you don't actually know whether
4 these components of that are prudently incurred, do you?
5 MR. TOTH: Again, individually, no. But, again,
6 through the assessment of the costs as a whole, by
7 inference, yes.
8 MR. SHEPHERD: And so there could be a line there
9 gambling losses. It wouldn't matter to you; right? It's
10 irrelevant, as long as the top line is fine, right, as long
11 as that 665 is right?
12 MR. PIENAAR: No. I think that is a poor example,
13 because we clearly looked at the make-up of the services,
14 and the entire basis of our methodology defines, in detail,
15 the services that are required.
16 So -- and also defines -- we know it's completely
17 transparent as to where those services are coming from,
18 which department. So we know that those services come from
19 certain departments. We know exactly what the activities
20 are in each of those services, and as we helped EGD to set
21 up the service descriptions, there would clearly not be a
22 gambling cost included, because we would know -- we looked
23 at the budgets, we looked at all of these individual costs
24 and where they flowed through from, to make sure that the
25 costs were relevant to what we were allocating.
26 So I think that is a particularly poor example of --
27 what goes into the board of directors' support is very
28 relevant to us and we have seen it. We might not have
1 evaluated whether the CEO or the CFO is getting paid the
2 right particular salary, but we know that the activities
3 that he undertakes is relevant to that particular service,
4 and, therefore, the proportion of the cost that he spends
5 on that service we find justifiable.
6 The proportion of the cost that that service
7 represents, that EGD consumes, we find that justifiable,
8 and, ultimately, that ends up with 665,000 total cost, and
9 providing that has as a cost benefit, in accordance with
10 the regulations, to EGD. We believe that the regulatory
11 criteria have been satisfied.
12 MR. SHEPHERD: Mr. De Vellis talked with you this
13 morning about the unusual aspect of Deloitte designing
14 RCAM, and then evaluating it. Do you recall that
16 MR. PIENAAR: Yes, I do.
17 MR. SHEPHERD: Now, he talked about the conflict of
18 interest inherent in that, and I'm not going to talk about
19 that. I have another question.
20 When you design something for a client, don't you
21 check your work, anyway, when you're finished -- before you
22 are finished with it?
23 MR. PIENAAR: Yes, we do.
24 MR. SHEPHERD: Doesn't that involve making sure that
25 your design achieves the goal you were paid more than
26 $700,000 to achieve?
27 MR. PIENAAR: Can you ask the question again?
28 MR. SHEPHERD: Doesn't that -- checking your own work,
1 doesn't that involve making sure that the design you've
2 delivered to the client achieves the goals you were paid
3 more than $700,000 to achieve; right?
4 MR. PIENAAR: Absolutely. And our goals, as you know,
5 were to make sure that the new methodology met our
6 recommendations in CAM, met the ARC recommendations -- or
7 the regulations set out in ARC and met the OEB three-prong
8 test. So we absolutely made sure that we were satisfied
9 that it actually covered those goals. So, yes, the answer
10 is yes.
11 MR. SHEPHERD: So you made clear this morning that you
12 don't claim to be independent, and I understand that, but
13 what I don't understand is why EI or anybody else would pay
14 you to do something you should have done in the first
15 place, check your own work and make sure it is right.
16 MR. MEES: Mr. Shepherd, I think that what we asked
17 for in the evaluative report is more than just checking
18 their own work. It is as -- Mr. Pienaar has talked ad
19 nauseam about this. It was a criteria-based evaluation.
20 So it is more than just reviewing the service descriptions
21 and reviewing the costs. It's criteria, to make sure that
22 we can say here today that we've met the three-pronged
23 test, and we can.
24 MR. SHEPHERD: So that's like an architect designing a
25 building and, when it is built, checking to make sure that
26 it's not going to fall down, and you're saying that you
27 should pay extra for that?
28 MR. MEES: If we felt it was necessary.
1 MR. SHEPHERD: The reason why RCAM included fully-
2 loaded costs, rather than the unloaded costs that were in
3 CAM, last year is that you recommended that last year;
4 right? You recommended a change to fully-loaded costs;
6 MR. PIENAAR: We recommended the way that the loadings
7 occurred, yes. We recommended that services should be --
8 or that costs should be loaded to services before services
9 are allocated to affiliates.
10 MR. SHEPHERD: And you made that recommendation
11 because, in a regulated environment, it's important to see
12 the actual costs of a service to assess whether it is
13 appropriate; right?
14 MR. PIENAAR: Do you have a reference for where we
15 said that?
16 MR. SHEPHERD: Why don't you describe in your own
17 words why you made that recommendation? That's easy.
18 MR. PIENAAR: Because in ARC, it very specifically
19 says that, number 1, it would assist to have -- it doesn't
20 specifically use these words, but basically it sets out a
21 set of criteria, the three-prong test and ARC, that says
22 you need a service-based methodology, and, in fact, fully
23 burdened costing, loaded costing is acceptable in the
24 context of cost-based methodology. That's why we
25 recommended loading the way we did.
26 And to be honest, CAM also loaded its cost, but loaded
27 it in a different way.
28 MR. SHEPHERD: Okay. I thought the point was
1 transparency, so that the Board could look at the costs and
2 say, All right, we believe these are reasonable, because we
3 understand what these services are worth.
4 MR. PIENAAR: The use of -- we talk about in our
5 report, as you will notice, transparency. And what
6 transparency, how we define it, is -- in our report, we
7 define transparency as being the fact that Enbridge Gas
8 defines the services that they require, so the services are
9 transparent to them, so that when they are actually
10 acquiring the services and purchasing the services, they
11 know what they're actually -- what services are being
13 As you see in the inter-corporate services agreement,
14 those services are quite detailed, the descriptions of
15 those services. That's what we implied and we say -- state
16 that in RCAM, as transparent. So it is transparent to the
17 buyer, the purchaser of the services.
18 MR. SHEPHERD: Now, I wonder if you could turn to page
19 15 of your report, this year's report.
20 MS. NOWINA: The reference, Mr. Shepherd?
21 MR. SHEPHERD: Oh, sorry. A6, tab 10, schedule 2, and
22 this is at -- this is not one of the appendices. This is
23 chapter 5.
24 MR. MEES: We have that, Mr. Shepherd.
25 MS. NOWINA: We have it too.
27 MR. SHEPHERD: Now, somewhere else in this report, you
28 said that the average loading in RCAM is about 54 percent,
1 right? You don't recall that number?
2 MR. TOTH: I recall the number. I just --
3 MR. PIENAAR: We may have used that -- the answer is,
4 yes, there was a loading of between 45 and 54 percent.
5 MR. SHEPHERD: Okay. And you think that’s reasonable;
7 MR. PIENAAR: Yes. Based on the knowledge we have of
8 the make up of the costs that go into the primary services,
9 we know that those numbers are reasonable.
10 MR. SHEPHERD: So if loading is 54 percent, then what
11 that means - tell me whether I'm wrong - is that you take
12 what you can allocate directly, you take 54 percent of
13 that: that's the support you put on top of that; right?
14 That's what “cost plus” means; right?
15 MR. PIENAAR: No.
16 MR. TOTH: No.
17 MR. PIENAAR: That's not what “cost plus” means.
18 MR. SHEPHERD: All right. So, then, help me out.
19 When you say that average loading is 54 percent, what does
20 that mean: 54 percent of the total? Or 54 percent of the
21 unloaded costs?
22 MR. TOTH: Typically, when you say 54 percent loading,
23 that's, kind of, overhead costs on top of whatever is the
24 cost object that you're costing. So, if it’s primary
25 service, it’s whether -- you know, the individuals
26 providing that service, and the costs of those services,
27 and then 54 percent allocation of overhead costs, such as -
28 - again, rent, leases, those types of items.
1 MR. SHEPHERD: So, if you had a primary cost -- an
2 unloaded cost of a $100, and you had 54 percent loading,
3 the support costs added on top of it would be $54?
4 MR. TOTH: Roughly speaking, yes.
5 MR. SHEPHERD: Wonderful. Okay. So then, take a look
6 at this page that I asked you to look at, page 15. And I
7 just did some math, and tell me whether I am right in
8 understanding what you're doing here.
9 You have this primary services number of 59.77 -- I
10 think that’s millions; right?
11 MR. TOTH: Correct.
12 MR. SHEPHERD: And of that, 10.49 million is from
13 support services; right?
14 MR. TOTH: Correct.
15 MR. SHEPHERD: But I also see that the loaded
16 departments -- that's 72.29, do you see that?
17 MR. TOTH: Correct.
18 MR. SHEPHERD: That also -- that's already loaded with
19 the general expenses, right, of 28.08 million?
20 MR. TOTH: That's correct.
21 MR. SHEPHERD: So, if I did the math right, that means
22 that -- you see this 46.16 million that goes from loaded
23 departments to primary services? Do you see that?
24 MR. TOTH: Correct, yes.
25 MR. SHEPHERD: Of that, 17.93 million is those general
26 expenses that have already been loaded in, right? It's the
27 same ratio, 28.08 over 72.29 is 17.93 over 46.16. Do you
28 see that?
1 MR. TOTH: Sorry, can you repeat your math, there?
2 MR. SHEPHERD: Well, let me put it another way.
3 That 28.08 of general costs that are loaded into the
4 departments --
5 MR. TOTH: Yes.
6 MR. SHEPHERD: -- that's about, what, 38 percent of
7 that total; right?
8 MR. TOTH: 30 percent of what -- of that 72.9?
9 MR. SHEPHERD: Of that 72.9.
10 MR. TOTH: Correct.
11 MR. SHEPHERD: Okay. And so I could take the same
12 percentage of 46.16 -- you're going to get 17 .93; right?
13 Subject to check, roughly?
14 MR. TOTH: Yes, roughly speaking.
15 MR. SHEPHERD: So I add the 17.93, which goes into
16 primary services, and the 10.49, which goes into primary
17 services, -- those are both support costs; right?
18 MR. TOTH: Correct.
19 MR. SHEPHERD: And I get a total of 28.42 out of that
20 58.77. And, just using the math you used, that's a 91
21 percent loading; isn't that right?
22 MR. TOTH: The math is correct. However, what needs
23 to be clarified is that there is a number of individuals
24 providing support services to the primary services.
25 And there’s people from these department-loadings, and
26 FTE involved, also, in providing those primary services, as
27 we talked. Examples of help desk, et cetera. And it is -
28 - it was believed to be appropriate to, also, allocate
1 those costs into the primary services. So, if you're
2 looking at all the FTE and individuals, and their specific
3 costs of providing that service, I don't know what the
4 ratio percentage would be.
5 MR. SHEPHERD: But it's true that almost half of what
6 EGD is being asked to pay is support on the unloaded costs,
7 right? Roughly.
8 MR. TOTH: As it's defined here, around general
9 expense and support services, correct.
10 MR. SHEPHERD: But you said elsewhere that 54 percent
11 was a correct loading. So how come you use 91 percent
12 here? Is that just how the numbers worked out?
13 MR. PIENAAR: Can I just take you back, because I'm
14 not sure that I followed your math. I want to take you
15 back to the 28.08 -- let's see if we can clarify this,
16 because I think it’s a confusion, not anything else.
17 The 28.08 and the 44.2 -- right? Do you see those
18 numbers there?
19 MR. SHEPHERD: Yes.
20 MR. PIENAAR: When those -- those are components of
21 general expenses and -- it’s a component of general
22 expenses, and it's the full amount of the department
23 budgets; right? This is a conceptual model you're looking
24 at. So all that’s happening there --
25 MR. SHEPHERD: Well, let me just stop you, sorry.
26 Conceptual model? It has numbers in it. It’s a dollar --
27 it shows where the dollars --
28 MR. PIENAAR: What you don't have is, you don't have
1 72 loaded departments reflected on that. You don't have
2 every single department, so it looks like it is a single
3 number. But bear with me, and you will see what I mean.
4 28.08 is coming from general expenses. The full
5 amount of the 44.2 is coming from the department budgets,
6 as in the 118 million, I note, which is the total of EI.
7 All that’s happening there is that those department budgets
8 are being redistributed across the departments that are
9 going to, ultimately, provide the services; right? On a
10 basis --
11 So, in other words, you're taking - if I'm not
12 mistaken, help me here, Gabor -- you're taking -- so you’re
13 redistributing those -- for that 44 million into the 72
14 million. So the 72 million comprises the 44.2 plus the
15 28.05. Those loaded departments, which are then defined
16 for distributing -- for providing the services, are then
17 providing some services -- some primary services and, in
18 some cases -- and, in other departments, are providing
19 support services. And so the 72 million is, basically,
20 split up. Some go directly to the primary services:
21 that's the loading. The 46 million and the 13 million is
22 the loading. There is now an appropriate loading, that’s
23 now occurring into primary services and into support
25 Once you're in support services, we then have an
26 amount of the support services that are then -- loaded,
27 again, across multiple primary services -- or spread across
28 10.4 million. And then, as I said, the loaded departments
1 are spread into those primary services. But they're going
2 -- portions of those loadings are going to different
3 primary services. Portions of the support services are
4 going to different, individual, primary services. And it's
5 at that point that, then -- we have, now, a fully-loaded
6 set of primary services, that can then be allocated in
7 accordance with the ARC.
8 So I don't know if that’s helpful.
9 MR. SHEPHERD: Well, that doesn't sound to me -- this
10 is my last question, before we take a break. And that
11 doesn't sound to me like what Mr. Toth just said. So let
12 me see if I can play it back to you, and you can tell me
13 whether I've got it right, or wrong, or I'm out to lunch.
14 You’ve got the department budgets. They flow directly
15 into that 72.29, and they stay where they are, because
16 we're still doing it by department.
17 Then, you've got these general expenses that have to
18 be loaded on top of the department budgets, because they're
19 not in the department budgets, right now. So that's, for
20 example, like stock-based compensation for the people in
21 those departments; right?
22 So you have -- the first level of loading is, you load
23 the departments up with the general expenses.
24 MR. PIENAAR: And that's the 28 million.
25 MR. SHEPHERD: And that's the 28 million. And that --
26 by my calculation, we're already got a 64 percent loading.
27 But then, you take those loaded numbers, and you load them,
28 again, because you have some circularity, here. You have
1 some departments that, actually, support other departments.
2 So, some of them go into support services, which then
3 get loaded back, when you reallocate these as services;
4 isn't that right?
5 MR. PIENAAR: No. No. Because the only loading is
6 occurring is that 28.08. If you look at it -- as I said to
7 you, there's a conceptual diagram. It's conceptual to the
8 extent of instead of having some arrows going down, we
9 wanted them all to flow from left to right so it is easier
10 to read. So the 44.2 million that is in the department
11 budget box is also a 44 million exactly like that in the
12 loaded department box. The only thing that has happened
13 there is 28 million has come from general expense and is
14 the loading to those same departments.
15 So the cost in the 72.2 million, if you analyzed each
16 cost, is exactly the same as it was in 44.2, plus a 28.08
17 loading that's been spread across each of the departments.
18 That's the loading. Thereafter, to classify the balance as
19 loading is not entirely correct, because what is then
20 happening is the loaded departments are simply being
21 defined by the services they provide.
22 So all of the services are defined and the cost of the
23 departments are then transferred either into support
24 services or into primary services. No further loading is
25 occurring. It's a distribution of those costs to the
27 MR. SHEPHERD: What I was asking about, then, would be
28 double counting; right?
1 MR. PIENAAR: No, no.
2 MR. SHEPHERD: What I was suggesting --
3 MR. PIENAAR: You were suggesting double counting.
4 I'm suggesting it is not double counting.
5 MR. SHEPHERD: Okay. Madam Chair, now that I am
6 thoroughly confused, I would ask to take a break.
7 MS. NOWINA: Good time to take a break and everybody
8 can clear their heads. We will get together again at ten
9 minutes before the hour.
10 --- Recess taken at 2:35 p.m.
11 --- On resuming at 2:55 p.m.
12 MS. NOWINA: Please be seated. Mr. Shepherd.
13 MR. SHEPHERD: Mr. Pienaar, or maybe -- I think this
14 is actually Mr. Toth. This is probably for you. By the
15 way, Madam Chair, I'm 45 minutes into a 90-minute cross and
16 I am on schedule.
17 MS. NOWINA: Maybe I can stop and make a comment,
18 then. It would not appear that we will finish with this
19 panel today. I think that we can make that assumption and
20 go forward and assume a 4:00 to -- or shortly after 4
21 o'clock end today.
22 MR. SHEPHERD: Mr. Toth, in many of your detailed
23 assessments of reasonableness of costs, I think those --
24 you did those hourly rate numbers; right?
25 MR. TOTH: Not all of them, but some of them, yes.
26 MR. SHEPHERD: And you used 2,080 hours per person?
27 MR. TOTH: Correct.
28 MR. SHEPHERD: So I want you to turn to appendix 10 of
1 your report -- sorry, appendix 8 of your report. This is
2 A6, tab 10, schedule 2, appendix 8. I'm looking at page
3 10. Do you have that?
4 MR. TOTH: Correct.
5 MR. SHEPHERD: And there you're referring to an
6 affiliate of EI called EPI; do you see that?
7 MR. TOTH: Yes.
8 MR. SHEPHERD: And you say that they used 1,600 hours
9 per employee, and that appears to you to be reasonable.
10 Why the difference?
11 MR. TOTH: My comment was related to that $85 an hour
12 based on a 1,600-hour year appears reasonable. Calculated
13 on a 2,080-hour basis equivalent, it would be $110.50. So
14 on that basis -- sorry, I have to double-check my math
16 MR. SHEPHERD: I think that is the other way around.
17 MR. TOTH: Yes.
18 MR. SHEPHERD: It would be $65 an hour.
19 MR. TOTH: Yes. Sorry, my math was incorrect.
20 MR. SHEPHERD: Okay. I want you to, if you can,
21 please, to appendix 4 of that same exhibit at page 2.
22 Do you have that?
23 MR. TOTH: Sorry, appendix 4, page 2.
24 MR. SHEPHERD: Appendix 4, page 2.
25 MR. TOTH: Does this relate to the time estimation
27 MR. SHEPHERD: Yes. So you see there it has -- you
28 talk about how you account for everybody's time, and under
1 "General Administration Time", you say - and tell me
2 whether this is right - when people spend time working on
3 their career plans, doing performance reviews, going to
4 retirement parties, things like that, that that still has
5 to be estimated, and then that is fed into the general
6 administrative hours; right?
7 MR. TOTH: Correct.
8 MR. SHEPHERD: Then that is reallocated to the
9 services; right?
10 MR. TOTH: No. What that was meant to do is we tried
11 to take out the administrative time and, therefore, adjust
12 the allocations based purely on the time to the particular
14 So, in fact, that is included -- it is included.
15 MR. SHEPHERD: Sorry, the administrative --
16 MR. TOTH: To be clear, it is included.
17 MR. SHEPHERD: It's included in the support side;
19 MR. TOTH: No. It is included in everybody's time.
20 MR. SHEPHERD: And it's treated as time spent on
21 service delivery; right?
22 MR. TOTH: Yes. It is treated as -- it's day-to-day
23 activities. It is part of what individuals do. It's part
24 of their everyday activities. You pay them on an annual
25 basis, and these are parts of an individual's activities in
26 a year.
27 MR. SHEPHERD: So that explains the 2,080 hours. As a
28 lawyer, I look at docketable hours and I think, 2,080
1 hours, that's somebody working real hard. But that
2 includes everything; right?
3 MR. TOTH: Yes. The 2,080 hours is, I believe, on a
4 40-hour workweek.
5 MR. SHEPHERD: Yes. So that includes everything?
6 MR. TOTH: Correct.
7 MR. SHEPHERD: And so those things eventually get
8 charged, then, to EGD or a portion of them; right?
9 MR. TOTH: Correct. It is included in the services.
10 MR. SHEPHERD: So when you're talking about hourly
11 rates for -- or the effective hourly rate of the people
12 involved in providing these services, and you're using
13 2,080 hours, that's not like a billing rate for a
14 professional, is it? It's not --
15 MR. TOTH: Not specifically, no.
16 MR. SHEPHERD: Because Deloitte, for example, you
17 don't bill clients for a percentage of your time spent
18 doing performance reviews, do you?
19 MR. TOTH: No, we do not.
20 MR. SHEPHERD: That's just built into your hourly
22 MR. TOTH: Correct.
23 MR. PIENAAR: May I just give some clarification on
24 this, if I might, Madam Chair? We used 2,080 hours in some
25 of our calculations because, in fact, Enbridge is not a
26 professional service firm. It is not billing its time in
27 the same way that lawyers or consultants would bill their
1 So the kind of numbers that we would use in our hours
2 we wouldn't regard as entirely relevant. Enbridge pays a
3 salary for a person to work for the entire year. It pays
4 them that salary whether they're on vacation, whether
5 they're sick or not. So we based our calculation on 2,080
6 hours because they get paid for the full year. So we don't
7 try and make some arbitrary adjustment down to what it
8 would be if they were lawyers or accountants, because that
9 would be completely arbitrary.
10 They get paid for the full 2,080 hours. The only
11 discussion one can have is: Is 2,080 hours the right --
12 it's 52 weeks multiplied by 40 weeks. We were told that
13 most of the individuals that worked at Enbridge Inc. and
14 Enbridge Gas that are involved in this probably work ten to
15 twelve hours a day. We used only eight, because that was
16 -- that was fair, because that is really what people are
17 being paid for, subject to any overtime that might get
19 So in clarification, that is where the 2,080 comes
20 from, because they get paid for every hour, whether they're
21 sick or on vacation.
22 MR. SHEPHERD: So the people at EI who provide these
23 services to -- that's services in quotes, to Enbridge Gas
24 Distribution, they don't actually spend 2,080 hours a year
25 providing services to EGD, do they?
26 MR. TOTH: In total, they do, because, again, part of
27 these general administrative activities is part of their
28 responsibilities and their job. So that would be included
1 as overall responsibilities, I guess.
2 MR. SHEPHERD: Can you tell us, without giving us a
3 trade secret, what the average billable hours per
4 professional, excluding students, is at Deloitte?
5 MR. TOTH: Average billable rate?
6 MR. SHEPHERD: It's a figure you know; right? You
7 talk about it within the organization; right?
8 MR. TOTH: I guess I could refer you to our engagement
9 letter where the rates per professional by level is
10 actually in evidence.
11 MR. SHEPHERD: I didn't ask for hourly rates. I asked
12 for number of hours per professional.
13 MR. PIENAAR: Can you just clarify the question?
14 MR. SHEPHERD: Yes. You have a number of
15 professionals billing out time; right?
16 MR. PIENAAR: Right.
17 MR. SHEPHERD: It's true that the more junior ones
18 spend 2,000 hours a year billing out, and the more senior
19 ones are more like 1,200; isn't that right?
20 MR. PIENAAR: That is correct. As I did explain,
21 though, I'm not sure that comparing this to billing rates
22 for professionals has any relevance, but the answer is yes.
23 MR. SHEPHERD: I wonder if you can turn to tab I --
24 sorry, Exhibit I, tab 11, schedule 65. And if it's
25 convenient for you, it's at tab 12 of the VECC compendium,
27 MR. MEES: Mr. Shepherd, what page was that, within
28 IGUA 65?
1 MR. SHEPHERD: Page 1. There’s only one. It's a one-
2 page answer.
3 MR. MEES: Sorry. I thought you were talking about
4 the attachments.
5 MR. SHEPHERD: Do you have that?
6 MR. TOTH: IGUA 65, yes.
7 MR. SHEPHERD: Yes. And what this shows is that EI
8 management time has been allocated to the RCAM development
9 process; right?
10 MR. TOTH: Yes.
11 MR. SHEPHERD: And you allocated $385,700 to that?
12 That's what it says; right?
13 MR. MEES: That's correct.
14 MR. SHEPHERD: And that's for 2,755 hours, which I
15 calculate to be exactly $140 per hour. Is that a round
16 number just by coincidence, or did you use that in
17 calculating the dollar value of the hours?
18 MR. BROWN: We use $140 an hour at Enbridge Inc. as
19 the charge-out rate, so we used that rate.
20 MR. SHEPHERD: Really. So then I wonder if you can
21 turn to Exhibit K9.5, which you talked about this morning,
22 Mr. Toth.
23 MR. TOTH: Yes.
24 MR. SHEPHERD: And if I'm right, the hourly rates at -
25 in 2,080 hours -- mind you, those hourly rates that you put
26 in your report for business development, for external
27 communications, for investor relations, are well over $140
28 an hour; right?
1 MR. BROWN: If I could add --
2 MR. SHEPHERD: Well, let Mr. Toth answer, and then you
3 can add something, Mr. Brown.
4 MR. MEES: Okay. Well, at least clarify the $140 an
5 hour, then.
6 MR. BROWN: It’s not fully-loaded.
7 MR. SHEPHERD: Oh, it’s not fully-loaded.
8 MR. BROWN: No.
9 MR. SHEPHRD: So, then, that $385,000 that you talked
10 about as being the cost --
11 MR. BROWN: It's a calculation we do, annually, for
12 internal purposes, whereby we take the department budgets
13 which, as you know from CAM, are not loaded, and work out
14 an average cost per hour of all Enbridge Inc. employees
15 from the departmental budgets, which are not loaded.
16 MR. SHEPHERD: So that's the $44 million? Is it a 44
17 million number? That total of 44.2 million that we saw on
18 that previous page we were talking about -- that chart;
19 right? Which is A6, tab 10, schedule 2, page 15.
20 MR. TOTH: You're referring to the department costs?
21 MR. SHEPHERD: Yes.
22 MR. TOTH: Those are not loaded.
23 MR. SHEPHERD: No, I'm asking Mr. Brown: that's the
24 amount -- that 44.2 million is the amount from which you
25 get the $140 per hour?
26 MR. BROWN: The rate of $140 an hour was provided to
27 me as the calculation from the 2005 Enbridge Inc. budget.
28 So, I believe, this 44.2 would be 2006. So this would be
1 inflated from the actual amount of the 2005 budget, that
2 the $140 was derive from.
3 MR. SHEPHERD: And you say that’s an unloaded cost,
4 right? 140 is an unloaded cost.
5 MR. BROWN: Yes. Subject to check. I'm fairly
6 certain when Enbridge Inc. provides that, on an annual
7 basis, for invoicing, that it is non-burdened departmental
9 MR. SHEPHERD: Well then I guess -- can you tell me
10 whether the average cost of your staff is $291,200 a year,
11 Mr. Brown?
12 MR. BROWN: The cost of my staff?
13 MR. SHEPHERD: Of the staff at EI. Average cost per
14 person, 291,200, or is that high?
15 MR. BROWN: I'm sorry, I don't know.
16 MR. SHEPHERD: Because that's what $140 times 2,080
17 hours would be; right?
18 MR. BROWN: So the math is, sorry?
19 MR. SHEPHERD: 140 times 2,080 would be 291,200.
20 MR. BROWN: Okay. So if that's the math, then that's
21 the average departmental -- the average cost of an
22 employee, including training, travel, all departmental
24 MR. SHEPHERD: At EI?
25 MR. BROWN: At Enbridge Inc. Yes, sir.
26 MR. SHEPHERD: All right.
27 I want to move to another area. All of this
28 discussion that we've just had, it assumes that the
1 services are needed and provide value.
2 I want to turn to the charges for Mr. Letwin, if I
3 could. So to do that I wonder if you could turn to Exhibit
4 K9.2, tab 2, and look at page 63 of appendix 8. K9.2, tab
5 2 - I think it’s tab 2 -- no, I'm sorry, it's tab 5. And
6 look at page 63 of appendix 8. It's the page marked “Group
7 V-P Gas Strategy and Corporate Development.” No. 39. Do
8 you have that?
9 MR. MEES: Yes, we have that.
10 MR. SHEPHERD: And I don’t want to go through it in
11 detail, but I -- just tell me whether I -- this is a fair
12 precis of your conclusions. Two of the three roles of Mr.
13 Letwin are unsupported by evidence showing they’re a value
14 to EGD. Managing Mr. Schultz and managing gas supply were
15 not shown to meet the costs-incurrence test; is that
17 MR. PIENAAR: Correct.
18 MR. SHEPHERD: And managing Ontario business
19 development has been shown to meet the cost-incurrence
20 test, but the dollar figure is hard to figure, so you've
21 sort of, given them credit for it, elsewhere; is that
23 MR. PIENAAR: Well, no allocation was made on the cost
24 for that service. If you look at 339.3.4, no -- therefore,
25 no allocation was provided.
26 MR. SHEPHERD: You didn't figure a dollar figure, but
27 on -- if you look at the __ at page 65, Ontario business
28 development, you talk -- or, sorry, page 66, at the end,
1 you talk about the fact that, since you didn't allocate
2 anything for the group VP gas strategy under his own
3 heading, you gave them the benefit of the doubt in the
4 calculation of Ontario business development; is that fair?
5 MR. PIENAAR: That is correct. There was an
6 allocation given under Ontario business development for
7 those activities.
8 MR. SHEPHERD: Now -- yet, here, EI is back again
9 saying that EGD should pay 1.4 million for Mr. Letwin's
10 costs, which is - what? - about 85, 90 percent of his
11 costs, right? Something like that.
12 MR. PIENAAR: No. It's, in fact, I believe, a lot
13 less portion of his costs, because there’s -- I don't have
14 the schedule in front of me, but it is - Mr. Letwin's
15 costs, in the final attribution to -- sorry. In the final
16 attribution, Mr. Letwin's costs to EGD for the various
17 services that he performs -- and there is about five or six
18 of them -- is never more -- all of his costs are -- that we
19 allowed, was only attributable on the basis of time. The
20 time is never more than 50 percent. In fact, in three or
21 four cases it is 50 and in one or two cases it is 40
22 percent of his time which he spends on EGD.
23 However, that 50 and that 40 is -- actually, each of
24 those numbers, 50, 40, for each of the six services, is
25 attributed by formula to a small portion of his total time
26 for those particular services themselves. So, ultimately,
27 the cost gets through -- I believe is low, but I -- it's
28 lower than the 90 percent that you referred to.
1 MR. SHEPHERD: I guess I'm just trying to understand,
2 then. EGD is being expected to eat about 1,350,000 or so.
3 So that would mean that his cost is at least 2.7 million,
4 his loaded cost?
5 MR. PIENAAR: I believe his cost is at least 2. -- for
6 sure is at least 2.7 million. In fact -- yes, I can say --
7 I haven't got the numbers in front of me, but I do believe
8 his loaded costs for his departments are at least 2.7
9 million in total.
10 MR. SHEPHERD: Now, so last year you said he wasn't
11 any use to EGD, and this year you're saying he's worth
12 1,350,000. So I guess I want to know what changed.
13 MR. PIENAAR: I think it's quite clear, if you look,
14 for example, at 39.2.1. If you actually look at the
15 wording there, Madam Chair, it says quite simply that there
16 is inadequate support to demonstrate that the service would
17 be required by EGD as a stand-alone utility. That was in
18 the absence of an inter-corporate services agreement that
19 resembled anything that was required by ARC or the
20 three-prong test.
21 We now have a very detailed services agreement for
22 each of the six services that Mr. Letwin actually
23 contributes time, effort and costs to. We also have had a
24 discussion on each of those services a number of times with
25 the buyers of the service in EGD, who confirmed that now
26 that those services are adequately described and they can
27 actually -- it's visible, as I said, transparent to them,
28 as to what they're buying. Then those services and the
1 services offering has become transparent, and they're
2 satisfied that those services are what they're buying, and
3 we, therefore -- and then we also had multiple discussions
4 with Mr. Letwin in person to justify exactly what he was
5 doing and now -- and satisfying ourselves that what was in
6 the inter-corporate services agreement is what he believes
7 he's offering. We have EGD's confirmation that they are
8 now satisfied and that those numbers were justifiable.
9 I would also say that we disallowed some of Mr.
10 Letwin's costs, and, in fact, we allowed none of his
11 indivisible costs whatsoever. So I hope that answers your
12 question, Mr. Shepherd.
13 MR. SHEPHERD: Okay. So I'm looking at Exhibit K11.1,
14 which was filed by my friend, Mr. De Vellis, this morning.
15 Do you have that?
16 MR. PIENAAR: We have it.
17 MR. SHEPHERD: And I'm just looking at line 41, group
18 VP gas strategy. It says here that 89 percent of the
19 departmental budget for Mr. Letwin is allocated to EGD. Is
20 that figure wrong?
21 MR. MEES: I can indicate that it is wrong, because
22 the EI departments are not fully loaded.
23 MR. SHEPHERD: Oh, okay. So then we have to add,
24 what, about 30 percent to that? The support costs there at
25 the bottom, 3 million out of 10, so add 30 percent. So
26 that means that about 70 percent of his costs are being
27 allocated to EGD; is that right?
28 MR. MEES: That loading seems a little low, but --
1 MR. SHEPHERD: You know what? Let's make it simpler.
2 I wonder if you could undertake to provide us the
3 percentage of Mr. Letwin's fully-loaded costs that are
4 allocated to EGD, along with the calculation?
5 MR. PIENAAR: We can do that.
6 MR. BATTISTA: And we will give that undertaking
7 number J11.4.
8 UNDERTAKING NO. J11.4: PERCENTAGE OF MR. LETWIN'S
9 FULLY-LOADED COSTS ALLOCATED TO EGD, ALONG WITH
11 MR. SHEPHERD: Now Mr. Pienaar, what happened between
12 last year and this year, with respect to Mr. Letwin -- and
13 don't get me wrong. I'm not picking on him. I actually
14 like Steve Letwin a lot, but it's easier to refer to him as
15 that, rather than a title that has about 18 words to it.
16 Between last year and this year, what happened was you
17 got some details on what he was actually doing for the
18 company; right?
19 MR. PIENAAR: Yes, in the context of the inter-
20 corporate services, development of the inter-corporate
21 services agreement.
22 MR. SHEPHERD: And you talked to people at EGD and you
23 talked to people at EI, and they all said, Yes, he's doing
24 lots of good stuff for EGD; right?
25 MR. PIENAAR: They said he's providing the services
26 that were described in the inter-corporate services
27 agreement. They confirmed that that's what he was
1 MR. SHEPHERD: So I wonder if you could turn to
2 appendix 6 of your current report, which is A6, tab 10,
3 schedule 2, and look at page 18.
4 I just took an example of -- hang on. I may be in the
5 wrong place, because it doesn't look like appendix 6.
6 MR. TOTH: Are you referring to customer, industry and
7 community relations?
8 MR. SHEPHERD: I am. Yes, here we are. Page 18,
9 that's right. So this is one of the areas where you have
10 now found that he's actively involved in helping EGD;
12 MR. PIENAAR: Correct.
13 MR. SHEPHERD: And what it says here on page 18 is
14 that -- and I'm quoting:
15 "These skills ...”
16 That is the skills of Mr. Letwin.
17 "... are not generally available in Ontario and
18 would need to be sourced from other markets."
19 So that took me aback somewhat, because I think he's a
20 really good guy, but I didn't think he was so good at
21 customer relations that we couldn't find anyone that good
22 in Ontario. Can you explain this?
23 MR. PIENAAR: We're referring to the composite skills
24 that Mr. Letwin possesses. So that composite set of skills
25 that Mr. Letwin can actually bring to bear on the six -- I
26 think it was six services that he provides. We believe
27 that someone with that extensive knowledge, that those
28 skills would be difficult to source in the local market.
1 MR. SHEPHERD: Appendix 11 of your report is the RCAM
2 service schedules that actually form the basis of your
3 review; right?
4 MR. PIENAAR: Appendix 11?
5 MR. SHEPHERD: Yes. Appendix 11 has the agreement,
6 and then the actual service -- the agreement is 10, and
7 then 11 is the service schedules themselves; right?
8 MR. PIENAAR: That is correct.
9 MR. SHEPHERD: And those are what you reviewed; right?
10 MR. TOTH: Correct.
11 MR. SHEPHERD: So you're aware that ten days ago, EI
12 amended a number of the schedules to add additional
13 descriptions of services; right?
14 MR. TOTH: Actually, that was identified a while back.
15 It was an administrative oversight. The numbers in the
16 descriptions should have been -- sorry, the descriptions
17 should have been in the service descriptions. The numbers
18 were there. It was identified a while ago, but I guess
19 because of summer vacations, et cetera, it was not filed in
21 MR. SHEPHERD: So was it you, Mr. Toth, that prepared
22 those amended schedules?
23 MR. TOTH: No. It was not me.
24 MR. SHEPHERD: Who was it?
25 MR. TOTH: It was --
26 MR. BROWN: My staff in Calgary.
27 MR. SHEPHERD: And what those schedules did, aside
28 from a couple of other minor changes, the bulk of it was to
1 put Mr. Letwin in a number of schedules; right?
2 MR. BROWN: That is correct. He was always in, and,
3 unfortunately, the administrative error a number of months
4 ago was that we had initially prepared the service
5 schedules for each individual and the services they
6 provided, but what we had to do was re-shuffle the deck so
7 that they were organized by service recipient. It was in
8 that process that it was inadvertently deleted.
9 MR. SHEPHERD: Well -- so I guess this confuses me,
10 and I don't know whether this is Mr. Pienaar or Mr. Toth.
11 When you justified the total dollars for each of those
12 service schedules, Mr. Letwin wasn't in there?
13 MR. TOTH: Yes, he was.
14 MR. SHEPHERD: Oh, so he was in there. But you just
15 said that these ones that are attached to your report,
16 those are the ones you locked at; right?
17 MR. TOTH: The dollars were in there and the
18 components of each of the dollars were in there, including
19 Mr. Letwin's time.
20 MR. SHEPHERD: I'm just looking at appendix 11 of your
21 report, okay? And appendix 11 has service schedules that,
22 you say, are the reason why you could let Mr. Letwin's
23 costs stay in: and he's not in there. I don't understand.
24 MR. BROWN: He was always in there. There were two
25 versions of the service schedules, and Mr. Letwin's
26 services, as described here, were always there.
27 Unfortunately, when the second version was re-sorted,
28 for whatever reason, his were omitted. But the work that
1 we all did showed these services, with Mr. Letwin in.
2 MR. TOTH: Just to clarify, as well, we knew at all
3 times that Mr. Letwin's time and costs were included. When
4 we looked at the time study, when we looked at the various
5 costs, when we looked at the allocation model that provided
6 the costs, and we did the analysis around the breakdown, we
7 knew, at all times, that Mr. Letwin's costs were included.
8 MR. SHEPHERD: But the report you filed with this
9 Board, that you said was correct, and that includes the
10 service schedules that you just testified you relied on,
11 doesn't have any mention of that position - does it? - or
12 Mr. Letwin.
13 MR. PIENAAR: That is correct. And I think we’ve said
14 that there was an error of omission in the fact that the
15 schedules that came through, which we did believe were
16 complete, were not. And so we have filed those additional
17 schedules now. But, as Mr. Toth indicates, those schedules
18 -- the content of those schedules was taken into account.
19 The schedules weren't in the report. It was our error of
21 MR. SHEPHERD: Let me turn to another area, D&O
22 insurance. You know what D&O insurance is?
23 MR. PIENAAR: Can you explain.
24 MR. SHEPHERD: Directors’ and officers’ insurance?
25 MR. PIENAAR: Sure.
26 MR. SHEPHERD: You're familiar with it.
27 MR. PIENAAR: Yes.
28 MR. SHEPHERD: And the costs to EI for all of its D&O
1 insurance is $4.2 million; is that correct?
2 I have a reference here, I think, if I could find it.
3 Appendix 7 of your report, A6, Tab 10, schedule 2, appendix
4 7, page 6.
5 MR. PIENAAR: And you're referring to which number?
6 MR. SHEPHERD: I'm referring to the one that says
7 “directors’ and officers’ liability.” $4.2 million.
8 MR. PIENAAR: Right.
9 MR. SHEPHERD: Right. And now -- you said this
10 morning that, while you talk about direct charges, they're
11 not actually direct; right? They're actually allocated.
12 True? For example, insurance premiums.
13 MR. PIENAAR: I'm just taking a look at the wording.
14 It's an allocation.
15 MR. SHEPHERD: Okay. And so, for D&O insurance, what
16 you do is take the total costs of 4.2, and you allocate 55%
17 to Canada; right? That's the first step.
18 MR. TOTH: Yes.
19 MR. SHEPHERD: That's right? And that's on the basis
20 of an external consultant's report; is that correct?
21 MR. TOTH: Yes.
22 MR. SHEPHERD: Did you review that report?
23 MR. PIENAAR: No, we did not.
24 MR. SHEPHERD: So how do you know it’s right?
25 MR. TOTH: We had other members on our team, also,
26 look at this.
27 MR. SHEPHERD: I can't hear you.
28 MR. TOTH: Sorry. We had other team members on the
1 team, specifically, John Morgan and Chris Beaton, helping
2 with this project.
3 MR. SHEPHERD: So --
4 MR. TOTH: Deloitte Resources.
5 MR. SHEPHERD: So Deloitte reviewed the report. It's
6 just you, personally, didn't review it.
7 MR. TOTH: Correct.
8 MR. SHEPHERD: Okay. And has that been filed in this
10 MR. TOTH: The report, specifically -- I do not
11 believe it was filed.
12 MR. SHEPHERD: So can you undertake to provide it,
13 then, please?
14 MR. TOTH: Yes.
15 MR. BATTISTA: That will be J11.5.
16 UNDERTAKING NO. J11.5: TO PRODUCE THE EXTERNAL
17 CONSULTANT’S REPORT RELATING TO THE ALLOCATION OF THE
18 COSTS OF DIRECTORS’ AND OFFICERS’ INSURANCE COVERAGE
19 MR. SHEPHERD: Thank you.
20 So then you take 55 percent of 4.2 million - which, by
21 my calculation, is 2,310,000 - and that's the allocation to
22 Canada. And that includes, for example, the D&O insurance
23 for Enbridge Inc.; right?
24 MR. TOTH: Correct.
25 MR. PIENAAR: Well, we can’t -- the truth is that we,
26 as we indicated, we didn't look at this report, at all. We
27 -- one of the reasons that we didn't look in detail at this
28 report on insurance premiums was the information we were
1 provided by Enbridge Inc. was that all of these allocations
2 were 100 percent in accordance with industry standards.
3 And so any questions that you might ask us on how this
4 calculation is being performed, we will not be in a
5 position to answer.
6 MR. SHEPHERD: Okay. Well, I -- sorry, I thought this
7 was your report.
8 MR. PIENAAR: Yes, it is.
9 MR. SHEPHERD: So you're telling us how it's
10 calculated; right?
11 MR. PIENAAR: We've included this direct cost in our
12 report, yes.
13 MR. SHEPHERD: But you didn't do the calculations?
14 MR. PIENAAR: We didn't do the calculations in this
15 particular case, because it was part of the Enbridge Inc.
16 budget, and, as we indicated before, we didn't do a
17 detailed analysis of the allocations that occurred within
18 Enbridge Inc. So we did not look at this report.
19 MR. SHEPHERD: Okay, well that's interesting.
20 Then I want you to turn to the next page -- so you
21 don't know how they came up with these numbers, but what
22 you do know is that you tested them against an independent
23 AON study, to make sure that there was a net benefit to
24 EGD; right?
25 MR. TOTH: Correct.
26 MR. SHEPHERD: And you reviewed that AON study; right?
27 MR. TOTH: Correct.
28 MR. SHEPHERD: So, where it says “EI stated that it
1 had a study”, we should read that as “Deloitte reviewed an
2 independent study”; right?
3 MR. TOTH: Correct.
4 MR. SHEPHERD: And has that study been filed in this
6 MR. TOTH: No, it has not.
7 MR. SHEPHERD: Will you undertake to do so, please?
8 MR. TOTH: Yes.
9 MR. BATTISTA: That's Undertaking J11.6.
10 UNDERTAKING NO. J11.6: TO PROVIDE A COPY OF THE
11 INDEPENDENT AON STUDY WHICH WAS REVIEWED BY DELOITTE
12 MR. SHEPHERD: Now, can you just turn to the next page
13 in this same appendix, which is entitled "Audit Fees." Do
14 you have that?
15 MR. TOTH: Yes.
16 MR. SHEPHERD: So, let's start with the 700,000 direct
17 allocation. If I understand correctly, you say that PWC,
18 the auditors, did a breakdown of how much each business
19 unit would pay for the annual audit; right?
20 MR. TOTH: Correct.
21 MR. SHEPHERD: The total fee to PWC is just over $3
22 million a year?
23 MR. PIENAAR: Yes.
24 MR. SHEPHERD: And that's a figure that’s negotiated
25 between PWC and EI, presumably; is that true?
26 MR. BROWN: That's correct.
27 MR. MEES: Yes it is, yes.
28 MR. SHEPHERD: I take it that's a substantial discount
1 over PWC's rack rate, some sort of volume discount?
2 MR. MEES: Yes, it is. I believe this was discussed
3 as part of panel one.
4 MR. SHEPHERD: Good. And, Mr. Mees, were you
5 involved in determining the breakdown between EGD and the
6 other units?
7 MR. MEES: No, I was not. That was -- as it indicates
8 there, it was done by PWC.
9 MR. SHEPHERD: What's the amount allocated to EI in
10 that breakdown?
11 MR. MEES: It appears we don't have the amount with
12 us, today.
13 MR. SHEPHERD: Well, I can help you. Because there's
14 an amount here of 78,650 that is an indivisible charge;
16 MR. MEES: Thanks, Mr. Shepherd. Yes, it is there.
17 MR. SHEPHERD: And so that's allocated on the basis of
18 FCER, which is 20 percent to EGD. So if you just multiply
19 that by five, you get what EI had to pay for its audit;
21 MR. BROWN: That makes sense.
22 MR. SHEPHERD: Good. And so that would be, if my
23 math is correct, $393,250. Am I close?
24 MR. PIENAAR: Yes. And that -- just to make a
25 correction, that's what -- if you're referring to EI as a
26 corporate entity, that is what the other affiliates would
27 have to pay.
28 MR. SHEPHERD: That's right. So what happens is EGD
1 has to pay for its own audit and it has to pay for 20
2 percent of EI's audit; right? That's how this works?
3 MR. BROWN: Correct.
4 MR. SHEPHERD: You look confused, Mr. Pienaar. Is
5 that not what you thought it was?
6 MR. PIENAAR: I'm not understanding the logic that
7 you've just expressed. You said EI has to pay for --
8 MR. SHEPHERD: No, EGD.
9 MR. PIENAAR: EGD has to pay for its own allocation
10 and 20 percent of the indivisible charge.
11 MR. SHEPHERD: That's correct.
12 MR. PIENAAR: Correct.
13 MR. SHEPHERD: Okay. And the EI audit is only about
14 half the cost of the EGD audit. Why is that?
15 MR. BROWN: I'm not party to the negotiations that the
16 CFO, controller and various others have with PWC, but I do
17 know it's based on audit hours, and that would result in
18 the PWC fee.
19 MR. PIENAAR: Let me just give you the answer to that.
20 The total audit, in accordance with the budget, is actually
21 3 million, of which EGD pays 778. The balance, which is
22 2.2 million, is paid by EI and its affiliates. So EGD is
23 paying less than 30 percent of that audit fee, and we do
24 not have the number today as to, of the $2.3 million that
25 is paid to everyone other than EGD, what's the split
26 between EI's audit fee and all of the other affiliates. I
27 think that might clarify --
28 MR. SHEPHERD: See, I thought it was very simple. I
1 had straight answers from Mr. Brown and Mr. Mees. Now I'm
3 You're saying there might be circumstances in which
4 EGD would be paying for part of the audit of some of the
5 other affiliates?
6 MR. PIENAAR: No.
7 MR. SHEPHERD: So the only other payments it could
8 make is the audit for EI; right?
9 MR. PIENAAR: It's not making a payment for the audit
10 of the EI.
11 MR. SHEPHERD: What's the indivisible cost that EI is
12 bearing -- that EGD is bearing, sorry?
13 MR. PIENAAR: So the indivisible -- the total
14 indivisible charge by inference from this table is, as we
15 know that FCER is 20 percent, it means 78,650 is 20
16 percent. The indivisible portion, therefore, of the total
17 audit fee, the total audit fee, is as you indicated,
18 approximately 350,000. So that's the indivisible portion.
19 The visible - in other words, the portion that can be
20 directly allocated to affiliates - is 3 million, minus
21 350,000, minus Enbridge's 700,000, and that's then
22 allocated to EI and everybody else. The only indivisible
23 portion is the 350,000.
24 EI is paying for an FCER, 20 percent of that
25 indivisible portion. That indivisible portion, again, is
26 not -- it's not paying for EI's audit fee. It is paying
27 for the indivisible portion. EI has got already its direct
28 allocation in the direct piece, that, you know, we talked
1 about. So it is paying its share. Everybody is paying
2 their share based on their applicable FCER of that 350,000,
3 including EI.
4 So, by definition, the fact that that indivisible
5 portion -- that the FCER includes all minority investments,
6 including financial minority investments - which are not
7 just the ones that are owned and operated, but those just
8 held on the balance sheet - they're even paying a portion
9 of it. It's being attributed to them as though that is a
10 part of EI's --
11 MR. SHEPHERD: PWC gets paid $3 million. They get
12 paid that for auditing a number of companies; right?
13 MR. PIENAAR: Correct.
14 MR. SHEPHERD: And so the work they do to audit each
15 of those companies is charged to that company; right?
16 MR. PIENAAR: As a portion of that 3.045 million.
17 MR. SHEPHERD: Okay. So then you're saying there is
18 $350,000 paid to PWC for audit fees, but it is not auditing
19 any companies. Then what is it?
20 MR. PIENAAR: Well, again, I would have to look -- we
21 could take this on an undertaking, because what I'm saying
22 is the total budget is $3 million for audit fees. I can't
23 answer, unfortunately, without looking at the details,
24 whether that $3 million is the entirely -- only audit fees,
25 or whether there is a portion of other costs that are
26 included in the entire management of the audit relationship
27 with PWC.
28 MR. SHEPHERD: Well, no, Mr. Toth knows the answer to
1 this question. So does Mr. Brown. There is a separate
2 line for the management of the audit relationship; isn't
4 MR. BROWN: This is the budgeted PWC audit fee based
5 on our best information at the time for 2006.
6 MR. SHEPHERD: Every dollar of this goes to PWC?
7 MR. BROWN: That was the budget, yes.
8 MR. SHEPHERD: Great. Wonderful. Let me turn to my
9 last area, and that is -- and to do this, I've handed out
10 an exhibit entitled "Comparison of 2004 CAM Report to 2006
11 Recommended RCAM Changes". That's been provided to the
12 Board and to the company and to the parties in the room.
13 MR. BATTISTA: The exhibit will be numbered K11.2, and
14 it will be described as "Comparison of 2004 CAM Report to
15 2006 Recommended RCAM Changes.
16 EXHIBIT NO. K11.2: COMPARISON OF 2004 CAM REPORT TO
17 2006 RECOMMENDED RCAM CHANGES
18 MR. SHEPHERD: I just want to take a couple of minutes
19 on this, Mr. Pienaar. Let's start with column, 3, 4, 5 and
20 6, if we could. We will get to the other ones in a second.
21 Just deal with those three.
22 MR. MEES: Sorry, Mr. Shepherd, you just need to hang
23 on. We need to get the reference.
24 MR. SHEPHERD: Sorry.
25 MR. MEES: Sorry, Mr. Shepherd, we now have it.
26 MR. SHEPHERD: Now, so columns 3, 4, 5 and 6 is what
27 I'm concentrating on right now. I will get to the other
28 ones in a second. Column 3 and column 4 are numbers
1 directly from appendix 9 of your report, right, A6, tab 10,
2 schedule 2, appendix 9; correct?
3 MR. TOTH: Subject to check, correct.
4 MR. SHEPHERD: And -- well, you can see the totals are
5 correct; is that right? Those are the same totals that you
6 got to in your report?
7 MR. TOTH: It looks correct.
8 MR. SHEPHERD: Okay. And then column 5 just
9 calculates how much you adjusted each line for in adjusting
10 the 2004 report. Do you see that?
11 MR. TOTH: Yes.
12 MR. SHEPHERD: So you adjusted them a total of 24
13 percent, increased them a total of 24 percent, to make them
14 applicable to 2006 instead of 2005; is that right?
15 MR. TOTH: Correct.
16 MR. SHEPHERD: And the point of this appendix is to
17 show, if you took the same approach as you took in your
18 last report, last year, but you used the new data that you
19 have, the new EGD budget -- sorry, the new EI budget, you
20 would get different numbers; right? And this is just to
21 tell us what those different numbers would be, based on
22 that approach?
23 MR. TOTH: Correct, based on the 2005 budget adjusted
24 for inflation and other known factors.
25 MR. SHEPHERD: Well, okay. So we heard the other day
26 that the 2005 budget was being adjusted for inflation. We
27 only heard today that it was adjusted for other things,
28 too. I guess --
1 MR. MEES: I don't think that is the case, Mr.
2 Shepherd. I remember specifically talking about this.
3 MR. SHEPHERD: My apologies.
4 MR. TOTH: It is also in an IR.
5 MR. SHEPHERD: I must have been napping. But I guess
6 -- it looks like the budget for EI must have gone up 24
7 percent; right?
8 MR. BROWN: There are selected line items within the
9 budget that were better information than just a simple 2
10 percent inflation rate. And we also have to remember that
11 the phase-in of the stock-based compensation, as per the
12 CICA, is being built up over a four-year period, and so
13 there would be a percentage that would be a lot higher than
14 the 2 percent inflation applicable to it.
15 Insurance was another line that was a different
17 MR. SHEPHERD: Well, are those the big adjustments,
18 insurance and stock-based compensation?
19 MR. BROWN: If my recollection --
20 MR. MEES: Sorry. If you look at column 5, you can
21 see the biggest numbers that are in there. You have the
22 stock-based compensation. You have audit fees, which I
23 think everybody is aware is increasing substantially;
24 insurance premiums, but then there is also the EFS support,
25 which we still have to figure out why it's gone up $1.3
27 MR. SHEPHERD: Let me come back to that. But it's
28 true, isn't it, that the category of direct costs, which is
1 that section at the bottom from lines 27 to 33, that only
2 went up 17 percent. That's all those stock-based
3 compensation, insurance, all that stuff.
4 But your regular costs in EI, they appear to have gone
5 up 31 percent. Now, a big chunk of that is EFS.
6 MR. MEES: You have to remove the $1.3 million, which
7 seems a bit of an aberration in there.
8 MR. SHEPHERD: Okay. So then maybe -- Mr. Pienaar,
9 maybe you could describe why you would have adjusted that
10 line by $1.3 million.
11 MR. PIENAAR: Unfortunately, we are -- that particular
12 calculation on the EFS support is a complex calculation and
13 relates to a whole lot of true-ups. Different entities in
14 the organization provide services to each other, and it is
15 a true-up done, as described in our -- in the body of our
17 It's a reasonably complex calculation, and the
18 calculation was done by the individual Mr. Jonathan Morgan,
19 who works on our project -- who worked on our project to do
20 all the modelling and the calculations, and I -- we would
21 have to take an undertaking to give you the details of that
22 number, because between us we can't give you that answer at
23 this point.
24 MR. SHEPHERD: Let's do that, then.
25 MR. BATTISTA: That will be undertaking number J11.7.
26 UNDERTAKING NO. J11.7: BREAK DOWN OF CALCULATION
27 MR. SHEPHERD: Now, am I right, Mr. Pienaar, that last
28 year you said that the CAM amount of $22 -- it was about
1 $22 million, something like that, should be reduced by
2 about 8-1/2 million; is that right, roughly?
3 MR. PIENAAR: Yes.
4 MR. SHEPHERD: And if I look at this new number, $16.8
5 million, it looks to me like you're still saying that,
6 under CAM, you should reduce what they're allowed to claim
7 by 8.5 million.
8 MR. PIENAAR: That's not what that number is actually
9 implying. That number is implying as if we did not -- and
10 I repeat, if we did not develop a service-based methodology
11 that met the regulations, but we applied the interim
12 calculation that we did in 2004, that would be the number
13 we may come up with. That's all that number -- that's all
14 your 16.76 applies.
15 It says if we use those calculations with all its
16 divide by twos, et cetera, as we said was inappropriate
17 unless -- you know, then we would come up with that number,
18 but because we have a new service methodology, that number
19 is no longer really that relevant.
20 MR. SHEPHERD: Is it correct that column 8 of this
21 correctly shows the excess of the RCAM allocations on a
22 departmental basis over the original CAM allocations?
23 MR. PIENAAR: And that is column 7 minus column 3.
24 MR. SHEPHERD: That's right.
25 MR. PIENAAR: Right. That shows the result of column
26 7 deducted from column 3, yes.
27 MR. SHEPHERD: Okay. Some of these are very large
28 increases. I'm looking at the group VP corporate
1 resources, for example. That's because you got more
2 information about what that person did?
3 MR. PIENAAR: I think that you need to look at the --
4 at all of the numbers in that column, and all of the
5 numbers would be expected to be different, significantly
6 different, either up or down, based on the fact that we are
7 using a robust regulatory criteria-based, service-based
9 So you should not expect any numbers in that column to
10 vaguely resemble necessarily any of the other numbers in
11 any other CAM report or adjusted CAM. They would -- the
12 numbers would stand on their own, based on the criteria we
14 MR. SHEPHERD: Your numbers in your CAM report, they
15 department have any additional loading. The loading was
16 all built into the numbers you said were okay, right, in
17 columns 3 and 4?
18 MR. PIENAAR: Columns 3 and 4, my understanding is
19 that the loading was in the actual department numbers
20 already. So we started with a department -- a department
21 budget that had loading in it already.
22 MR. SHEPHERD: That's not what I understood. I
23 actually understood that it was not in and you put it in in
24 your report; isn't that right? Maybe Mr. Brown put it in.
25 MR. PIENAAR: That is correct. We added the loadings
27 MR. SHEPHERD: So in order to compare column 7, for
28 example, to column 3, we'd have to take that 2.7 million
1 under additional loading, and we'd have to somehow allocate
2 it between the departments, right, in order to make a fair
4 MR. PIENAAR: No. I don't think that's correct,
5 because what we are saying is that to apply our
6 calculation, which resulted in 13.5 million, we started
7 with the CAM budget. You can correct me, Mr. Brown. We
8 started with the EI budgets. We then adjusted that --
9 those EI budgets, as you know, from our CAM report. We
10 made a series adjustments to the CAM report -- sorry, to
11 the EI budget, to attempt to make the budget numbers look a
12 bit like a service-based methodology.
13 In doing that, we included the loading already. So
14 when we get to 13.518 million, the loadings are in there,
15 because we know that loadings are permitted by -- were
16 permitted by ARC. So the 13.518 includes loadings. So I'm
17 not sure -- as does the 21.314. They -- it includes
18 loadings. Both those numbers include loading, but using
19 fundamentally different approaches to calculating a number.
20 MR. SHEPHERD: So they're not comparable?
21 MR. PIENAAR: Oh, absolutely. I think I've said many
22 times today that you cannot compare a number that's been
23 generated by interim calculation that's not -- that's not
24 based on, you know, even a semblance of a true service-
25 based methodology with one that is. They would be
26 different and they should be expected to be different.
27 MR. SHEPHERD: But that's the problem this Board
28 faces; right? You haven't provided a break-down that
1 tracks new to old. You gave us one example earlier today
2 with Mr. De Vellis, but you said those comparisons from CAM
3 to RCAM, they don't really work; right?
4 MR. PIENAAR: Well, remember what I did say, also, is
5 that I said that 13.518 is not a starting point for any
6 reasonable discussion and is a red herring. Those were the
7 words that I used.
8 So from our perspective, that number shouldn't even be
9 on the table for discussion. It is not relevant to what we
10 are discussing. What we're discussing is the service-based
11 methodology that we have developed. Appropriate? Does it
12 meet the requirements of ARC? Does it meet the regulatory
13 precedents, and does the number that is generated from that
14 methodology stand up on its own? If that number happens to
15 be 21.3, which it is, it implies, by inference, that any
16 other number that has been looked at before was wrong. In
17 other words, there was under-charging occurring, because we
18 now have a methodology that is justified by the regulations
19 the OEB has actually established.
20 MR. SHEPHERD: You attended some consultations with
21 EGD stakeholders, Mr. Pienaar?
22 MR. PIENAAR: We did.
23 MR. SHEPHERD: And the stakeholders asked you
24 repeatedly to provide a break-down that showed how you got
25 from CAM to RCAM line by line; right?
26 MR. PIENAAR: Are you talking about -- I would need to
27 confer in a second, but that did occur in our CAM report.
28 We were asked, when we were developing CAM, that they
1 wanted a historical background. In fact, there is an
2 entire section which really, you know, added minimal value,
3 but showed a break-down virtually by year of that
4 historical data.
5 We didn't believe it added any real value to the
6 ultimate result of that report. We didn't offer to do that
7 again, because it made no sense in terms of what we were
8 trying to achieve, which was develop a new service-based
10 I would like to confer, if I may, with Mr. Mees, who
11 is with me, because I don't recall in the stakeholder
12 meetings that we had - there were three, two primary ones -
13 whether that did actually come up. Certainly --
14 MR. SHEPHERD: Let me make it clear. Were you asked
15 to compare the 13.5 to the 21.3 and show how you get from
16 one to the other? Yes or no?
17 MR. PIENAAR: I do not recall if we were asked to
18 specifically do that in our report. I do not believe we
19 were asked to specifically put that number in our report.
20 MR. SHEPHERD: Mr. Mees, do you recall that?
21 MR. MEES: I'm trying to rack my brain, Mr. Shepherd.
22 I don't remember that. Sorry.
23 MR. SHEPHERD: Okay. Those are my questions, Madam
24 Chair. I'm sorry for going over, but I was closer this
26 MS. NOWINA: Thank you, Mr. Shepherd. I don't think
27 we will start another examination today.
28 Ms. Persad, in terms of schedule --
1 MS. PERSAD: Madam Chair, I just have a request to get
2 a time check on how much time we might be expecting this
3 panel to be on tomorrow.
4 MS. NOWINA: Well, we're on the same wavelength. I
5 was going to check your schedule first to make sure that
6 this panel would be returning tomorrow morning.
7 MS. PERSAD: Yes they are.
8 MS. NOWINA: And so, Mr. Thompson, Mr. Dingwall?
9 MR. DINGWALL: Mr. Thompson has graciously allowed me
10 to go first, as I have a scheduling conflict tomorrow
11 morning, and I estimate half an hour.
12 MS. NOWINA: Okay. Mr. Thompson?
13 MR. THOMPSON: I think I'm still about 45 minutes.
14 MS. NOWINA: Mr. Millar?
15 MR. MILLAR: Very little or nothing, Madam Chair.
16 MS. NOWINA: And, Ms. Persad, that leaves it to you in
17 terms of your re-examination.
18 MS. PERSAD: I have almost nothing so far, so it
19 shouldn't be much.
20 MS. NOWINA: So an hour or an hour-and-a-half is what
21 we're looking at. Are there any further matters?
22 MS. PERSAD: Madam Chair, would you like a report on
23 what panels would follow tomorrow?
24 MS. NOWINA: Yes. We were just talking amongst
25 ourselves on that. And the other question -- or the other
26 clarification I wanted to make is that on Wednesday, we
27 will only be meeting in the afternoon, and that will be for
28 a fairly short period starting at one o'clock.
1 MS. PERSAD: So following the corporate cost
2 allocations panel will be an O&M panel for operations and
3 strategic and key accounts, and we currently have estimates
4 from the intervenors for one-and-a-half hours of
5 cross-examination for that panel.
6 And assuming that they are finished tomorrow,
7 following them would be an O&M panel consisting of a few
8 departments, including human resources, finance,
9 non-departmental expenses and non-utility eliminations.
10 That would take us as well into Wednesday.
11 MS. NOWINA: All right. Thank you very much. Any
12 other matters? We will adjourn until 9 o'clock tomorrow
14 --- Whereupon the hearing adjourned at 3:55 p.m.