ONTARIO
ENERGY
BOARD
FILE NO.:
RP-2005-0020
EB-2005-0378
VOLUME:
7
DATE:
January 23, 2006
BEFORE:
Pamela Nowina
Presiding Member and Vice Chair
Paul Vlahos
Member
Bob Betts
Member
RP-2005-0020
EB-2005-0378
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 Hydro One Networks
Inc. for an Order or Orders approving or fixing just and
reasonable rates for the distribution of electricity to be
implemented on May 1, 2006.
Hearing held at 2300 Yonge Street,
25th Floor, West Hearing Room,
Toronto, Ontario, on Monday,
January 23, 2006, commencing at 9:03 a.m.
--------Volume 7
--------B E F O R E:
PAMELA NOWINA
PRESIDING MEMBER AND VICE CHAIR
PAUL VLAHOS
MEMBER
BOB BETTS
MEMBER
A P P E A R A N C E S
DONNA CAMPBELL
JENNIFER LEA
DUNCAN SKINNER
Board Counsel
CHRIS CINCAR
HAROLD THIESSEN
NABIH MIKHAIL
Board Staff
DONALD ROGERS
SUSAN FRANK
ALLYN ABBOTT
ANITA VARJACIC
Hydro One Networks Inc.
MURRAY KLIPPENSTEIN
Pollution Probe
ROBERT WARREN
Consumers Council of Canada
DAVID POCH
Green Energy Coalition
JAY SHEPHERD
DARRYL SEAL
School Energy Coalition
BRIAN DINGWALL
Canadian Manufacturers &
Exporters
JOHN DeVELLIS
Vulnerable Energy Consumers
Coalition
ROGER WHITE
ANDREW BATEMAN
ECMI Coalition of Smalland Medium-Sized
Distributors
PETER SCULLY
Federation of Northern
Ontario Municipalities and
the City of Timmins
RICHARD STEPHENSON
JUDY KWIK
Power Workers Union
PHILIP TUNLEY
MAYANK SHARMA
Inergi
DAVID MacINTOSH
Energy Probe
JOHN McGEE
Federation of Ontario
Cottagers Association Inc.
PETER RUBY
MICHAEL STEWART
City of Greater Sudbury
I N D E X
O F
P R O C E E D I N G S
Description
Page No.
--- Upon commencing at 9:03 a.m.
1
Preliminary Matters
1
Hydro One Networks - Panel 7
Howard Gorman; Affirmed
Robert O'Brien; Sworn
Greg Van Dusen; Previously Sworn
Examination by Mr. Rogers
Cross-examination by Ms. Campbell
3
12
--- Recess taken at 10:45 a.m.
--- On resuming at 11:09 a.m.
65
65
--- Luncheon recess taken at 12:33 p.m.
--- On resuming at 1:48 p.m.
120
120
Preliminary Matters
121
Hydro One Networks - Panel 7; Resumed
Howard Gorman; Previously Affirmed
Robert O'Brien, Greg Van Dusen; Previously Sworn
Continued cross-examination by Ms. Campbell
Cross-examination by Mr. Warren
Cross-examination by Mr. DeVellis
Cross-examination by Mr. Scully
Cross-examination by Mr. Dingwall
Questions from the Board
128
159
176
194
204
208
--- Whereupon the hearing adjourned at 4:33 p.m.
220
E X H I B I T S
Description
Page No.
EXHIBIT NO. K7.1: RP-1998-0001 ORDER INCLUDING
DISTRIBUTION RATE ORDER
13
EXHIBIT NO. K7.2:
20
BOARD DECISION RP-2002-0133
EXHIBIT NO. K7.3: TABLE ENTITLED "HYDRO ONE, COMMON
CORPORATE COST MODEL, ESTIMATED TIME DISTRIBUTION"
189
U N D E R T A K I N G S
Description
UNDERTAKING NO. J7.1: TO PROVIDE ANSWER AS TO
WHETHER THE BUDGET COMPENSATION, SALARY AND
BENEFITS REFLECTS VACANCIES.
Page No.
2
1
1
Monday, January 23, 2006
2
--- Upon commencing at 9:03 a.m.
3
MS. NOWINA:
4
Good morning, everyone.
Please be seated.
Today is the seventh day in
5
the hearing of application EB-2005-0378 submitted by Hydro
6
One Networks for an order or orders approving or fixing
7
just and reasonable rates for the distribution of
8
electricity.
9
Today we will begin the examination of the panel on
10
cost allocation.
Before we do that, we have one small
11
preliminary matter on the compensation and benefits
12
question, Mr. Rogers.
13
question on that.
Mr. Vlahos is going to ask you a
14
PRELIMINARY MATTERS:
15
MR. ROGERS:
Yes.
16
MR. VLAHOS:
Mr. Rogers, just I need some
17
confirmation.
The budget compensation, salary and
18
benefits, does it reflect any vacancies that are maybe --
19
there may be for the test year - that's the question - or
20
is it just assuming that all vacancies will be filled or
21
are filled at all points in time during the test year?
22
MR. ROGERS:
23
advise you, sir?
24
out.
Could I take that under advisement and
I don't know the answer.
I will find
25
MR. VLAHOS:
Thank you.
26
MS. NOWINA:
Perhaps we can have an undertaking on
27
28
that so we don't lose track of it, Ms. Campbell.
MS. CAMPBELL:
Of course.
J7.
All right.
So that is
2
1
J7.1.
2
UNDERTAKING NO. J7.1:
3
WHETHER THE BUDGET COMPENSATION, SALARY AND BENEFITS
4
REFLECTS VACANCIES.
5
MS. NOWINA:
6
Thank you.
TO PROVIDE ANSWER AS TO
Any other preliminary
matters?
7
MR. ROGERS:
None for me this morning.
8
MS. NOWINA:
Mr. Rogers, would you like to introduce
9
10
your panel?
MR. ROGERS:
Thank you very much, Madam Chair.
We
11
have a three-person panel, as you can see.
12
left is Mr. Greg Van Dusen, who is employed by Hydro One,
13
and he has been here before and is sworn.
14
two gentlemen from the R.J. Rudden Associates consulting
15
firm, first Mr. Robert O'Brien in the middle, and to his
16
left, Mr. Howard Gorman.
17
18
To my immediate
Next to him are
Could Mr. Gorman and Mr. O'Brien be sworn, and then I
will qualify them?
19
MS. NOWINA:
Yes.
20
MR. ROGERS:
Stand up, gentlemen, and permit Mr. Betts
21
to swear you in.
22
HYDRO ONE NETWORKS – PANEL 7:
23
Howard Gorman; Affirmed
24
Robert O'Brien; Sworn
25
Greg Van Dusen; Previously Sworn
26
MR. BETTS:
27
MS. NOWINA:
28
Go ahead, Mr. Rogers.
The witnesses have been sworn in.
Thank you, Mr. Betts.
3
1
EXAMINATION BY MR. ROGERS:
2
MR. ROGERS:
Thank you very much.
Mr. Gorman, perhaps
3
I will start with you, sir.
I understand that you are a
4
principal with R.J. Rudden Associates Inc., a consulting
5
company.
6
MR. GORMAN:
Yes, that's correct.
7
MR. ROGERS:
And that as principal of R.J. Rudden, you
8
participated in the several studies which have been filed
9
with the Board dealing with cost allocation of common costs
10
for Hydro One; is that correct, sir?
11
MR. GORMAN:
Yes, it is.
12
MR. ROGERS:
You hold a degree from New York
13
University in accounting, which you achieved in 1976?
14
MR. GORMAN:
Yes.
15
MR. ROGERS:
You have a masters of business
16
administration degree from Harvard University, which you
17
obtained in 1981?
18
MR. GORMAN:
Yes that's correct.
19
MR. ROGERS:
Your curriculum vitae has been filed in
20
this proceeding as Exhibit A, tab 19, schedule 2, page 20.
21
Does it contain an accurate summary of your qualifications
22
and experience?
23
MR. GORMAN:
Yes, it does.
24
MR. ROGERS:
I see, Mr. Gorman, that in the course of
25
your career, you have worked in a number of capacities.
26
see from 1987 to 1995 you worked for a company called
27
Trigen Energy Corporation?
28
MR. GORMAN:
Yes.
I
4
1
MR. ROGERS:
What is Trigen Energy Corporation?
2
MR. GORMAN:
Trigen was a co-generator and distributor
3
of electricity.
4
with headquarters in Trenton, New Jersey, with one co-
5
generation -- actually, it was a tri-generation plant.
6
generated electricity, chilling and heating from the same
7
system, and we grew through the process of expansion into
8
11 companies with approximately 15 or so units operating
9
throughout the US and Canada.
10
MR. ROGERS:
We owned -- we started out as a company
All right.
Thank you very much.
We
So I
11
see from your curriculum vitae, then, that you have been
12
involved in the electricity business for quite some time?
13
MR. GORMAN:
Yes.
14
MR. ROGERS:
You've been a consultant with R.J. Rudden
15
since 1997?
16
MR. GORMAN:
1997, yes.
17
MR. ROGERS:
Now, sir, in that capacity, I understand
18
that you took part in the studies that have been filed in
19
these proceedings, dealing with the cost allocation for
20
Hydro One?
21
MR. GORMAN:
Yes.
22
MR. ROGERS:
And will be prepared to answer questions
23
this morning about those studies?
24
MR. GORMAN:
Yes, sir.
25
MR. ROGERS:
Can I move to your colleague Mr. O'Brien.
26
Once again, sir, I understand you also are a principal
27
28
with R.J. Rudden Associates?
MR. O'BRIEN:
That's correct.
5
1
MR. ROGERS:
As principal of that consulting firm, you
2
participated in these several studies which have been filed
3
with this Board?
4
MR. O'BRIEN:
5
MR. ROGERS:
Yes, I did.
Your curriculum vitae has been filed as
6
Exhibit A, tab 19, schedule 2, page 21.
7
accurate summary of your qualifications and experience?
8
MR. O'BRIEN:
9
MR. ROGERS:
Does it contain an
Yes, it does.
I understand, sir, that you have a
10
bachelor of business administration degree, majoring in
11
accounting and finance from New York State University --
12
no, I'm sorry, University of Cincinnati?
13
MR. O'BRIEN:
14
MR. ROGERS:
15
That's correct.
Forgive me.
You're a certified public
accountant in the State of New York?
16
MR. O'BRIEN:
17
MR. ROGERS:
Yes, I am.
I see from your curriculum vitae that you
18
began your career in the accounting profession with Ernst &
19
Young?
20
MR. O'BRIEN:
21
MR. ROGERS:
That's correct.
And since that time have been involved in
22
a variety of businesses, including a long period of time
23
with the Citizens Utilities Company in the United States?
24
MR. O'BRIEN:
25
MR. ROGERS:
26
MR. O'BRIEN:
27
MR. ROGERS:
28
Yes.
You were there from 1975 to 1999?
That's correct.
Just tell us very briefly, what is
Citizens and what did you do there?
6
1
MR. O'BRIEN:
Citizens back in the mid '70s, when I
2
started, was an operating utility company that had 40-plus
3
individual utilities in ten different states.
4
was the head of the regulatory group and, as such, I
5
developed the cost allocation process that distributed the
6
cost of Citizens' administrative offices to all of its
7
different operating subsidiaries or divisions, which were
8
in the electric, gas, telephone, water, and waste water
9
businesses.
My function
10
Through 25 years that I was there, Citizens grew from
11
about half a million customers to 2 million customers, and
12
we ended up operating in about 18 states by the end of the
13
1990s.
14
My functions there were mainly cost allocation
15
processes for the administrative office in running and
16
presenting rate proceedings throughout the United States.
17
MR. ROGERS:
Thank you very much.
It's apparent to
18
me, then, you've had a fair bit of experience dealing with
19
cost allocation studies and methodologies, such as we'll be
20
discussing today?
21
MR. O'BRIEN:
22
MR. ROGERS:
Yes, that's correct.
May I just turn to you, Mr. Gorman.
Can
23
you just give us very briefly your experience dealing with
24
cost allocation methodologies?
25
MR. GORMAN:
Sure.
By participating in cost studies
26
of various sorts for about ten utilities in the United
27
States and several of the transmission -- large
28
transmission companies, such as PGM and New York Hydro.
7
1
MR. ROGERS:
2
Gentlemen, finally, can you confirm for me that the
3
opinions set out in the R.J. Rudden & Associates reports
4
which have been filed with this Board represent your views
5
as to appropriate cost-allocation methodologies for this
6
utility?
7
MR. O'BRIEN:
8
MR. ROGERS:
9
10
Thank you very much.
That's correct.
And that each of you will be able to
answer questions this morning dealing with the methodology
and the results?
11
MR. O'BRIEN:
Yes, we will.
12
MR. ROGERS:
13
I have a few questions in chief, if I might, Madam
Now, thank you very much.
14
Chair, just to hopefully orient people as to who will be
15
answering what.
16
Mr. Van Dusen, dealing first with you, sir, can you
17
please tell us what aspect of the revenue requirement this
18
panel will be discussing this morning?
19
MR. VAN DUSEN:
Yes, I can.
As discussed in previous
20
panels, Hydro One groups its OM&A and capital work program
21
and projects into a number of categories: sustaining,
22
development, operations, customer care, and shared
23
services.
24
Costs get allocated to the projects and programs in
25
one of two ways: direct charge and cost allocation.
26
Specifically, for sustaining development and operation work
27
programs, costs are charged directly to those work
28
programs.
Labour and fleet costs are charged by applying
8
1
applicable standard rates to the hours worked on those
2
programs.
3
to the appropriate work program.
4
identified the methodology for developing standard rates in
5
a costing of work exhibit, which is filed as Exhibit C1,
6
tab 5, schedule 2.
7
Materials and other costs are charged directly
Panel 2's evidence
For common costs which support both our transmission
8
and distribution business, we use a cost allocation
9
methodology which Mr. Gorman and Mr. O'Brien from
10
11
R.J. Rudden & Associates are here to discuss with you.
MR. ROGERS:
Thank you very much.
Now, I would like
12
to ask you to comment a little bit more on this issue of
13
how labour costs and program costs relate.
14
How do the payroll costs which were discussed by
15
Panel 6 and appear in Exhibit C1, tab 4, schedule 2,
16
page 1 end up in work program costs?
17
MR. VAN DUSEN:
Yes.
For the various categories of
18
employees working on work programs, standard labour rates
19
are developed.
20
rates in Hydro One that we utilize.
21
We have approximately 80 standard labour
Costing of work, Exhibit C1, tab 5, schedule 2,
22
table 1, identifies the costing details for a specific
23
trade, the regional line maintainer, one of about 80
24
standard labour rates used within Hydro One.
25
The largest component of a standard rate consist of
26
our payroll obligations and makes up $65.50 of the total
27
$91 that you see in that table in that exhibit.
28
payroll obligation costs consists of base wages, wages --
The
9
1
base wages, incentive costs, allowances and benefits as
2
outlined in table 1, page 1 of the compensation, wages and
3
benefits exhibit, which is Exhibit C1, tab 4, schedule 2,
4
that you discussed with Panel 6 last week.
5
I should note that the standard labour rate includes
6
additional items for pension which is not included in the
7
payroll costs in the compensation exhibit.
8
9
MR. ROGERS:
All right.
Hopefully that will make
sense when we look at the actual exhibits.
So that
10
clarifies or at least emphasizes what was said by Panel 6,
11
I think it was?
12
MR. VAN DUSEN:
Yes, that's correct.
13
MR. ROGERS:
14
Gentlemen, Mr. Howard or Mr. Gorman -- Mr. O'Brien,
All right.
Thank you very much.
15
rather, or Mr. Gorman -- maybe Mr. O'Brien can answer this.
16
But this utility has common costs which you deal both with
17
distribution and transmission.
18
are -- you were asked to allocate the distribution through
19
the cost-allocation methodology, and that is what you will
20
be addressing today; is that right?
21
MR. O'BRIEN:
Correct.
And I understand that costs
We will be addressing the
22
distribution of the common costs incurred to the various
23
entities, transmission, distribution, and also some small
24
subsidiary operations.
25
MR. ROGERS:
26
MR. O'BRIEN:
27
MR. ROGERS:
28
Such as what, Brampton Hydro and so on?
Correct.
Very well.
Can you tell us very briefly
what was Rudden's approach in approaching this study.
10
1
MR. O'BRIEN:
2
MR. ROGERS:
We generally followed -Mr. O'Brien, can I ask you to lean
3
forward and speak into the microphone so people can hear
4
you.
5
MR. O'BRIEN:
We generally followed a common practice
6
which is used where you first identify the functions and
7
services that are being performed at the entity whose costs
8
you're going to distribute.
9
Once you've identified those, you will then look at
10
the activities that are necessary to perform those costs.
11
You also look at the overall costs themselves by each one
12
of the functions that are performed -- functions at that
13
individual operation.
14
the common corporate functions and services, or CCFS.
15
In this case, they're referred to as
In doing that, we then looked at how those costs were
16
distributed in the past and developed a process to
17
determine the correct methodology as well as the weightings
18
to put on the costs to distribute going into the future.
19
We conducted tests.
We conducted time studies.
We
20
interviewed people.
21
the process we were going to use as well as the nature and
22
amount of the costs to be distributed.
23
MR. ROGERS:
And as a result of that, we determined
Thank you very much.
Can you tell me,
24
please, or tell us, what principles were used to distribute
25
common costs?
26
MR. O'BRIEN:
In general, we tried to get as much
27
direct assignment of costs as possible.
If we can identify
28
where an individual is working, if they're performing a
11
1
function that goes directly to the benefit of one of the
2
entities that you're charging to, you try to direct assign
3
it to those entities.
4
In some instances individuals were will be performing
5
services that go to multiple entities or benefit multiple
6
entities.
7
cost drivers in order to distribute those costs to the most
8
entities that benefit from that individual service.
9
In those instances, you select what are called
Where you have cost drivers that are fairly simple,
10
such as square footage or communications equipment, you
11
would use those in instances you may use multiple ones in
12
combination with those to be distributed are fairly general
13
or are to be spread over many entities, not just one or
14
two.
15
MR. ROGERS:
Fine.
Can you tell me now:
You said
16
that the preferred approach is to assign costs directly.
17
understand that you did that where you could in this case?
18
MR. O'BRIEN:
19
MR. ROGERS:
20
21
I
That's correct.
Roughly what proportion of costs were
directly assigned, as opposed to allocated?
MR. O'BRIEN:
When we completed the study, it ended up
22
approximately 36 percent were directly assigned, which is a
23
fairly good number to get directly assigned from a set of
24
functions that are being performed at an administrative
25
service, which are more general in nature than ones that
26
are performed at an operating level.
27
MR. ROGERS:
All right, sir, thank you very much.
28
I believe the witnesses are now available to answer
12
1
2
3
questions, Madam Chair.
MS. NOWINA:
Thank you.
Thank you, Mr. Rogers.
We're going to
begin with Ms. Campbell.
4
MS. CAMPBELL:
Thank you.
5
CROSS-EXAMINATION BY MS. CAMPBELL:
6
MS. CAMPBELL:
The first thing that I am going to do -
7
and my -- all of the intervenors and my friend Mr. Rogers
8
were provided with this already - is to distribute the
9
original order that was made back in 1998 to the Ontario
10
11
Hydro Services Corporation.
As you know, various panels had made passing reference
12
to this as being the reason why certain things were done,
13
and in the Rudden report itself and in the pre-filed
14
evidence there is reference to the fact that the Board
15
directed a cost allocation study be undertaken.
16
As a result, I have decided that the appropriate thing
17
to do is to have the order before you so that you can see
18
the language that was used by the previous Board when they
19
were looking at the allocation methodology used at the time
20
that the predecessor to Hydro One was before you.
21
So the first thing I am going to do is provide copies
22
to the Panel.
I sent e-mailed copies of the reasons to my
23
friend on Friday.
24
Because of the way the system is set up, the actual
25
transitional rate order was stored in a different place.
26
So I have a photocopy for my friends of the rate order to
27
which the decisions and reasons are attached.
28
does is establish the date that the order was made, and
All this
13
1
that the reasons are attachment D to the order.
2
to -- for the Panel, I managed to get that all bound
3
together; for my friends, because of the miracle of e-mail,
4
I couldn't.
5
6
7
8
9
I'm going
What I am going to do is have hard copies provided to
my friends at the back.
MR. ROGERS:
I think, Mr. Rogers, you have one?
Well, I have a copy of the reasons, which
I have just given to the panel.
MS. CAMPBELL:
10
MR. ROGERS:
11
MS. CAMPBELL:
I have an extra copy -I don't have that.
-- of the order.
The order actually --
12
the only thing that is important about it is it indicates
13
the date it was made and that Exhibit D, i.e., the
14
distribution rate order, is in fact the reasons.
15
MR. ROGERS:
16
MS. CAMPBELL:
17
18
All right.
Thank you.
Perhaps we should make this the first
exhibit, and that would be K7.1.
I am going to call it one document because in
19
practical reality it should be one document.
20
transitional -- sorry, it's the -- yes.
21
0001 order to which attached is Exhibit D was distribution
22
rate order.
23
EXHIBIT NO. K7.1:
24
DISTRIBUTION RATE ORDER
25
MS. NOWINA:
It’s the
It's the RP-1998-
RP-1998-0001 ORDER INCLUDING
Ms. Campbell, can I ask during break that
26
you have copies of that to put at the back table for those
27
intervenors who are not here right now --
28
MS. CAMPBELL:
Certainly.
14
1
MS. NOWINA:
2
MS. CAMPBELL:
3
MR. WARREN:
4
5
to Mr. Rogers.
-- and may come in later in the day.
I apologize, Ms. Campbell, I was talking
I missed what the exhibit number was.
MS. CAMPBELL:
6
K7.1.
7
MR. WARREN:
It's the first one of the day, so it is
That's the distribution rate order?
8
MS. CAMPBELL:
9
MR. WARREN:
10
Certainly.
Yes, yes.
Thank you.
MS. CAMPBELL:
I have a few questions that relate to
11
this, because it is from this rate order that the decision
12
to undertake a study of the allocation of corporate
13
services was undertaken.
14
The specific page that you would find this starts at
15
page 61 and it goes to 65, so it is a fairly short part of
16
the report.
17
Now, the reasons -- if you look at the rate order, we
18
know that the reasons were issued March 15th, 1999.
19
time of the decision, the organization was different.
20
At the
Mr. Van Dusen, you're probably the only one who can
21
speak to this.
My understanding is that at that time, it
22
was Ontario Hydro Services Company which was a holding
23
company; is that right?
24
MR. VAN DUSEN:
25
MS. CAMPBELL:
That's correct.
All right.
It was the OHSC that
26
incurred the costs for the shared functions and the
27
services carried on by the company's business unit?
28
MR. VAN DUSEN:
That's correct.
15
1
MS. CAMPBELL:
Okay.
And the business unit, from what
2
I can understand from reading, were the network asset
3
management, called NAM, N-A-M, in the order?
4
MR. VAN DUSEN:
5
MS. CAMPBELL:
6
MR. VAN DUSEN:
7
MS. CAMPBELL:
8
9
Correct.
And network services?
That's correct.
Which is NS.
And customer care
services?
MR. VAN DUSEN:
Correct.
10
MS. CAMPBELL:
Which is CCS.
11
Then it says:
“Default supplier.”
12
13
Could you explain
what that was, or do you know?
MR. VAN DUSEN:
The default supplier -- at that time,
14
Hydro One had a retail business, and the retail business
15
was the default supplier.
16
MS. CAMPBELL:
All right.
And at the time that you
17
appeared before the Board, there was a particular
18
methodology in place.
19
I know that, in response to an interrogatory from
20
Board Staff, that you provided a copy of the cost
21
allocation evidence.
22
schedule 93.
23
MR. VAN DUSEN:
24
MS. CAMPBELL:
That's H -- Exhibit H, tab 1,
That's correct.
All right.
What I would like to do is
25
just do a very brief review of this so we have an idea of
26
the context of the order and the methodology that was in
27
place at the time that the Board made its directive
28
concerning obtaining a cost allocation study.
16
1
MR. VAN DUSEN:
2
MS. CAMPBELL:
Okay.
So the attachment to schedule 93 is
3
noted as being filed December 23rd, 1998.
It is entitled
4
"The Functions and Services Cost Allocation Method."
5
could just -- when I read it, it says:
If I
6
"The basis for the approach were the principles
7
of cost causality and benefit."
8
9
Can you give me a very brief summary of what you
understood the methodology to be --
10
MR. VAN DUSEN:
11
MS. CAMPBELL:
12
MR. VAN DUSEN:
13
MS. CAMPBELL:
14
MR. VAN DUSEN:
Yes, I can --- that was in place?
Yes, I can do that.
That would be appreciated, thank you.
The basic methodology that was in
15
place for this proceeding, that we filed for this
16
proceeding, is a methodology that, once again, takes a look
17
at the total level of common costs that are required for a
18
business such as Hydro One, and then looks at the
19
appropriate way to allocate those common costs to the
20
appropriate end users.
21
When we take a look at the principles of -- I'm sorry,
22
what page were you referencing when you referenced the
23
principles that were utilized?
24
MS. CAMPBELL:
I just am looking at this right now,
25
and the explanation seems to start around page 8.
26
principles themselves are enumerated on page 9.
Right.
The
27
MR. VAN DUSEN:
Thank you.
28
The causality principle and the benefit principle are
17
1
an early version of what we now know and understand as
2
being the three-prong test that is required for all
3
utilities to meet with respect to developing and
4
implementing a cost-allocation approach.
5
to causality and this primary principle articulated here,
6
you're trying to look to attribute the costs, the common
7
cost area, to the transmission and distribution businesses
8
based on causality, how -- what uses a certain service to
9
be used by these various businesses, and can you then
So with respect
10
attribute that cost directly or using an appropriate
11
driver?
12
cost driver.
13
So causality speaks to the appropriateness of the
The benefit that is talked about here, as the second
14
principle talks to:
15
actually get a benefit?
16
to utilize these services?
17
Do the units that receive these costs
Is there a cost benefit for them
If I can just step back for a second, these two
18
principles now are incorporated in the three-prong test in
19
a broader way.
20
elements of it.
21
aspect of the three-prong test, says that the costs needed
22
to have been prudently incurred.
23
trying to allocate direct level of costs and have you shown
24
that?
25
The three-prong test now has three main
Cost incurrence, the cost incurrence
Are the costs that you're
We had, as panel 4, myself and Mr. Carlton and
26
Mr. Innes, talked about the level of common costs here
27
previously before this Board.
28
The cost allocation is somewhat similar to the
18
1
causality principle, as articulated in the original
2
decision.
3
receiving area based on some sort of causality basis; i.e.,
4
what is it that drives the use of that cost?
5
direct assignment is the most preferred method.
6
depict the selection of appropriate drivers is what should
7
be done.
8
9
That says that you should send the costs to the
Once again,
If not,
The third principle articulated in the three-prong
test is similar to the benefit principle, as articulated in
10
this earlier documentation, has to do with:
11
receiving units need this service?
12
from this service?
13
service through a common, shared allocation methodology
14
than having procured it themselves?
15
MS. CAMPBELL:
Do the
Do they get a benefit
And is it cheaper for them to get that
What I am going to do right now -- this
16
again was given to my friends.
You have made reference to
17
the three-pronged test.
18
a slightly later date, but since you have made reference to
19
it, it seems appropriate to do it right now.
I anticipated dealing with this at
20
As my friends know from an e-mail I sent to them
21
yesterday afternoon, there is reference in the Rudden
22
report to the three-pronged test and to a decision of this
23
Board in an Enbridge application, and the decision is
24
RP-2002-0133.
25
The relevant -- all of that decision is relevant.
The
26
most relevant part of that decision to this proceeding is a
27
section entitled "Corporate Cost Allocations," and it is
28
about nine pages long and in it is an elucidation of the
19
1
2
three-pronged test that Mr. Van Dusen has been speaking of.
The original three-pronged test is in a 1994 decision
3
which the Board Staff is unable to obtain because it is
4
lost in some sort of incompatibility limbo right now.
5
the best I can do is to make reference to this, and since
6
the Rudden Consultants did, I thought it was appropriate
7
for us to do it, also.
8
9
10
So
So as I said, my friends were sent a copy by e-mail
and I am going to provide a copy to the Panel members.
In another mystery, pages appeared on my screen but
11
pages did not photocopy.
Page numbers did not photocopy.
12
So I can tell everybody in the room that the three-pronged
13
test appears starting at paragraph 570, and I will be
14
making reference to another portion of that when I discuss
15
this with Mr. O'Brien and Mr. Gorman at a later time
16
period.
17
Could you give the hard copies out?
18
So just to recap, Mr. Van Dusen.
19
20
21
22
The three-pronged
test you're talking about -MS. NOWINA:
Ms. Campbell, are we going to mark this
as an exhibit?
MS. CAMPBELL:
I will, certainly.
It starts at
23
paragraph 570 and finishes at 573, and the three-pronged
24
test is cost incurrence for the corporate centre charges
25
prudently approved by or on behalf of the company for the
26
provision of services required by Ontario ratepayers; cost
27
allocation, where the corporate centre charge is allocated
28
appropriately to the recipient companies based on the
20
1
application of cost drivers/allocation factors supported by
2
principles of cost causality; and the third prong,
3
cost/benefit.
4
equal or exceed the costs?
5
6
Did the benefits to the company's ratepayers
This will be our second exhibit, and that will be
K7.2.
7
EXHIBIT NO. K7.2:
8
MS. CAMPBELL:
9
BOARD DECISION RP-2002-0133
Now you made reference before I
interrupted you, Mr. Van Dusen, to drivers.
When I looked
10
at Exhibit 93, I found the general drivers were listed on
11
page 11 and the specific drivers were listed on page 12
12
through 14.
13
MR. VAN DUSEN:
14
MS. CAMPBELL:
Yes, that's correct.
Okay.
My understanding - and my
15
understanding of this, of course, may not be nearly as
16
perfect as yours - but my understanding from reading this
17
cost allocation report is that the -- there were two
18
different results for net asset management and network
19
services, and I find this on page 17.
20
So for net asset management, the allocation
21
percentages were derived by comparing the total OM&A and
22
the capital costs of the two aspects of the regulated
23
business which resulted in a 65 percent transmission
24
allocation and a 35 percent distribution.
25
MR. VAN DUSEN:
26
MS. CAMPBELL:
Yes, I see that.
If I go to page 18 and 19, I find that
27
for network services the allocation percentages were
28
derived by using an activity-based approach to assign
21
1
overhead, organizational costs of the products and services
2
that require those costs to be incurred, and the allocation
3
was 61 percent transmission and 39 percent distribution.
4
MR. VAN DUSEN:
5
MS. CAMPBELL:
Yes, I see that.
Customer care was 100 percent to
6
distribution because it didn't provide any services to
7
transmission.
8
MR. VAN DUSEN:
9
MS. CAMPBELL:
10
MR. VAN DUSEN:
Correct.
That basically hasn't changed, has it?
I believe there is a very small
11
portion of our customer care costs that are allocated to
12
transmission at this point in time.
13
MS. CAMPBELL:
14
MR. VAN DUSEN:
15
16
17
18
But the great majority remain.
The great majority remain with the
distribution customers, correct.
MS. CAMPBELL:
That is basically the background to the
methodology that was filed at the last hearing.
If I go to page 61 of the 1998 order, it is actually
19
-- March 15th, 1999 is actually the date it was made.
20
panel starts discussing this on page 61, and it discusses
21
the fact that there is a 65/35 split for net asset
22
management and a 61/39 split for network services starting
23
on page 63.
24
MR. VAN DUSEN:
25
MS. CAMPBELL:
26
this and looked at it.
27
28
The
I have that.
So that is where they have discussed
Then if I turn over, I find the Board findings are at
page 64, over to page 65.
These are the Board findings on
22
1
2
the cost allocation study.
On page 64, the second paragraph, the Board stated:
3
“The Board has reservations about the allocation
4
methodology employed to separate overhead costs,
5
first between NAM and network services then,
6
secondly, between transmission and distribution.
7
“The company agreed that the drivers used to
8
calculate the initial calculation are
9
substandard, both by its own internal assessment
10
11
12
and by industries standards.”
The Board goes on to state, if I go to the following
paragraph:
13
“The last step taken in the allocation process
14
was for the business units, NAM and network
15
service, to allocate the overhead costs to the
16
transmission and distribution businesses.
17
Board has concerns about the divergence in the
18
methodologies applied by the business units to
19
accomplish this last step since presumably the
20
same types of costs were assigned to each
21
business unit in the first place.”
22
The
Then, it speaks about some of its concerns regarding
23
a -- whether or not a labour allocator should have been
24
used.
25
26
At the bottom of the page, the very last sentence,
right above 64:
27
“While either approach in isolation could be
28
appropriate, the OHSC has failed to justify why
23
1
the use of different assignment methodologies is
2
appropriate for the same pool of costs.
3
the lack of historical information available, the
4
Board cannot adequately assess the
5
appropriateness of the proposed overhead costs or
6
the allocation process utilized by OHSC.
7
subsequent applications, the Board expects OHSC
8
to provide a more substantive support for its
9
corporate services costs and allocation
Due to
In
10
methodology.
11
of the overhead costs, historical data, and work
12
papers detailing projected costs for the rate
13
period.
14
commonly-implemented drivers should be developed
15
using historical measures.”
16
This would include detailed support
In addition, industry-approved and
Then the concluding paragraph:
17
“Furthermore, the Board believes that OHSC should
18
adopt a consistent approach to allocating
19
overhead costs to distribution and transmission
20
in order to ensure that customers of transmission
21
and distribution pay a fair share of the costs
22
associated with the services received by these
23
respective units.
24
applications, the Board expects the company to
25
adopt a consistent allocation methodology to be
26
used by NAM and network services.
27
also be prepared in the next rate application to
28
provide the rationale and justification for the
Therefore, in subsequent
OHSC should
24
1
2
3
4
approach selected.”
So that is the background to why we are here and why
the Rudden group were retained.
In the pre-filed evidence, in fact the final paragraph
5
found at C1, T6, schedule 1, page 1 says:
6
One retained Rudden in the fall of 2004.”
7
“Therefore Hydro
Now, these reasons were issued on March 15th, 1999.
8
And I understand, Mr. Van Dusen, that the numbers that we
9
read for 2002 to 2005 are all what we like to call
10
"pre-Rudden".
So those numbers are numbers based on the
11
old methodology?
12
MR. VAN DUSEN:
13
MS. CAMPBELL:
14
MR. VAN DUSEN:
That's not quite correct.
Okay.
You can certainly characterize the '02
15
to '05 period pre-Rudden.
16
submitted for 2006 and Hydro's methodology for the test
17
year.
18
The Rudden methodology has been
Coming out of this decision back in 1998/1999, Hydro
19
One, OHSC - I forget when we changed our name - at the time
20
did retain CapGemini/Ernst & Young, to do a full
21
cost-allocation study.
22
place a new methodology consistent with the direction that
23
this Board gave at that time for allocating costs.
24
methodology was used in 2001 and 2002.
25
We conducted that study and put in
That
In the fall of 2002, the company changed fairly
26
dramatically in terms of its make-up, in terms of the
27
organization, structure; and in terms of the approach, the
28
back-to-basics, back-to-core business was the focus of the
25
1
2
company.
There were some changes made to the methodology for
3
2003; those changes were made by people under my direction.
4
So we basically utilized the CapGemini methodology
5
that had been in place for ‘01 and ’02, made some minor
6
adjustments for it for use in '03; however, in the '04 and
7
‘05 period, I substantially revised the model, made it
8
simpler and easier to use.
9
I should note that in the changes made in '03 and for
10
the model that was used in '04 and '05, the basic
11
three-prong test criteria as well as the Affiliate
12
Relations Code criteria associated with cost allocation
13
were still met.
14
was just a matter of taking a look at the business at the
15
time, taking a look each year of refreshing drivers,
16
refreshing the analysis of cost causality and what costs
17
should go to which business units, and simplifying the
18
model.
19
So those principles and that approach was utilized for the
20
entire period up to '05.
21
They were still part of the criteria.
MS. CAMPBELL:
All right.
It
I find that quite -- that
22
is very interesting.
23
evidence that, in fact, there was a step in between with
24
CapGemini because, as I indicated, the pre-filed evidence
25
indicates that the -- that Hydro One took to heart what the
26
Board said in March 15th, 1995 and retained Rudden in the
27
fall of 2004.
28
It's not apparent in the pre-filed
There is no indication that between 1999 to 2004 and
26
1
the arrival of Rudden group on the scene that any steps
2
were taken.
3
What I would like to do is discuss with you a couple
4
of interrogatories that make reference to changes.
5
them somewhat confusing, so possibly you will be able to
6
help me --
7
MR. VAN DUSEN:
8
MS. CAMPBELL:
9
Certainly.
-- understand.
references to methodologies.
There were two specific
One is in Interrogatory 93,
10
which you've looked at, which has an attachment.
11
not the attachment that I want to look at.
12
actual answer in the interrogatory.
13
I found
But it is
It is the
So when I look at this, it attaches the cost
14
allocation evidence.
15
asked about previous -- sorry.
16
made, and that was a request for how CCFS allocations were
17
made to distribution and transmission used in any of the
18
previous applications, and that was what you attached was
19
the 1998 methodology.
20
21
Then it goes on, and the answer, when
There were two requests
But nothing else was attached, just the 1998
methodology?
22
MR. VAN DUSEN:
23
MS. CAMPBELL:
Correct.
Then the request was made:
Please
24
explain any significant differences between the results of
25
the previous method, which is the 1998 attachment, and the
26
results of the current method, which is Rudden.
27
MR. VAN DUSEN:
28
MS. CAMPBELL:
Correct.
We've already talked about the fact
27
1
that A is the attachment.
Let's go to B.
2
said in Interrogatory 93.
It said:
Here is what was
3
"The methodology used in the RP-1998-0001
4
proceeding was developed internal to Hydro One
5
and was customized to the business model being
6
used by Hydro One at the time.
7
reviewed the results of the Hydro One methodology
8
at a high level.
9
proceeding provides details of the approach
10
11
Ernst & Young
Supplemental filing G to that
used."
And that is what we have talked about:
12
"In summary, the approach was based on the
13
general principles of cost causality and benefit.
14
Cost drivers were utilized based on a high level
15
activity-based costing approach.
16
made constant improvements to the allocation
17
methodology over time, making greater use of the
18
OEB's three-pronged test as a key principle on
19
which to base changing methodologies.
20
addition, there have been changes made to reflect
21
changes in the CCFS activities and changes in the
22
business model."
23
Hydro One had
In
Over the page:
24
"In summary, the two approaches are similar in
25
nature.
26
possible and the use of appropriate drivers where
27
costs cannot be directly assigned.
28
1998 proceeding, Hydro One has expanded its use
They both use direct allocation where
Since the
28
1
of drivers, further refined the
2
services/activities to be allocated, and has
3
updated data.
4
precision and accuracy in the allocation."
5
The changes have led to more
So that says basically there have been variations on a
6
theme in the 1998 methodology and it is virtually
7
comparable to Rudden.
8
9
MR. VAN DUSEN:
The general principles that have been
employed all along have been the same general principles.
10
MS. CAMPBELL:
11
MR. VAN DUSEN:
Okay.
Consistent with the Board's direction
12
to bring forward the next time we appeared, a detailed
13
third-party cost allocation study from an external expert
14
on Hydro One did retain R.J. Rudden to bring forward that
15
expert study put before you.
16
articulated in our initial study are still the same basic
17
principles.
18
model and there have been changes in some of the details in
19
terms of the drivers, but it's essentially the same.
But the basic principles
There have been changes obviously in business
20
MS. CAMPBELL:
21
MR. VAN DUSEN:
Okay.
I just want to bring to your attention
22
that one of the reasons we struggled with this is that
23
question B specifically talks about the differences in the
24
results.
25
specifically.
26
methodology back to 1998 or the 1998 methodology forward,
27
despite the fact that basic principles are the same,
28
they're so different and -- they are fairly different in
And that is what we struggled with quite
If we were to try to apply the new
29
1
terms of makeup.
2
analysis.
3
It was hard to do a detailed numbers
We did file with the Board, in response to an
4
interrogatory from the VECC, H5, 37, an impact analysis,
5
and moving from the model, the Hydro One model, in '05 to
6
the Rudden model in '06 to give you an impact analysis at a
7
high level between the two.
8
that.
9
MS. CAMPBELL:
Okay.
So we were able to provide
Thank you for providing us with
10
that.
As I said, there were two interrogatories that were
11
-- provided different information.
12
go to is H1, schedule 59.
13
the fact that there were major changes that occurred?
14
MR. VAN DUSEN:
15
MS. CAMPBELL:
The next one I want to
In your answer, you spoke about
Yes.
This actually reflects the fact that
16
there were major changes, because 93 suggests, at least in
17
my mind -- Interrogatory 93 suggested that the two
18
"methods" were basically the same, just polished and
19
tweaked.
20
you - H1, 59, over the -- and this is an answer from Hydro
21
One:
This says - and I would like to explore this with
22
"Over the 2002-2006 period, the company changed
23
and improved its allocation methodology several
24
times.
25
2003.
26
these years not comparable to the other years.
27
Attempts to normalize the data would be time
28
consuming, very difficult and would require a
The major changes occurred in 2002 and in
The changes made in 2002 and 2003 make
30
1
2
fair amount of judgment."
It then goes on to talk about the fact that:
3
"The total common costs allocated to the
4
distribution business in these years are provided
5
in the evidence in Exhibit C1-2-6.
6
comparisons that are done on a detailed
7
line-by-line activity over this period will show
8
changes that do not relate to the work
9
accomplishments.
However,
The allocation methodology in
10
2004 and 2005 remained fairly stable."
11
So that is in contrast to the major changes that
12
occurred in 2002 and 2003 that make those numbers very
13
difficult to be compared to anything.
So:
14
"The allocation methodology in 2004 and 2005
15
remained fairly stable.
16
approach was refined over the 2004-2005 period to
17
reflect better information and improvements in
18
cost-allocation methodology."
19
The cost allocation
So as a result, I am a little confused, because one
20
makes it sound like tweaks were made.
21
like significant changes occurred.
22
suggests that there were, in fact, significant changes.
23
24
25
So would you just clarify?
This makes it sound
And your answer
What should we be relying
upon?
MR. VAN DUSEN:
Okay, yes, I think I can help.
I
26
think, in my response to your earlier question, what I was
27
trying to articulate is the basic approach to cost
28
allocation, utilizing factors like the three-pronged test,
31
1
the causality and benefit test that was articulated in the
2
1998 submission.
3
Those basic principles had been utilized all along.
4
You will be able to ask Mr. Gorman and Mr. O'Brien at your
5
leisure whether these principles are universally accepted
6
and used in other jurisdictions.
7
they are and they were the appropriate principles to use.
8
9
It was our belief that
In response to H1, 59, what we wanted to make clear
was we had been asked in several places in the
10
interrogatories to give detailed line-by-line breakdowns of
11
some of the common costs to the portion that went to
12
distribution for all years, '02 to '06.
13
What we indicated is we feel much more comfortable
14
giving you '04 to '06 to give you a base comparison of the
15
level allocated to distribution.
16
the work done by any common function and services -- let's
17
take the human resources group.
18
level of the human resource costs, the activities they
19
undertook on behalf of the company, why they were prudently
20
incurred.
21
If we try to talk about
We talked to the overall
If you break it down to the allocation to
22
distribution, in '02 and '03 what we were finding is you
23
were seeing variations because of the change in the
24
methodology that really didn't talk to the core work being
25
done.
26
in '02 and '03, we found them not overly -- in certain
27
cases they moved up and down, and we didn't want to come
28
and start talking to just:
So there is the work being done, and the allocation
That was based on this
32
1
methodology, based on these drivers.
2
changed the driver, because we found a better approach of
3
doing it in subsequent years.
4
What we did is we
We didn't want the conversation just to go down to
5
that level of detail and not talk about the total level of
6
common services and the activities that are undertaken
7
there.
8
generally consistent.
9
years, but generally consistent.
10
From '04 through '06, we have data which is
There have been changes in those
We can talk in a fair
level of detail to the changes in methodology.
11
I can describe for you, if the Board wishes, if you
12
wish at some time, the changes that were utilized in '02
13
and '03, if you wish, to give you some sort of indication
14
of the high level, if you wish.
15
MS. CAMPBELL:
I guess what it really comes down to is
16
how reliable are the allocation numbers between 2002 and
17
2005, because with Rudden Group we have a methodology and
18
we can analyze it, but what you're telling me is there are
19
changes in methodology that occurred between the 2002 to
20
2005 period that make numbers in that time period not
21
comparable to other numbers.
22
and compare it to 2004 and 2005.
23
MR. VAN DUSEN:
So I can't take 2002 and 2003
I think you can on a bottom-line
24
basis.
25
years, '02 through '06, in the evidence.
26
We provided the allocations to distribution for all
What we did not do is go back to each specific line
27
unit and break that out further.
But there is information
28
on record about the allocation to distribution of OM&A
33
1
costs and capital costs through that entire time frame.
2
MS. CAMPBELL:
Yes.
But my understanding, from
3
reading the answer to the specifically Interrogatory 59 is
4
that I can't compare the allocation to distribution with
5
any degree of certainty between, let's say, 2002 to 2005.
6
So I am not getting an accurate picture of the growth in
7
distribution because they're not apples and apples.
8
9
There is a difference between the allocation
methodology that was used.
So I end up with Rudden, and I
10
understand how Rudden is done because I've got -- I've got
11
a report and I was able to walk through it and I can
12
understand how that was done.
13
I have a 1998 methodology report that was provided to
14
the Board in 1999.
15
today, and answers from -- in the interrogatories that
16
suggest that in a certain time period -- I'm not suggesting
17
this was not done with the best of intentions on the part
18
of Hydro One to comply with the order of 1999, but there is
19
variation in that time period.
20
allocation to distribution with any certainty from 2002 to
21
2006, because the method for allocating to distribution
22
alters during that time period.
23
MR. VAN DUSEN:
What I have are answers from you, here
So I can't truly track the
Once again, I just have to come back
24
to the fact that we have filed on a bottom-line basis the
25
allocation to distribution.
26
27
28
In response to H1, 59, in the second paragraph, we
say:
“However, comparisons that are done on a detailed
34
1
line-by-line activity over this period will show
2
changes that do not relate to work
3
accomplishments.”
4
So I think we indicated why we didn't feel it was
5
going to be helpful to anyone, on the details, to show the
6
allocation to distribution.
7
Has it changed over time?
8
that it has.
9
detailed study?
10
11
And have we responded to the Board with a
We have.
MR. ROGERS:
So...
The other thing, just to help, the total
costs were given for each of those years.
12
MS. CAMPBELL:
13
MR. ROGERS:
14
I think we've been clear
Yes, that is not an issue.
I don't know what else the company could
do.
15
MS. CAMPBELL:
Schedule 59 says that the major changes
16
occurred in 2002 and 2003, and the changes made these years
17
not comparable to the other years.
18
about the fact that although it is very clear what is
19
allocated to distribution, there is a change in the method
20
that is used between obviously 2005 to 2006 because of
21
Rudden and earlier dates.
22
MR. ROGERS:
23
MS. CAMPBELL:
So I'm just talking
Yes.
So there is a variation.
And at 2002,
24
2003, cannot be compared to the other years, based on what
25
has been said.
26
27
28
MR. ROGERS:
No.
Well, compared?
The process was evolving.
MS. CAMPBELL:
Okay.
Yes.
With precision?
35
1
MS. NOWINA:
Ms. Campbell, let me wade in here for a
2
moment to make sure that the board panel understands what
3
we're after here.
4
So we have the bottom line numbers.
We know how much
5
was allocated to distribution and transmission through the
6
entire time period.
7
don't understand the underlying methodology, that we don't
8
know whether the differences from year to year were caused
9
by a changing methodology or by a growth in the two
10
You are concerned that because we
areas --
11
MS. CAMPBELL:
12
MS. NOWINA:
Yes.
-- or for some other reason.
So we don't
13
understand the drivers of that change from year to year.
14
Is that your concern?
15
16
17
MS. CAMPBELL:
Yes, that it is difficult to measure
that.
And I appreciate that, from my understanding and from
18
reading the Rudden report, you can attempt to be as precise
19
as possible, but there are still things that cannot be
20
measured.
21
whether it is business is up, or in 2002 there was a change
22
and the allocation for distribution got tweaked into 2002
23
and 2003, but then we tweaked it again in 2004 and 2005.
24
So the numbers appear to go down, but it is not business.
25
We used a slightly different driver, so it is no longer
26
comparable.
27
28
And that's my concern, yes.
But I can't tell by the face of it.
getting at.
We can't say
That is all I was
Because I found, quite frankly, the
36
1
2
interrogatory somewhat confusing.
But I think we have gone as far as we can on that.
3
What I would really like to do now is go to the Rudden
4
method, because I have numbers for that and I have charts
5
and I think that is quite wonderful.
6
7
8
9
MR. BETTS:
Just before you leave that, perhaps I
could ask Mr. Van Dusen a question.
Did you record at any time during these changes your
philosophy and the allocation?
I understood when you first
10
gave some oral evidence this morning that you actually
11
instigated some changes yourself in the methodology.
12
MR. VAN DUSEN:
13
MR. BETTS:
That's correct.
I think it was 2003, 2004, maybe 2002.
14
any point did you record what you were doing for your
15
management's understanding?
16
MR. VAN DUSEN:
Yes.
At
In all cases, the changes that
17
are made to cost allocation are reviewed with the senior
18
management team on an annual basis.
19
that I was requesting to make to the corporate controller,
20
the CFO, the director of regulatory finance, and the chief
21
regulatory officer to discuss the changes that I was
22
making.
23
MR. BETTS:
I took the changes
I appreciate that you would have to
24
discuss the magnitude or the effects of those changes.
25
you at any point have anything written or recorded about
26
the reason for the changes, your reasoning?
27
28
MR. VAN DUSEN:
Without perfect knowledge of the
records from all of those years ago, I can’t give you
Did
37
1
orally now at a high level the reasons why the changes were
2
made year over year.
3
see what I did.
4
them rather than just my good looks and charm, presumably,
5
but I don't recall exactly what it was.
6
I know what the changes were and why we made them each year
7
at a high level without going to each individual activity
8
and each driver and why we changed it.
9
conceptually.
10
I would have to check my records to
I mean, I would have taken something to
MR. BETTS:
Okay.
But I can tell you
I can tell you
Ms. Campbell, would it be helpful
11
to hear that?
12
hear it myself.
13
think, you were trying to gather.
14
either seek anything that was written or ask for that high-
15
level review?
16
I am really -- I don't necessarily need to
I know that was part of the information, I
MS. CAMPBELL:
Is it of any value to
Would it assist -- Mr. Van Dusen, would
17
it assist us in understanding the changes between 2002 and
18
2003 and 2004 and 2005 if we saw that?
19
us a slightly better idea?
20
make you run around and make you get more information if it
21
is not going to provide additional clarity.
22
gone as far as we can go on this.
23
MR. VAN DUSEN:
Would it just give
I don't really want to get --
We might have
I guess I am prepared, if the Board
24
finds it helpful, to spend three minutes to give you an
25
overview of the changes.
26
MS. NOWINA:
I think given how much time we have spent
27
on it right now, three minutes might be well spent, Mr. Van
28
Dusen.
38
1
MR. VAN DUSEN:
Thank you very much, Madam Chair.
2
As indicated earlier, in -- coming out of the initial
3
decision in '98/’99, we retained CapGemini/Ernst & Young to
4
do a study for us.
5
and developed a model for us.
6
They did a full cost-allocation study
This model had a very detailed two-tiering approach to
7
it.
What I mean by “two-tiering” is they attempted to line
8
up like costs in one area before allocating them.
9
As an example, they would take some of the energy
10
costs that were associated with the payables, receivables,
11
so on and so forth, and lay it back on to the
12
controllership-type activities.
13
the human resources-type support to human resource back to
14
finance.
15
that went on to try to get a -- at the time, they were
16
trying to come up with a true cost of that function in
17
total, with all of the various support groups in.
18
multiple tiering involved.
19
They would layer some of
So there was a multitude of different layerings
I described it as a “tier 1” and “tier 2.”
It had
Tier 1 was
20
this multiple tiering of costs to get an appropriate cost;
21
tier 2 was then the allocations using the appropriate
22
drivers and the costs benefit and the causality.
23
was used in '02.
24
In the fall of '02, the business decided it was a core
25
transmission and distribution business.
26
simplify the cost-allocation approach to make reporting
27
simpler, to make management decision-making simpler, but
28
maintain the regulatory requirements in terms of the
So that
I was asked to
39
1
Affiliate Relations Code and maintain the three-pronged
2
test.
3
4
5
I couldn't give that away, but I was to simplify it.
MR. ROGERS:
Mr. Van Dusen, could I slow you down a
little bit so the reporter can get this.
MS. NOWINA:
Maybe I could jump in and ask a point of
6
clarification.
At that point, the company decided they
7
were going to focus on distribution and transmission and
8
all of the other ancillary services that they might have
9
been thinking about taking to market and going for IPO, and
10
all of those kind of ideas went away and the company began
11
to focus on distribution and transmission.
12
simplifying your methodology, were you looking at taking
13
the total costs, then, and allocating them to those two
14
buckets, if you like, or primarily to those two buckets
15
where previously they had been allocated to other areas?
16
MR. VAN DUSEN:
So in
Absolutely that is one of the major
17
changes, and some of them were allocated to other areas.
18
But in addition, the tiering layered a complexity that
19
didn't help us in terms of our reporting process as well.
20
So, yes, that is true.
21
In ‘03 - the change was made late in the fall of '02 -
22
business planning was well underway for the next period.
23
So I was only able to make some changes to the tiering
24
methodology for '03.
25
made was to eliminate some of this tiering that didn't seem
26
to add additional precision to the cost allocation approach
27
and certainly added a fair bit of confusion in terms of how
28
the model worked and who was receiving what costs and what
So for ‘03 the major change that was
40
1
was I being charged for.
That was utilized in '03
2
In '04, by and large Jettison, the CapGemini model at
3
that point, developed an even-more simplified model, which
4
eliminated all of the tiering that had been done before and
5
took a look at the basic activities performed by the common
6
cost groups at a very aggregate level, and that is one of
7
the improvements that was brought to us at R.J. Rudden, for
8
'04 and '05, quite aggregated the activities performed by
9
each of these groups and was allocating them using very
10
11
high level simple data.
Net book value is one of the drivers utilized in '04
12
and '05 to allocate a lot of the common costs.
Net book
13
value is a representative of the size of a business and,
14
therefore, gives you some sense of causality in terms of
15
the services performed for that business.
16
One of the changes of the shift in the allocation
17
methodology that we have talked about in these proceedings
18
was net book value, by its nature and because of the size
19
of our transmission business, was more heavily weighted to
20
transmission.
21
When we moved away from the net-book-value approach
22
that we had utilized extensively in -- used a lot in '04
23
and '05 at the recommendation of R.J. Rudden, that was one
24
of the reasons for the costs moving back to distribution,
25
and that I think we articulated in the earlier
26
interrogatory response where we gave you a bit of a high-
27
level sensitivity analysis.
28
So that is -- I'm sorry, it is probably more than
41
1
2
three minutes, but that is my summary.
MS. NOWINA:
It was very helpful, Mr. Van Dusen, and I
3
might just ask a couple of follow-on questions just to
4
really simplify what you have told us.
5
you essentially developed a new methodology which is
6
similar to the Rudden methodology being used now?
7
MR. VAN DUSEN:
8
MS. NOWINA:
9
10
That's correct.
A major difference was that it had a
heavy reliance on net book value, which allocated more to
transmission because it holds more assets?
11
MR. VAN DUSEN:
12
MS. NOWINA:
13
So in 2004/2005,
That's correct.
And that has changed in the Rudden model
in 2005?
14
MR. VAN DUSEN:
15
MS. NOWINA:
That's correct.
Do you have any comfort that the
16
methodology you used in 2004/2005 obtained similar results
17
than you would have -- would have obtained from the more
18
detailed CapGemini/Ernst & Young methodology you had been
19
using to that point?
20
21
22
23
24
25
26
MR. VAN DUSEN:
I can answer that.
MS. NOWINA:
I really don't feel in a position that
I don't have that --
You don't know, because you didn't do a
comparison?
MR. VAN DUSEN:
No.
There were comparisons done at
the time between the -- sorry.
There were comparisons done at the time, and that
27
comparison moved from -- there was a heavier weighting to
28
distribution in the CapGemini-type models than there was in
42
1
the '04/'05 models, and now we have come back.
2
talk about it that way in simplified form, heavier
3
weighting to distribution in '02/03, heavier weighting to
4
transmission in '04/05, and now a heavier waiting to
5
distribution at this point.
6
7
8
9
MS. NOWINA:
Thank you.
We want to
That is helpful for me, in
any case.
MR. VLAHOS:
Can I just follow up.
Mr. Van Dusen,
just to confirm, the numbers that have come out of those
10
different methodologies, did they have any role to play in
11
any of the rate-making exercises before this Board?
12
MR. VAN DUSEN:
13
MR. VLAHOS:
All right, thank you.
14
MS. NOWINA:
Thank you, Ms. Campbell.
15
16
No, they did not.
You may
proceed.
MS. CAMPBELL:
Thank you very much.
Can I just ask
17
you, Mr. Van Dusen, why you decided to hire Rudden
18
ultimately?
19
own, or was there a -- I'm just curious, because you said
20
you went to CapGemini.
21
you did something on your own, and then you hired Rudden.
22
So I am just trying to figure out why.
23
24
25
Did you get tired of trying to do this on your
MR. VAN DUSEN:
Then you got tired of CapGemini and
Okay, because the CFO may listen to
these transcripts I -- no.
Clearly, the expectation from this Board was that we
26
were to bring a much more rigorous methodology back in
27
front of them that was supported by industry, approved in
28
industry-standard drivers, and had some sort of higher
43
1
level of validity to it.
2
approach to doing that was to issue an RFP, which we did in
3
the fall of '04, and select a firm that had a good track
4
record, the right type of resources, that they understood
5
our requirements and kind of had people who could come and
6
witness their work in front of this Board.
7
MS. CAMPBELL:
We saw as the only reasonable
All right.
Now what I would like to do
8
is actually go to the report.
That is found -- the Rudden
9
report, and that is found at C1, tab 6, schedule 1.
10
that entire tab, I believe, is devoted to the Rudden
11
report.
12
13
14
And
It starts off with an overview, and then attached at
page 7 as attachment A is the report itself.
Now, I understand, just while everybody is turning it
15
up, that the Rudden Group did three particular studies:
16
One was the cost allocation study; the other was a shared-
17
assets methodology review, and that is found at C1, T6,
18
schedule 3; and, finally, there was an overhead
19
capitalization -- sorry, distribution, overhead and
20
capitalization rate method, and that actually is Exhibit
21
C1, tab 6, schedule 2, I believe.
22
That's attachment A.
23
It starts at schedule 2.
The questions that I have for this panel are strictly
24
on cost allocation, the cost allocation report.
So I just
25
want to put on the record that the other Rudden reports
26
were filed, but the questions that are going to be asked
27
relate to the allocation report.
28
questions on the overhead capitalization before the task
We already had some
44
1
panel.
2
So, as I indicated, the report starts at page 7.
3
There is just an overview that might be helpful before we
4
get into the nitty-gritty on the cost-allocation
5
methodology.
6
fact that, on page 2, that Rudden was hired in the fall of
7
2002 -- 2004.
8
am using "you" in a collective sense, Mr. Gorman and
9
Mr. O'Brien.
10
We have the history of the 1998 order and the
There is a synopsis of what you did.
And I
Just before we jump into the actual report, I would
11
like to direct the attention of the Panel to table 1, which
12
is found on page 4 of that grouping, and that gives an
13
overview of the total common costs for 2006 and how they
14
were allocated the transmission, distribution and what is
15
called "Other."
16
One Brampton, remote communities, and labour and material
17
rates.
18
“Other” includes Hydro One Telecom, Hydro
I am correct, am I not, Mr. O'Brien or Mr. Gorman -
19
whoever feels like answering this - in that the allocation
20
study that you did is focussing on the common corporate
21
function and services?
22
MR. O'BRIEN:
23
MS. CAMPBELL:
That's correct.
All right.
And that the number that
24
appears in table 1 has been revised slightly, and the
25
number at the bottom, if we go along the bottom -- sorry,
26
starting at the top, the common corporate function and
27
services should be 210,700,000.
28
I just wish to make sure that everybody has got the
45
1
right numbers.
2
sheet?
Does the Panel have a blue sheet or a white
Do you have the updated number?
3
MS. NOWINA:
4
MS. CAMPBELL:
5
6
7
8
9
Which page is that?
Table 1, which is C1, tab 6, schedule
1, page 4 of the text that leads up to the report.
MS. NOWINA:
We don't -- at least, I don't have the
revised number.
MS. CAMPBELL:
Let me just give them to you.
CCFS, the total, should be $210,700,000.
The
Transmission
10
should be 81.2 million, distribution is 112,700,000, and
11
"Other" remains 16.8 million.
12
91.1; transmission, on the second line, is 51.8;
13
distribution 39.3; and the rest of the numbers on the chart
14
remain the same.
15
Asset management remains
What alters as a result of the alteration of that top
16
line is the totals become 345,800,000.
17
becomes 161,000 -- can be, so -- sorry, 161,500.
18
distribution, the total is 167.5 million.
19
20
21
MS. NOWINA:
Ms. Campbell, the last number?
MS. CAMPBELL:
I had put in front of me an update
which has exactly the same.
23
3rd, 2005.”
25
MR. ROGERS:
It says:
“Updated November
We can get you another copy of this.
This was updated November 3rd, 2005.
26
MS. CAMPBELL:
27
MR. ROGERS:
28
Then
What table were you referring to then,
22
24
Transmission
copies for Panel.
Yes.
I will be quite happy to make extra
46
1
MS. CAMPBELL:
The easiest thing we could do is
2
provide them over the break or over lunch.
3
for the purposes of just going through, you just need to
4
change that top line.
5
MS. NOWINA:
6
MS. CAMPBELL:
7
Those were the numbers that we are talking about.
8
What I would like to do right now is to go to the
9
But right now,
We have it, thank you.
Okay, thank you, Mr. Rogers.
Rudden report itself and start walking through the Rudden
10
report and get a description from you concerning the
11
methodology.
12
Before I do that, Mr. Rogers, something that I thought
13
perhaps we should deal with upfront.
This question has
14
arisen before, and I will just give you the context for it.
15
Page 4, underneath table 1, it says:
16
“Hydro One proposes that the result of the Rudden
17
study being accepted as providing reasonable and
18
equitable approach to the assignment of common
19
costs among the business entities using the
20
common services.
21
prepared using this methodology.”
22
The 2006 business plan has been
One of the things that came up previously was the
23
effect of having the Rudden methodology accepted and the
24
effect it would have on transmission.
25
could clarify what it is Hydro One is looking for.
26
MR. ROGERS:
I wonder if you
Well, this did come up before.
I think
27
Mr. Vlahos was asking me about it; maybe other panel
28
members as well.
I think Mr. Betts did as well.
In fact,
47
1
I think all three panel members did.
2
important to the applicant.
3
It is obviously
What the applicant asked the Board to do in this case
4
is accept the Rudden methodology as an appropriate way to
5
allocate costs to the distribution business for the
6
purposes of making rates for 2006.
7
Now, it does have implications for the transmission
8
side of the business, as was pointed out by our witnesses
9
on an earlier panel.
I understand the Board cannot bind
10
the hands of another panel which will deal with the
11
transmission case when it comes before the Board sometime
12
over the next few months.
13
However, in fairness, the company does ask and expects
14
that the Board will, as usual, be fair in -- when it comes
15
to deal with transmission to hopefully accept the approach
16
in the distribution case and the drivers that were used in
17
distribution and hopefully approved by the Board in a
18
distribution case as being appropriate for the transmission
19
case as well.
20
Now the level of costs will be different - I
21
understand that - at that time.
22
the company's business, which will necessitate some
23
modification in the approach.
24
expects and hopes the Board will do is to use the same
25
approach, the same drivers, so that the applicant is not
26
disadvantaged by a shift in the Board's attitude about what
27
is an appropriate methodology to be used.
28
There may be changes in
But what I think the company
We do understand there is a business risk the
48
1
applicant must take when it comes before the Board on its
2
transmission side that things will have changed and there
3
may be some modifications made in the way the costs are
4
allocated, but it only seems fair to the applicant - and I
5
hope the Board would agree - that absent some changes in
6
business context, the same drivers should be used.
7
that clarifies.
8
MS. NOWINA:
9
MS. CAMPBELL:
10
I hope
Thank you.
Thank you, Mr. Rogers.
Now I would
actually like to start on the Rudden report, if I could.
11
If I go to the Rudden report, the first four pages is
12
a summary, and pages 5 to 19 is a detailed walk-through of
13
every step that was taken to come up with the numbers.
14
That is sort of very Reader’s Digest version of your
15
report.
16
So what I would like to do, first of all, is go to
17
page 9.
18
evidence that the task you were given is to find a -- I
19
think it is referred to as recommending a best-practice
20
methodology to distribute the costs of providing the common
21
corporate functions and services, including the costs under
22
the Inergi contract.
23
I understand from reading all of the pre-filed
That's correct?
What I would like to do is take you to page 9, which
24
is a summary of the steps that you took in this.
First of
25
all - and I don't know which one to address this to - we
26
talked about a best-practices methodology.
27
assuming that the methodology that is reflected in your
28
report is, in your considered opinion, the best practices
Am I correct in
49
1
methodology for the Hydro One group of companies?
2
MR. O'BRIEN:
3
MS. CAMPBELL:
Yes, it is.
And are there other methodologies that
4
you considered and rejected, or is this what I would call
5
the cutting edge of best practice methodologies?
6
7
MR. O'BRIEN:
I think when you look at an allocation
process, it all starts at the same point in the umbrella.
8
MS. CAMPBELL:
9
MR. O'BRIEN:
Yes.
You start with wanting to make sure the
10
costs are prudent.
You want to make sure they're going to
11
be charged to the appropriate entity or business unit, and
12
you want to make sure there is a benefit provided in those
13
costs that are charged to the unit.
14
That's the three-pronged test.
It’s the basis of any
15
cost-allocation methodology.
16
practices, it says that you want to determine those things
17
at the lowest or most detailed level that you can, which is
18
prudently established for the company that you're dealing
19
with.
20
to cost twice as much as the costs being allocated.
21
wouldn't make a lot of sense when you could get a lot of
22
detail on it and you could keep everybody's time by 15-
23
minute increments and charge those to very specific
24
functions.
25
costly.
26
When you look at best
You don't want to establish a practice that is going
That
It would end up being time consuming and very
So when you look at a business practice methodology,
27
in my opinion, you're looking at taking those three - as
28
the Board calls them, the three-pronged tests - and seeing
50
1
how they apply to an individual entity that you're dealing
2
with, how low you can take them as far as detail goes, and
3
how much is prudent to establish as to what the alternative
4
costs might be.
5
So when we got into the Hydro One assignment, we had
6
looked at what the makeup of the Hydro One company was;
7
what process they had in place at the time, not to see how
8
they were doing it or what drivers they were using but what
9
their functions were; what they were performing; and who
10
they were performing them for.
11
and I -- Mr. Gorman and I developed our overall process
12
that we would go through and try to determine what the best
13
elements of each one of those units would be.
14
So as we did that, Howard
And in doing that, we came down to what our report
15
presented, and we believed that for Hydro One, these would
16
be the best practice functions and concepts that we would
17
use.
18
MS. CAMPBELL:
All right.
And you made reference to
19
the three-pronged test, and that is the three-pronged test
20
that appears in the excerpt from the Enbridge decision.
21
MR. O'BRIEN:
22
MS. CAMPBELL:
23
Yes.
All right.
So that is the cost
incurrence, cost allocation, and cost/benefit.
24
MR. O'BRIEN:
25
MS. CAMPBELL:
Correct.
Those principles are in this
26
methodology; they're an underlying bed of principles to the
27
methodology?
28
MR. O'BRIEN:
I like to look at it as an umbrella
51
1
effect:
Anything you do has to come under those premises
2
or they've got to be built on that foundation.
3
MS. CAMPBELL:
4
MR. O'BRIEN:
5
MS. CAMPBELL:
All right.
So we can look at it either way.
Okay.
So keeping that in mind, it’s
6
either a umbrella or foundation, depending on how you look
7
at the world, let's start walking through what was actually
8
done.
9
Now, we've got this nice overview at table 5, which is
10
page 9, but page 9 -- but what I would like to do is just
11
walk through.
12
and services included in the common corporate functions and
13
services.”
14
Now, task 1 says:
“Identify the functions
When I looked at your report, I found that you started
15
-- let me just find this.
16
services on page 10, I believe.
17
said:
18
corporate functions and services.”
19
If I looked at page 2 -- sorry for the flipping around.
20
you look at page 2, you made a table that lists the
21
functions and services.
22
reflects the first step, I take it?
23
24
So if I turn the page, you
“The functions and services that make up common
MR. O'BRIEN:
step.
You defined the functions and
If
So if I go to that table, that
Right.
That would be part of the first
If I can flip you a little bit also.
25
MS. CAMPBELL:
26
MR. O'BRIEN:
Certainly.
If we look at the attachment A1, which
27
is back after page 22 of the report, it provides a little
28
more detail into the functions and services that exist at
52
1
2
Hydro One.
MS. CAMPBELL:
Yes.
So pages A1 to A6 contain a
3
breakdown of the common functions and services.
4
is the overview just listing the name of the function and
5
service.
6
detailed description and each broken down?
And then if I go to A1 forward, I get the
7
MR. O'BRIEN:
8
MS. CAMPBELL:
9
That's correct.
All right, thank you.
I counted 32
common corporate functions and services.
10
MR. O'BRIEN:
11
MS. CAMPBELL:
12
So table 1
I will accept that.
Thank you.
Subject to check.
So there
are 32 common corporate functions and services.
13
After you have the common corporate functions and
14
services listed, the next task that I saw was that you were
15
to identify the activities performed to provide each of
16
these common services.
17
And an example would be, if we go to human resources,
18
using Exhibit A, still staying with your definition, I've
19
got -- at the bottom of A1, I've got “Human resources” and
20
a little line that says:
21
labour relations".
22
"Focus primarily on employee and
Then if I go to A6, it says "Human resources payroll"
23
right at the top.
24
I get to B1, I see “Human resources,” and I see it broken
25
down into activities.
26
number 2 was?
27
MR. O'BRIEN:
28
MS. CAMPBELL:
Then if I go to the page behind that and
Is that the next step?
Is this what
Correct.
So number 2 is exemplified by all of
53
1
them under there.
2
you've gone and you've broken it down into specific
3
activities for the 32 different functions and services?
4
MR. O'BRIEN:
5
MS. CAMPBELL:
If I look, “Activities performed,”
That would be correct.
All right, thank you.
Then the next
6
step, as I followed it, was you determined -- task 3 was to
7
determine how much had been set aside in the 2006 budget
8
for those particular functions and services?
9
MR. O'BRIEN:
10
MS. CAMPBELL:
That's correct.
All right.
So, again, if I look at
11
“Human resources” and I go to the first page of Exhibit B,
12
I find out that Hydro One has set aside 4,556 -- yes,
13
$4,556,000 for human resources?
14
MR. O'BRIEN:
15
that particular page.
16
MS. CAMPBELL:
Right.
Yes.
That is shown in column D of
All right.
Then the next step,
17
task 4, was to identify the business units, and the
18
business units are which of the six Hydro One business
19
units use those services.
20
21
22
So in your report, you've got a table 6, which is at
pages 11 and 12?
MR. O'BRIEN:
Correct.
That appears -- that table
23
appears under the item D, which is task 4, “Identify
24
business units.”
25
provide a little bit of description as to what those
26
business units were and how they operated.
27
28
MS. CAMPBELL:
So we tried to not only identify them but
Okay.
going on to page 12.
So that is bottom of page 11
54
1
Then the next task, which is task 5, is to distribute
2
the resources for each function among the activities.
3
this is -- occupies most of page 12 and over to most of
4
page 13.
5
And
The task says that the purpose of the task was to
6
distribute the resources, time for labour and costs for
7
non-labour and energy required for each of the functions
8
identified in task 1 among the activities identified in
9
task 2.
10
Then there is a breakdown.
There is the way that the
11
budgeted labour costs were distributed and the non-budgeted
12
-- sorry, the budgeted and non-labour costs.
13
explain how that was done, task 5?
14
MR. O'BRIEN:
Could you
Basically, the labour costs you look to
15
distribute based on the functions that the individuals
16
perform.
17
be performing certain accounting functions, and you would
18
try to identify how much time they spent or what percentage
19
of their time was spent on the different activities and
20
then use that as a guideline or benchmark to charge their
21
time.
22
If someone is in the accounting area, they would
If you could not identify specific activities, as we
23
discussed, you would use cost drivers that would best
24
identify where their costs were.
25
non-payroll, at times you've got very specific ways of
26
charging those items.
27
the regulatory functions of the company, and those may have
28
seven or eight different areas that they could be
When you get to the
You may have payroll that deals with
55
1
2
distributed to.
But you also may have a non-labour item, such as an
3
invoice from the Board, or something else that dealt with a
4
specific function or category.
5
in that way.
6
drivers, but you would apply the same basic principle.
7
would try to get the direct allocation first.
8
not get that, you would try to use a cost driver.
9
a last resort, you would use some sort of common allocator.
10
11
12
13
In those, you could charge
Some of them may have to be allocated or cost
MS. CAMPBELL:
You
If you could
And, as
If I could just go back to just ask you
a couple of questions about the budgeted labour costs.
It said:
"To distribute budgeted labour costs ...” --
I'm reading the second full paragraph under task 5:
14
"... Rudden interviewed the Hydro One manager
15
responsible for each of the function or service,
16
and the manager estimated the portion of annual
17
time spent by the personnel under his or her
18
supervision on each of the activities identified
19
in the task."
20
Then it says:
21
"Some managers based their estimates on
22
concurrent time records that they maintain.
23
conducted interviews with their personnel.
24
used their informed judgment."
25
Some
Some
That strikes me -- as I'm reading that, that seems to
26
be in descending order of precision.
So concurrent time
27
records would be the best way of keeping track of and --
28
keeping track of time so that you can budget the labour
56
1
2
3
costs?
MR. O'BRIEN:
They wouldn't necessarily be in
descending order of importance.
4
MS. CAMPBELL:
5
MR. O'BRIEN:
6
that group was doing.
7
MS. CAMPBELL:
8
MR. O'BRIEN:
9
It would depend on the --
Precision, not importance.
Precision.
It would depend on the functions that
Okay.
In some instances, you can have people
keep time sheets that are very accurate and can identify
10
functions and processes where they can charge time to.
11
other areas, you can't.
12
precise way to do it.
13
spend a certain amount of time maintaining this set of
14
data, and then that data benefits four different groups.
In
It is just not -- there is no
Someone would identify that they
15
So keeping my time would be accurate on the different
16
groups, but I have no way to charge that time individually
17
to a group other than by some allocator.
18
19
So some people within a group or within a function
would be able, and they do keep time records.
20
I know when I was with Citizens, I maintained a time
21
sheet of everything I did, because we had to charge 40 or
22
50 different properties for the functions we performed.
23
we maintained time sheets.
24
they did not have the ability to identify things at that
25
precise a level.
26
So
Other groups did not, because
What we did there is similar to what we did here, talk
27
to the people in charge to give us an idea that the
28
activities that we had were accurate for their group and an
57
1
approximation of how much time the individuals working for
2
them spent on those activities.
3
MS. CAMPBELL:
Okay.
But these are estimates; right?
4
So if a manager has a group that can't or doesn't keep time
5
sheets, then it is the manager's best estimate of the time.
6
That is simply my point.
7
MR. O'BRIEN:
8
MS. CAMPBELL:
9
MR. VAN DUSEN:
10
That would be correct.
All right.
Sorry.
I think --
I think it may be helpful for
me to add here.
11
MS. CAMPBELL:
12
MR. VAN DUSEN:
Certainly.
In terms of the finance estimate that
13
came from corporate finance, I participated in actually
14
developing that with the corporate controller and the CFO.
15
Although it is an estimate, we spent an awful lot of
16
time taking a look at the specific activities in our groups
17
and analyzing, given our experience over the last couple of
18
years, how much time was spent supporting the various
19
activities and supporting the various business units as
20
well.
21
was a fairly detailed estimate.
22
So in our case, it wasn't a high-level estimate.
MS. CAMPBELL:
All right.
So it's an estimate based
23
upon day-to-day knowledge by the manager or the personnel
24
involved of what they do?
25
MR. VAN DUSEN:
Yes.
It
The corporate controller
26
actually interviewed each one of her direct reports, and we
27
actually did -- I wouldn't call it a time study, but we did
28
some work in terms of actually querying, quizzing them in
58
1
terms of percentages of time to different activities and
2
the different units.
3
4
MR. O'BRIEN:
the
Just to follow up on that.
With most of
groups we found they did out an iterative process.
5
MS. CAMPBELL:
6
MR. O'BRIEN:
What does that mean?
Well, we had supplied them with the
7
activities that we had found in going through the data that
8
their groups would be performing.
9
interviews with them, with Mr. Van Dusen and several other
We sat down and had
10
people to go through and make sure we had a comprehensive
11
list.
12
estimated to have such a small piece of time they were
13
included in “Other,” rather than having 20 items of which
14
you had six that accomplished about 70 or 80 percent of the
15
time.
16
We added some items; we took some off.
Some were
So we tried to keep it on that basis.
The individuals that we spoke to in most cases were
17
the heads of the departments, had people with them when we
18
interviewed.
They went back and then got the time
19
distributed.
We had follow-up interviews - in most cases,
20
face-to-face; in some instances, by phone - in order to
21
determine that the estimates we were getting made sense,
22
that we understood them, and we went through a process of
23
then getting back to them with a final run.
24
So we had an iterative process going back and forth
25
where the numbers that were put down were the basis of what
26
the department heads interacted with their people on, who
27
sometimes accompanied them, our review of them, and going
28
back again to make sure we had everything accounted for.
59
1
For example, we would not be satisfied if somebody
2
identified 60 percent of their tasks.
3
120 percent, we had some question as to what they were
4
doing, and we went back and forth.
5
followed over the years, as being fairly accurate because
6
you are dealing with the people who actually do the work.
7
All I can look at is say I understand this is good, yet
8
that makes sense to me, as they explain it and as they go
9
through.
10
11
12
MS. CAMPBELL:
All right.
Likewise, if it was
It is a process that I
So that is the first part,
which is to distribute the budgeted labour costs.
If I drop to the second, it says:
13
“To distribute the budgeted non-labour costs of
14
43.3 million or 94.6 percent of the total 45.7
15
million.”
16
First of all, where did that number come from?
Can
17
you tell me what we're talking about?
18
that when we talk about distribution of total budget
19
resources - and I read budgeted labour costs and budgeted
20
non-labour costs - that somebody is dividing up $45.7
21
million, and 5.4 percent of it is budgeted labour costs and
22
budgeted non-labour costs are the other 94.6.
23
MR. GORMAN:
24
MS. CAMPBELL:
25
MR. GORMAN:
26
million.
27
or 94.6 percent.
28
Because it is clear
Maybe I could clarify that.
Certainly.
Total non-labour costs were $45.7
Of that, we specifically looked at $43.3 million,
The portion we specifically looked at included items
60
1
such as the invoices that the company gets from the Board,
2
Bill 198 compliance costs, which is a specific line item in
3
one of the budgets, actuarial costs, the audit fee; we
4
looked at program costs for the communications department,
5
specific out-of-pocket costs.
6
$43.3 million of non-labour costs.
7
other items such as general items or a very small portion
8
like that, and we just used general allocators for that.
9
MS. CAMPBELL:
10
45.7 million?
11
and I can't --
12
All right.
So we looked at a total of
Then there were some
But where do I find the
Because it's the first number that comes up,
MR. GORMAN:
I don't believe it specifically is culled
13
out in any of our reports.
14
items together for the purpose of preparing the exhibits,
15
so we would group labour and non-labour.
16
What we did was we grouped
For instance, in the communications department, if
17
they had -- a portion of the labour costs was safety
18
programs and there were some non-labour costs that were
19
also safety programs, in our exhibits we grouped those
20
together.
21
So you wouldn't see the 45.7 million anywhere.
MS. CAMPBELL:
Okay.
Under task 5, you also did some.
22
You looked at the functions and services provided by
23
Inergi.
24
approach for each of the functions and services provided by
25
Inergi.
26
If I go to the top of page 13, you described the
You have six points, six different areas that were
27
covered by the Inergi contract and how they were
28
distributed.
Could you give us a brief explanation?
61
1
MR. GORMAN:
Sure.
I'm going to just try to repeat
2
this, and I will elaborate a little bit for the benefit of
3
everybody, because it bears some discussion.
4
The customer support operations, there was an amount
5
of time that was estimated for each of the activities
6
performed by customer support, and those included
7
correspondence, billing activities, and an item called
8
fixed charges or fixed component, which basically related
9
to printing and mailing bills.
10
We worked with Hydro One to estimate what the portion
11
of the total CSO, or customer support operations, cost was
12
devoted to each of those activities.
13
The settlement function is the settlement with the
14
markets, with the energy markets, and that was really
15
classified as a single activity, settlement.
16
17
18
So breaking it up into activities was just one
activity.
Supply management services was -- again, there were
19
specific activities that were performed.
20
estimate from Hydro One as to what those activities were.
21
They included purchasing, warehousing, disposal of assets
22
and so forth.
23
We obtained an
Finance was the next one on the list, and we had a
24
list from Hydro One of what those activities performed by
25
Inergi were.
26
Inergi in the finance area were the transactional
27
activities, so we had accounts receivable processing,
28
accounts payable processing, budgeting and corporate
The activities that were sub-contracted to
62
1
planning, and I believe there were two or three others that
2
are listed.
3
What we did:
We had estimates of how much time had
4
been performed by the Hydro One people when that was the
5
Hydro One function.
6
to the Inergi cost to develop percentages.
7
some checking with the people who managed the Inergi
8
finance relationship as to whether they thought those were
9
still valid splits of time, and they concurred they were
10
We applied those to the Hydro One -Then we did
still valid.
11
Again, human resources was simply one activity.
That
12
piece of human resources that is contracted to Inergi is
13
just the transactional piece of getting people paid.
14
that is one activity, payroll.
So
15
Finally, the most complex was enterprise technology
16
services, and that really gets bifurcated to application
17
support and infrastructure support.
18
includes a number of applications such as the passport
19
application, which is a work-management program, some
20
finance applications and, sorry, it escapes me now, but I
21
know they're listed somewhere, several other applications.
Application support
22
We were able to work with records that the company had
23
as to how much time had been invested in those applications
24
and in the applications versus infrastructure split.
25
Back when Hydro One had the functions, we met briefly
26
with some people from Inergi that confirmed those numbers
27
were still fairly valid, and then we had the infrastructure
28
piece, which is basically the backbone, the supporting work
63
1
stations, the WAN and LAN, the wide area network, local
2
area network, the telecom backbone, and supporting the work
3
stations and PCs that we have all come to rely on as being
4
integral to our jobs.
5
6
So we work with the company to split those costs in
into the proper activities.
7
MS. CAMPBELL:
8
MS. NOWINA:
9
10
Okay.
Ms. Campbell, sorry, I was aiming to take
a break at 10:45.
MS. CAMPBELL:
It is just a few minutes before that.
I was just going to finish task 5, and
11
we're almost finished task 5, and then we can take a break
12
before we go on to the equally exciting tasks 6 to 10.
13
Just finishing off on enterprise technology services.
14
MS. NOWINA:
15
MR. ADAMS:
Sorry, Ms. Campbell, we have a question.
Sorry to interrupt, but I just wonder,
16
since you raised the issue of breaks:
17
other proceedings that are going on that we're trying to
18
follow.
19
synchronize their breaks around 11 o'clock -- I'm sorry.
20
21
What we’ve asked in the other rooms is they
MS. NOWINA:
They didn't go along with it?
Good try,
Mr. Adams.
22
MS. CAMPBELL:
23
MR. BETTS:
24
There are three
I'm sorry.
Now, we probably would have been more
flexible.
25
MS. NOWINA:
No doubt.
26
MS. CAMPBELL:
We could have done task 6.
27
MS. CAMPBELL:
Now we have to wait on tenterhooks.
28
Now, just finishing up on enterprise technology
64
1
services.
My memory is that the subcontract is under the
2
Inergi contract.
Mr. Van Dusen, am I right on that?
3
MR. VAN DUSEN:
4
MS. CAMPBELL:
Yes, that's correct.
I note underneath the little synopsis
5
on ETS that 75 percent of the costs were directly assigned
6
and the balance were allocated.
7
And that if we want to see the results of task 5,
8
dropping down even further, we can go to Exhibit B.
9
we could just turn back to Exhibit B, the result of task 5,
10
when I look at it, I can see it says the budgeted costs was
11
distributed to each activity - that is in column F - and
12
that costs distributed to each activity is in column G.
13
But the key thing is task 5 gives me column E.
14
MR. GORMAN:
15
MS. CAMPBELL:
That's correct.
So if
That's the key thing.
Once we have gone through task 5, we've
16
-- the first thing we did was find out the functions and
17
service.
18
we found out how much Hydro One was willing to spend on it.
19
Then we assigned an activity in those breakdowns, each
20
activity.
21
Then we broke it down into activities.
They then
So the first one, administer compensation and benefits
22
program, has been assigned a value of 10.9 percent of that
23
budget.
So it is roughly 495,000.
24
MR. GORMAN:
25
MS. CAMPBELL:
Yes, that's correct.
So that is the end of task 5.
26
Now we will be able to break at 10:45, as planned.
27
then we will come back to task 6.
28
MS. NOWINA:
And
We will resume again at five minutes past
65
1
2
3
11:00.
MR. ROGERS:
I will leave copies of the blue sheets,
for that table, for you.
4
MS. NOWINA:
5
--- Recess taken at 10:45 a.m.
6
--- On resuming at 11:09 a.m.
7
MS. NOWINA:
8
up during the break?
9
Thank you.
Please be seated.
MS. CAMPBELL:
Did any matters come
Good.
Mr. Warren was complaining about the
10
excitement in the room and has asked me to drop the level
11
down, because he's concerned that his overall state of
12
health can't stand it.
13
MR. WARREN:
14
[Laughter]
15
MS. CAMPBELL:
16
17
So I'm going to see what I can do.
I've had to readjust my heart monitor.
You know, Mr. O'Brien and Mr. Gorman
are going to go away taking it personally.
MR. ROGERS:
That's right.
These gentlemen, their
18
life is cost allocation, so I would ask you to treat them
19
with respect.
20
MS. CAMPBELL:
21
MR. O'BRIEN:
22
MS. CAMPBELL:
Yes, exactly.
Do we get any rebuttal?
Just something that came up over the
23
break, Mr. O'Brien.
24
you were discussing activities with individuals, it was a
25
process that had a lot of discussion.
26
something that you said, Oh, it looks like these are the
27
activities you do.
28
You talked about the fact that when
It wasn't just
You consulted with people.
As a result, there were estimates made.
I'm talking
66
1
about the fact that estimates were made.
2
these services asked to estimate -- asked about the --
3
asked to confirm the accuracy of the estimates, or in some
4
cases are the users of the services the performers of the
5
services?
6
MR. O'BRIEN:
Were the users of
Mr. Gorman can address that.
He had
7
actual meetings with the users of the service to discuss
8
with them the process and the results.
9
10
MS. CAMPBELL:
MR. GORMAN:
Oh, all right.
We did meet with the users of the
11
services at an early stage in the process and also at the
12
very end before we finalized the results.
13
your specific question -- and they did confirm that they
14
received each of the services for which they were being
15
charged.
16
allocate the dollars, and each of them said they were
17
comfortable with the overall level for which they were
18
being charged.
19
With regard to
They understood the process that was used to
With regard to the specific question, if a user was –-
20
said, We allocated payroll activity, let's say, X percent
21
to each of the business units, we did not ask the users, Do
22
you concur that X percent of the payroll department's time
23
is spent on your unit?
24
that.
25
service?
26
27
28
Because they really wouldn't know
They would just know, Am I getting a payroll
We did confirm with each of them that they’re getting
the services for which they were being charged.
MS. CAMPBELL:
Thank you.
When we left off, we left
67
1
at task 6.
2
starts at the bottom of page 13.
3
So we're going to task 6 right now.
This task was -- it says:
Task 6
"Assign activity costs to
4
business units".
5
numbers we've been discussing and you assign them to one of
6
the six business units; am I correct?
7
MR. O'BRIEN:
8
MS. CAMPBELL:
9
That basically means that you take the
That's correct.
All right.
When I look at this, if I
go to the top of page 14, you indicate that for each
10
activity identified in task 2 the Hydro One manager was
11
responsible for -- responsible for the function or service
12
was asked to divide the resources among one or more
13
business units based on which business units caused the
14
costs to be incurred and that, wherever possible, costs
15
were assigned directly.
16
I understand just from things that have been said
17
previously, I think Mr. O'Brien you said that direct
18
assignment is preferable.
19
MR. O'BRIEN:
20
MS. CAMPBELL:
That's correct.
All right.
It also indicates that when
21
less than 100 percent of an activity was assigned directly,
22
it was allocated among the business units using cost
23
drivers.
24
We're going to come to cost drivers.
But if I -- just a quick thing to note in your report.
25
You have down in the bullet points -- in the top half, you
26
have column J, K and I.
27
column G, H -- sorry, it was -- you have down J, K, L at
28
the very end of each of those phrases.
I think it is supposed to be
I think it is
68
1
meant to be G, H, I.
2
is repeated down -- if it isn't a typo, I don't have J, K
3
or L and I don't think anyone else does.
4
just confirm that, sir?
5
MR. GORMAN:
6
MS. CAMPBELL:
7
8
9
10
11
I just think it is a typo, because it
So if you could
Yes, it is a typo, and I apologize.
Okay, that's fine.
I don't think it
changes anything, but I think it is helpful to know that.
Now, we talked about the fact that there are two ways
to assign:
And one is direct assignment; the other is by
allocation.
If I go to page 5 of your report, I find a definition
12
under the heading "Principles of Cost Distribution".
13
got direct assignment and allocation.
14
We've
Direct assignment is used when the portion of an
15
activity used by a business unit can be reasonably
16
established.
17
or Mr. Gorman, that 38 percent of the functions or services
18
-- budgeted costs, sorry, were assigned directly to one or
19
more of the business units.
20
21
And you've already said, I think, Mr. O'Brien
And in brackets, it says 49 percent for CCFS and asset
management together were direct.
22
MR. O'BRIEN:
23
MS. CAMPBELL:
That's correct.
All right.
And allocation, according
24
to your report, is used when more than one business unit
25
uses an activity or the portions of the activity that each
26
uses cannot be directly established.
27
28
I would like to go right now to Exhibit C, because
Exhibit C, I think, gives us just the set-up, gives an
69
1
illustration of how the direct assignment and allocation
2
works.
3
So if I look at the top, the first page, which shows
4
“Human resources” at the top, has a column on the right
5
that says "Direct Assignment," and I flip to the second
6
page.
7
got “Allocation.”
8
on the first page is because there was no direct
9
assignment, and the reason that it is filled in completely
I've got “Human resources” at the top, but now I've
The reason that human resources is blank
10
on the second page is because it was allocated using cost
11
drivers.
12
MR. GORMAN:
13
MS. CAMPBELL:
That's correct.
Okay.
You define “cost driver” on page
14
6 as being a formula for sharing the cost of an activity
15
among those who cause the costs to be incurred and that the
16
principles are also -- the principles involved in assigning
17
cost drivers are also on page 6 of your report.
18
19
20
Can you briefly explain the principles to me of
assigning the cost drivers?
MR. GORMAN:
Sure.
First we look for -- these are
21
principles which we apply in all of the cost allocation
22
engagements that we undertake.
23
almost universal.
24
principles.
25
caused this cost to be incurred.
26
for -- in many cases, it's a little bit difficult to say
27
what the cause is; it's a lot easier to look for benefits,
28
so we look for benefits.
They're fairly -- they're
I would say they're universal
We look for cost causation, meaning what
The second thing we look
70
1
And I think that we have an example.
Let's say you
2
want to have -- assign the costs of mailing your bills out.
3
If you know exactly how many bills you are going to mail
4
out, you would split those dollars up over the number of
5
bills that are being mailed out.
6
reason - and this is obviously just an illustration - you
7
didn't know how many bills you were mailing out but you
8
knew how much energy each person used.
9
Well, I don't have a cost driver, but I'm going to go to
But let's say for some
So you would say,
10
benefits, so I'm going to distribute those costs based on
11
the number of kWhs and the amount of energy or the benefit
12
each person used.
13
In some of the services that we're looking for now, it
14
is a kind of blurry line between cost and benefits.
But in
15
other words, you could say that an allocation is being
16
cost-based but it is also very closely aligned with what
17
the benefits received would be.
18
principles.
We do stick to those basic
19
Then we temper that in some cases with the
20
implementation principles; meaning we make sure the
21
information is reasonably easy to get and can be gotten in
22
a consistent manner.
23
We also look at stability; meaning if a cost driver
24
tends to fluctuate over the years, it's less preferable
25
than one which is -- you know, which tends to be relatively
26
stable over the years.
27
28
Those are the two main implementation principles that
we run into.
71
1
MS. CAMPBELL:
All right.
And if I look at table 3 on
2
page 7, I have a description of the types of cost drivers,
3
and they're broken into external and internal cost drivers.
4
If I go over to table 4, it shows direct assignments
5
and cost drivers used for the common corporate function and
6
services.
7
Now, step 7 is to find the appropriate drivers in cost
8
allocation.
9
them on the side of the page, I have down to myself.
10
Exhibit D lists the cost drivers, and it lists
So if I go to D1, I look -- I find headings that have
11
external -- show external driver values.
12
left-hand side, I can find out what the driver is.
13
find out physical drivers, financial drivers.
14
15
I can
On page 2, I've got drivers financial, which I
understand to be a blend --
16
MR. GORMAN:
17
MS. CAMPBELL:
18
If I look on the
Yes, that's correct.
-- of drivers.
So that is when one or
more -- two or more cost drivers are used.
19
MR. GORMAN:
20
MS. CAMPBELL:
21
internal cost drivers.
22
MR. GORMAN:
23
MS. CAMPBELL:
I apologize.
Yes, that's correct.
Okay.
Then on page 3, we've got the
Yes, that's correct.
All right.
Now, the next step in this
24
-- so that is step 7.
25
copulated your cost drivers, which I found fascinating
26
because I don't quite understand what that meant.
27
mean assigning a value to the cost drivers?
28
MR. GORMAN:
The next thing you did was you
Did that
Yes, that is exactly what it means.
72
1
MS. CAMPBELL:
2
that number arrived at?
3
MR. GORMAN:
4
MS. CAMPBELL:
5
That is exactly how it means.
Is it an algorithm?
How is
Is it magic?
It not magic.
Mr. Warren was hoping that some sort of
magic would be involved, to keep him awake.
6
MR. GORMAN:
For Mr. Warren, we can make it magic.
7
MR. WARREN:
Can you make me disappear?
8
MS. CAMPBELL:
9
10
11
12
Actually, that going sentiment is
shared on this side, Mr. Warren.
Could you briefly explain what copulated cost drivers
means and how it is done?
MR. GORMAN:
Sure.
For the physical ones, physical
13
cost drivers we see on page D1, we obtain the values from
14
the company, such as the number of full-time employees, the
15
number of telephones, the number of work stations, and
16
those were the physical ones.
17
We have another one which are listed as physical,
18
which is program project costs.
19
allocator.
20
on the transmission, distribution -- versus distribution
21
business by the Network Services Group.
22
report for the period ended December 31st, 2004.
23
that as an allocator for many of the work management types
24
of costs.
25
And this is an important
This is the amount of dollars that were spent
Go to the next page, the page D2.
We obtained that
We used
We see the
26
financial drivers.
Again, these were estimates -- these
27
are budgeted amounts.
28
the actual budget amounts that the company had used.
They weren't estimates.
They were
Some
73
1
2
of them are projections; some of them are actual.
For instance, the amount, budget amounts.
The first
3
one is budget amount of capital expenditures for 2005.
4
Well, that's the company's capital expenditure budget for
5
2005.
6
That's the source of all of these.
Some of them --
7
you see, XB, that is a driver without values allocated to
8
Brampton because in many -- in several cases, Brampton
9
didn't use a particular service.
10
11
So we just refined the
allocator to take out the Brampton piece of it.
Down at the bottom we see “Derived financial,” which
12
is, as Ms. Campbell, said the blended drivers.
13
used when we felt that there were two different elements
14
which were cost -- which had cost causality, were related
15
to the cost.
16
the driver -- would be better to have a blended driver than
17
simply to rely on one versus the other; we gave them a
18
50/50 weighting.
19
20
These were
We felt both of those should be reflected in
Those are simply the mathematical or algorithmic
results of the weights.
We took an average of the weights.
21
Finally, we have the internal drivers on page D3.
22
Internal drivers are used when you have – a good example is
23
you have a person that supervises the activities of a
24
number of people.
25
are doing, and then you say, Well, this person, his job is
26
to supervise those people, so we allocate his or her salary
27
or cost based upon what those people are actually doing.
28
So first you look at what those people
This is the one we would actually have to look inside
74
1
the model and see how do I know that this is the way it
2
goes, you have to add up -- either use a calculator or look
3
inside the model, we make sure that we added up the right
4
line numbers to do this.
5
when we had to.
6
study to a far lesser degree than we would typically, which
7
is a good thing because you want to do cost drivers and
8
direct assignment as much as possible.
We relied on internal allocators in this
9
MS. CAMPBELL:
10
accurate than internal?
11
MR. GORMAN:
So external cost drivers are more
It's better if you can put something
12
directly into a bucket.
13
the best.
14
We relied on internal allocators
The best -- direct assignment is
You know that something goes directly in there.
MS. CAMPBELL:
Right.
Then, from what I understood
15
following your sequence, then, that cost drivers are when
16
you can't quite be certain.
17
assignment.
18
MR. GORMAN:
19
MS. CAMPBELL:
You don't have a direct
You don't have the direct link.
You don’t have the direct link.
But it
20
struck me - perhaps I misunderstood what you were saying -
21
you were distinguishing between external and internal cost
22
drivers and that external cost drivers are more accurate
23
than internal cost drivers.
24
MR. GORMAN:
It's not that they're more accurate.
It
25
is just that they establish a relationship that is clear
26
for people to understand.
27
MS. CAMPBELL:
28
MR. GORMAN:
They're more precise?
External --
It's the result of a clearer
75
1
2
relationship.
MS. CAMPBELL:
Okay.
Then the internal, the derived
3
financial, which is the two or more cost drivers, is the
4
least precise?
5
6
MR. GORMAN:
That is the same as a financial cost
driver.
7
MS. CAMPBELL:
8
MR. GORMAN:
9
No.
Okay.
You have an activity.
The controller's
department is responsible for all of the books and records
10
of the corporation.
11
to the size of the business, the assets; and in some
12
respects that is related to the volume of business, the
13
revenue.
14
So you include both of those, and you make a blended
15
driver.
16
Now, in some respects that's related
You wouldn't really want to omit either of those.
MS. CAMPBELL:
All right.
Thank you.
So once you've
17
copulated your cost drivers, you go to task 9, which is to
18
compute the total cost of the functions and services
19
distributed to each business.
20
direct assignment or allocation.
21
This is done by either
You gave an example at the bottom of your report at
22
page 15.
23
-- it's the tax function/compliance activities.
24
What I would like to do is, first of all, using
So if I first go to Exhibit C, and I go to C5 and C6,
25
at the top of C5 is “Taxation, compliance activities
26
including tax filings and audits.”
27
direct assignment, which isn't surprising, given its
28
compliance activities including tax filings.
I see there is no
But if I turn
76
1
the page, I found that this was allocated.
2
If I look, I can see my cost drivers, and I can see
3
how the allocation to transmission and distribution,
4
transmission and distribution and others is done.
5
is done by an allocator.
6
So that
Then I look to D2 -- you refer -- sorry to confuse
7
you.
On page 15, walking through your example, you show
8
that the compliance activities including tax filings and
9
audits, 105,000, directly assigned to "Other".
12,319 was
10
allocated among business units, which is column H, using
11
the cost driver operation, maintenance, EXP, asset blend.
12
If I look at D2, I can see the 4.9 percent -- 4.96
13
percent that is allocated using that driver.
14
across, I can see it is 4.96 there.
15
16
So if I look across this line, I can see the result of
the cost driver in the division.
17
MR. GORMAN:
18
MS. CAMPBELL:
19
That's correct.
All right.
Now, the cost drivers --
let's talk a bit about how the cost drivers are developed.
20
The cost drivers are unique to Hydro One.
21
MR. GORMAN:
22
MS. CAMPBELL:
The values are unique to Hydro One, yes.
The cost drivers themselves, I counted
23
66.
24
are 66 cost drivers.
25
If I go
You can tell what I spent the weekend doing.
There
So you said the values are unique to Hydro One.
Is
26
it, based upon your experience, working with utilities,
27
these cost drivers are appropriate for a utility such as
28
Hydro One?
Is that what --
77
1
MR. GORMAN:
2
MS. CAMPBELL:
Yes, absolutely.
All right.
So there are many different
3
kinds of cost drivers, but the 66 you've come up with are
4
particularly suited to a company that has the sort of
5
business mix --
6
MR. GORMAN:
7
MS. CAMPBELL: -- that it has, given the fact it is
8
9
10
11
12
Yes.
also a regulated utility.
MR. GORMAN:
Right.
MS. CAMPBELL:
Because my understanding is Hydro One
is somewhat unique.
MR. O'BRIEN:
Normally, when you look at the cost
13
allocation of the process, you have, as we discussed
14
before, the umbrella.
15
there are different ones.
16
cost drivers that we could identify.
17
MS. CAMPBELL:
18
MR. O'BRIEN:
And as you come down under that,
There may be 100 to 200 overall
I see.
What you then try to do is say which
19
ones are most correctly identified with the business that
20
we're dealing with today.
21
MS. CAMPBELL:
22
MR. O'BRIEN:
I see.
For example, there is no need to
23
distribute the costs between states or provinces, because
24
there is no functions being performed outside of a
25
province.
26
identified by a state or province would not be used here.
27
You take that group of them out of the way.
28
So any of your cost drivers which would be
You may have substantial unregulated businesses, which
78
1
I believe Hydro One was looking at at some point in time.
2
You would have cost drivers, then, that may be associated
3
with those functions and activities.
4
They would go away.
The small set of "other businesses," Brampton Telecom
5
and remotes, are regulated to some extent.
I think Telecom
6
is still somewhat but not a lot.
7
So when you look at those, you start to eliminate various
8
cost drivers or blended drivers that you would have, and
9
you end up with the ones that are most appropriate to the
10
unit or operation that you are looking at.
11
when you see them coming down, the costs are unique to
12
Hydro One, because they're Hydro One's costs.
13
That is why,
The drivers you see here may be used exactly as they
14
are for other businesses.
15
be the same exact 66 applied to different numbers or they
16
may be 84, depending on what that business needed to
17
distribute its costs.
18
MS. CAMPBELL:
19
MR. BETTS:
The 66 at another business may
Thank you.
Just for clarity - I believe I am right,
20
then - in what you said, saying that the drivers may be
21
applicable to other utilities, but the values and
22
percentages would not be?
23
MR. O'BRIEN:
24
MR. BETTS:
25
MR. O'BRIEN:
That's correct.
Okay.
If you looked at the plant, for example,
26
Hydro One has recorded plant data that is recorded on its
27
books.
28
utility reports.
It's presented in its financial reports and its
Those drivers -- those amounts would be
79
1
used within the plant driver.
2
in Canada or if I go to utilities in the United States, we
3
may use that same driver.
4
probably one of the constant drivers you would see anywhere
5
because of the nature of the business, but the amounts
6
would be different, depending on how much transmission
7
plant you had, how much distribution, whether you had
8
generation, which are common factors, whether you leased
9
cars or whether you owned them, whether you leased
10
11
If I go to another utility
As a matter of fact, that's
buildings or whether you owned them.
So all of those would factor into the amount that goes
12
in and, therefore, the percentages derived, but the driver
13
-- when you start up at the top of that umbrella, the
14
driver is the same each utility claimed the service.
15
MR. VAN DUSEN:
If I could interject for just a
16
second, Madam Chair, just in terms of the question of the
17
change of cost allocation over time.
18
example.
19
Taxation is a good
In '02 through '05 taxation was considered one
20
activity.
21
interviewing, broke the activities down into a much finer
22
level of granularity.
23
Rudden people, when they did the detailed
In '02 and '03, there was a different driver than we
24
used in '04 and '05.
25
There were different drivers in '02 and '03 versus '04 and
26
'05, and now in '06 it is broken down into various
27
activities and other drivers apply.
28
MS. NOWINA:
So there has been several changes.
Thank you.
80
1
MS. CAMPBELL:
And the end result of everything that
2
we've just talked about shows up in Exhibit E.
3
drivers have gone away, but what we've got is the activity
4
costs distributed to the business units.
5
So it is broken out, but the cost drivers are gone.
6
All of the detail is gone.
7
our 32, broken down by activity and percentage.
8
9
So the cost
We've got this reduced down to
If we go to the very last page of your report, all of
that information has been reduced to one sheet.
10
got our 32 activities.
11
have our totals.
12
MR. GORMAN:
13
MR. O'BRIEN:
So we've
We've got our allocation, and we
That's right.
Yes, that's right.
Instead of saying not there anymore,
14
they're all encompassed in everything that derives these as
15
you build this model up.
16
my base, or you could look at it as the top of the
17
umbrella.
18
what you come to when you apply all of those processes.
19
This is what I would look at as
You take your base, you build it up, and this is
MS. CAMPBELL:
Okay.
So I want to talk about the
20
summary results now.
21
We've seen how this all works.
22
We've gone through the process.
Page 17 of your report, basically it gives a summary
23
of results.
24
you thought should happen on a going-forward basis, now
25
that you have created this allocation model for Hydro One.
26
I would like to review that with you.
27
28
When I was reading it, it suggested to me what
“Use of estimates,” there is a reference in there, the
second sentence in the first paragraph under the heading:
81
1
"Hydro One intends to assign to the business
2
units the actual dollar amounts developed using
3
this methodology."
4
So is it the intention that the methodology is now in
5
place, so on an annual basis the -- sorry, right here, what
6
we have are estimates for 2006.
7
2006 year, the actual numbers will be plugged in using the
8
methodology?
9
MR. O'BRIEN:
At the end of the fiscal
That is generally what you do when you
10
establish some of these cost-allocation processes.
11
order to enable the company to budget and operate, you
12
would do these based on budgets each year.
13
MS. CAMPBELL:
14
MR. O'BRIEN:
In
Okay.
And you would establish your overall
15
costs.
You would establish the process you were going to
16
distribute those costs, and you would implement that into
17
whatever budget process the company had in place.
18
At the end of the year, you now have actual costs.
19
MS. CAMPBELL:
20
MR. O'BRIEN:
Right.
And the idea is to:
One, review the
21
process to make sure there have been no significant
22
changes; and, if there have not been any significant
23
changes, you follow the same process to the actual costs
24
that you have going in.
25
Now, the numbers may differ.
You may have more or
26
less employees at the end of the year than you had
27
budgeted.
28
distribution, more transmission, depending on what happened
You may install more or less plant, more
82
1
during the year to actually run the business, which is the
2
most important factor.
3
Once you get those actual costs that are then
4
documented and reported, you then have the process that you
5
go through in order to get those costs assigned to the
6
correct businesses.
7
Normally there should not be any real big swings,
8
unless happened during the year that wasn't anticipated in
9
the company's budgeting process.
10
MS. CAMPBELL:
I see.
But the methodology is in
11
place, and it's going to be used on a going-forward basis,
12
tweaked as necessary if something alters in the business?
13
MR. O'BRIEN:
14
MS. CAMPBELL:
15
16
That would be correct.
All right.
There is a discussion in
the summary -MR. BETTS:
Sorry.
This was a question I would have
17
asked at the end, and you've posed it, and I want to make
18
sure I understand it clearly.
19
MS. CAMPBELL:
20
MR. BETTS:
21
22
Certainly.
It really is what happens going forward
and how the Rudden methodology is applied.
It seems to me, going through this exercise that Ms.
23
Campbell has given to us, that this is a snapshot of the
24
allocations at a point in time, or in a given year; is that
25
correct?
26
MR. GORMAN:
The methodology would be consistent.
You
27
could use this methodology in '06, '07, or going forward.
28
The numbers, of course, will change.
83
1
MR. BETTS:
2
that correctly.
3
numbers would change.
4
Okay.
Well, that -- then I did interpret
The methodology may be consistent, but the
At some point, I'm going to be asking the question of
5
how that will -- how that will be implemented, how that
6
change will be implemented in the next budget process.
7
don't know whether you're the witnesses that can answer
8
that or whether someone can take me to that.
9
MR. VAN DUSEN:
I believe I can help you, sir.
I
Yes.
10
As part of the annual business-planning process, we would
11
look to update much of the base information that would go
12
into the cost-allocation methodology.
13
When they took a look at the drivers that Mr. Gorman
14
took you through, we would have to update those drivers for
15
the current information, net book values, revenues, number
16
of desktops, et cetera.
17
updated.
18
All of that information can be
In addition, in any given business-planning process,
19
there would be new costs as well.
20
function may go up or down, so you have a new cost to
21
allocate.
22
The cost of finance
So there would be also the time studies, all of the
23
base information.
We would have each of the common and
24
function service leaders review their time study that they
25
have provided and say, This still is representative of how
26
my business works and how those costs should be allocated.
27
All of those items would be undertaken on an annual basis
28
internally.
84
1
2
MR. BETTS:
Including a change in activities, if there
was more spending in transmission versus --
3
MR. VAN DUSEN:
4
MR. O'BRIEN:
Correct.
Actually, the normal process that I have
5
seen implemented at Citizens, when I was there, and at
6
other companies where you go through this process:
7
have your business planning process take a look at your
8
activities within your group to support the amount of costs
9
you're going to have for that next business planning unit.
10
You
They go through and say, Okay, that is fairly
11
comparable to what we had.
12
one or two groups that have whole new functions or have
13
eliminated functions that they're performing.
14
cases, they would have to sit down and, again, to support
15
their budget, they would have to come up with the reasons
16
for changes from what they had before.
17
They update it.
There may be
In those
Those are then used as your basis going forward for
18
that 2007 year.
Your budget process is finished.
Those
19
are implemented.
20
actual costs.
21
would then come back and say, Okay, has anything really
22
changed?
23
when they started the process, and you would get your
24
allocators.
When the 2007 is finished, you get your
The people responsible for the distribution
They would look at it for reasonableness from
25
So in this way, the system is reviewed almost annually
26
when you do your budgeting process to see what changes need
27
to be made.
28
overview of the process to see, Maybe we can get more
You look every three to five years at an
85
1
direct changes out of this group now because changes have
2
been made, or we can get less direct changes out of this
3
group and have to use more allocators, again, because of
4
changes in the business operation.
5
MR. BETTS:
And would that process of update be
6
completely internal, or would, at some point, the Rudden
7
Group or some other group be invited back?
8
MR. O'BRIEN:
What I've seen is it is mostly internal.
9
When you get to a three- to five-year period of time from
10
when you implemented the first process, we brought people
11
in from other groups within Citizens; we were a stand-alone
12
operating unit, but we brought other people in to look at
13
it and to make sure we were doing it okay.
14
It was also reviewed by our corporate auditors to make
15
sure we were getting the correct charges going into the
16
correct states and going into the correct business units.
17
Some of them were used in the audit profile; some of them
18
they did not.
19
Having it reviewed by multiple regulatory agency was
20
also helpful.
To keep consistency through each one of the
21
states, one of the things that we did not want to do there,
22
which is slightly different than here, but you have
23
transmission distribution as well as the other small
24
entities.
You don't want to have two different procedures
25
in place.
Understanding the numbers will change, but you
26
don't want two different procedures in place, because you
27
may allocate 80 percent to one, 15 percent to the other,
28
and then all of a sudden in those two things the company is
86
1
short 5 percent or 85 and 20 and the company is over 5
2
percent.
3
Keeping the process similar between each one of the
4
businesses each time you go to review it was very important
5
where we were operating in 10 to 15 states.
6
important here, but much fewer numbers that you're looking
7
at.
8
9
10
11
MR. BETTS:
It's as
Mr. Van Dusen, is that your understanding
of how the corporation would deal with changes in the
future?
MR. VAN DUSEN:
I can honestly say we haven't
12
specifically talked about the longer term.
13
on an annual basis, do an update of the basic drivers and
14
the basic information.
15
frequency with which we would do the type of review that
16
Mr. O'Brien talked about.
17
haven't discussed the frequency with my superiors at this
18
point in time.
19
20
21
MR. BETTS:
We intend to,
We haven't talked about the
Thank you.
We do intend to do it, I just
Sorry to interrupt,
Ms. Campbell.
MS. CAMPBELL:
Oh, no, that is actually -- if we go
22
through the two pages, some of what you've raised is
23
actually touched on in these pages.
24
What I really wanted to do was talk about it on a
25
going-forward basis, because there are various steps that
26
are set out by Rudden and some of my questions had to do
27
with what Hydro One plans on doing with those.
28
some of them, but not all of them, so I am just going to
You covered
87
1
march through so that we can get as much information as we
2
can from both Mr. Van Dusen and Mr. Gorman and Mr. O'Brien
3
on what should be done and what will be done.
4
So one of the things that I was talking about or was
5
referencing in your report, we talked about assigning the
6
actual dollar amounts.
7
If I go down to "absorption of overage and underage."
8
And I have to tell you last time I was reading that as
9
“over age and under age,” and I thought it would be much
10
more exciting, but it was still interesting though,
11
Mr. Warren.
12
This talks about –-
13
MR. WARREN:
14
that the reason?
15
MS. CAMPBELL:
Is that because you were in a bar?
Oh, Mr. Warren, really.
16
has taken such a huge hit by that.
17
on.
Is
My self-esteem
I may not be able to go
18
Now, so we're talking about -- in this paragraph, you
19
talk about the fact that when estimates are used to assign
20
the cost, the recommended methodology causes two types of
21
variance.
22
It talks about total costs distributed will likely
23
differ from actual amounts occurred, and that this
24
difference must be recognized in the financial statements
25
to avoid an under or over-absorption because the costs are
26
period costs and should be reflected in the period
27
incurred.
28
The second variance, you say, is the amounts
88
1
distributed to the business units most likely will differ
2
from the amounts computed using actual dollar amounts and
3
actual cost drivers.
4
charged or credited to the appropriate business unit as an
5
end-of-year adjustment.
You recommend that the differences be
6
I think, Mr. Van Dusen, you were talking about the
7
fact that you haven't quite -- you know it will be reviewed
8
annually.
9
Rudden group alert them to this, to take the steps that are
Is it Hydro One's intention, having had the
10
outlined in there, to ensure that these variances are
11
tracked accordingly and trued-up, so to speak?
12
MR. VAN DUSEN:
Yes.
Hydro One intends to adopt this
13
recommendation of the study.
14
is the exact way we will do it.
15
What I can't tell you exactly
Timing is a bit of an issue, in terms of when you --
16
when do you know the information?
You know the information
17
after the year is over and sometimes after the books are
18
closed.
19
the best way to implement this recommendation specifically.
20
So I don't have exactly how we're going to do it, but, yes,
21
there will be some form of a true-up consistent with the
22
direction provided here.
23
MS. CAMPBELL:
So we're going to have to take a look at what is
There is a recommendation on page 18.
24
There is a list of, carrying on at the top of page 19,
25
updates.
26
updating the information in the costs distribution model.
27
It has a list of things that should be updated.
28
In the report, it is a recommended schedule for
Mr. O'Brien, you touched on some of them in the
89
1
response you gave to Mr. Betts, but there are a few more.
2
The first one is budgeted costs.
3
annually.”
4
It says:
“Update
Then it says:
5
“Time estimates, review annually or when there
6
are significant changes in the business.
7
a formal time study, as was done for this report
8
every three to five years.”
9
Now, just pausing there.
Conduct
The formal time study that
10
is referred to - we're going to get to asset management
11
where there was a time study - is that the formal time
12
study that is referred to under "time estimates"?
13
MR. O'BRIEN:
No.
What I'm referring to, what we're
14
referring to there is the meetings with the department
15
heads, the time that they estimated their people would
16
spend on the various activities.
17
reviewed annually, but there should be a more intensive
18
review every three to five years to make sure that there
19
hasn't been any significant change.
20
Those are going to be
We found this was beneficial in ones that I have done
21
before, because people would normally say, Yeah, it's the
22
same as last year.
23
MS. CAMPBELL:
24
MR. O'BRIEN:
All right.
When you do a little more intensive one,
25
you find out there have been changes.
They normally don't
26
change the results significantly, but they do keep things
27
current so you don't get into a situation where you've gone
28
four to five years and find there have been significant
90
1
changes.
2
through.
3
4
5
6
Those changes are made gradually as you go
MS. CAMPBELL:
is it is probably better to review it annually?
MR. O'BRIEN:
You always review it annually because
there could be significant changes.
7
MS. CAMPBELL:
8
MR. O'BRIEN:
9
MS. CAMPBELL:
10
So in other words, what you're saying
MR. O'BRIEN:
I see.
But -Sorry.
You would not go as in-depth as you
11
would on a periodic basis just to make sure you do have
12
integrity to your numbers.
13
department heads are familiar with what is happening, are
14
seeing changes.
15
allocation process are also aware of what's going on.
16
But annually most of the
And most of the people in charge of the
So as you go through the annual budgeting process, the
17
year-end true-ups, you're going to have a pretty good idea
18
of where changes should be made or where changes should be
19
looked for.
20
When you do that one year and you do it a second year,
21
by the time you get to the third year there may be enough
22
activities or changes where you say, I want to do a more
23
in-depth look at it; Rather than simply relying on Bob
24
O'Brien to give me what he's saying, I may want to go a
25
little more in-depth there.
26
What I found is you can do that in year 3 with a third
27
of the group, in year 4 with another third, in year five
28
with another third, so that you get an active grouping like
91
1
2
that.
That procedure may not be right for every company and
3
it may be good to do it at one time because of the
4
interactions in the group, but that would be company
5
specific as you would look at how you updated.
6
MS. CAMPBELL:
All right.
Mr. Van Dusen, is it the
7
intention of Hydro One to undertake steps similar to those
8
described by Mr. O'Brien?
9
MR. VAN DUSEN:
Yes, it is.
In fact, I can assure the
10
Board almost as we're speaking all the common service
11
leaders are being sent out their time study from the
12
information filed in this and asked to take a look at it
13
and update it where necessary, so yes.
14
Then the -- in terms of the detailed review every
15
three to five years, yes, we intend to do.
16
landed on whether it is every three or four or five or, as
17
Mr. O’Brien said, is a third, a third, a third.
18
the type of detail we’re still discussing.
19
MS. CAMPBELL:
Thank you.
That’s
There is then a heading
20
that says “Physical cost drivers.”
21
to update cost drivers.
22
We haven't
It talks about the need
The first thing, the first heading is “Asset
23
management.”
We're going to get to asset management, which
24
has a time study which took place over a four-year period
25
-- or four-week period.
26
updating and whether it was done in 2005.
27
like to do is just hold that question until we do asset
28
management, but I would just like to get through the rest
There is a question concerning
What I would
92
1
of this.
2
It suggested that the call centre be updated annually
3
and that the facilities, the FTEs invoices to vendors, all
4
bills to customer, telephones, work stations, that the
5
actual data and the estimates be updated annually.
6
Similarly for program project costs, it should be updated
7
annually.
8
There is a note that the cost distribution -- that when the
9
cost distribution model is run mid-year for management
10
purposes, the data should probably be reviewed and updated
11
using the most recent estimates, because it is used in so
12
many calculations.
13
annually and work sheet FTEs updated annually.
14
Retail bills are to be confirmed
Again, Mr. Van Dusen, is it Hydro One's intention to
15
follow through on these recommendations for updates and
16
confirmations of accuracy?
17
MR. VAN DUSEN:
18
MS. CAMPBELL:
Yes, it is.
There is then a recommendation
19
concerning financial drivers, and there are just three of
20
those listed and three recommendations.
21
The accounting data indicates that the report used the
22
2005 budgeted data, and then when it was -- the 2006 budget
23
data is available, it should be compared to the values used
24
and true-ups should be made using the 2006 actual data -
25
there has been reference to that already - and that the
26
values should be updated annually.
27
28
I think, Mr. Van Dusen, you have already indicated
that that is something that will be happening or is
93
1
happening?
2
MR. VAN DUSEN:
3
MS. CAMPBELL:
4
Yes, it is.
Thank you.
Then the CDM plan, it is
noted:
5
"The CDM plan on which the cost driver is based
6
covers spending through 2007.
7
estimates should be used through that period.
8
the planner expected cost changes, it may be
9
prudent to consider changing the cost driver."
10
11
As a result, the
If
There is then a note that the effect would be very
small.
12
When I read that, Mr. O'Brien, I don't -- what I see
13
there is that you should use estimates through to the end
14
of 2007?
15
MR. O'BRIEN:
16
MS. CAMPBELL:
17
MR. O'BRIEN:
It would be on that particular item.
On that -But if those estimates are going to
18
change, as with any other one, you would want to make sure
19
that you change it as your estimates change.
20
at the labour or the physical cost drivers, any cost
21
driver, the object is to get them as close and as accurate
22
to the time you're distributing your costs.
23
When you look
So if you were to look at cost changing on a monthly
24
basis, you may want to say, Hey, I want to update that
25
particular driver monthly.
26
the company to do in hours and everything else and may not
27
provide any substantial benefit.
28
That may become very costly to
So when you look at changing things annually or
94
1
maintain them for the life of the project, you would want
2
to say, Life of the project in that instance makes sense to
3
me.
4
At that point in time, I'm going to do that.
However, if Mr. Gorman comes in in the middle of '06
5
and says, I've got to change this, we would not want to
6
keep using that project if it is -- that allocator if it is
7
going to change significantly based on something that
8
happens at that time that we can't foresee now.
9
So you leave that open to it.
And with any change
10
that you make, normally what happens is if the Board were
11
to say, This is a good process, you use it as you go
12
through, and Hydro One comes back in three years or so and
13
they have made some changes due to ongoing changes in the
14
business, those would be documented as to why you made the
15
change and why it is still consistent with the overall
16
process and methodology, but the change does reflect new or
17
different events that have taken place, business
18
opportunities or actions that were implemented.
19
MS. CAMPBELL:
Thank you.
And the last heading on
20
this end of the report concerning the common corporate
21
functions and services is entitled "Market Ready".
22
says:
23
spending.”
24
Dusen, you indicated that is going to occur.
It
“Forecast costs should be compared to actual
I think we have already covered that.
25
MR. VAN DUSEN:
26
MS. CAMPBELL:
Mr. Van
Yes.
Can I ask you, Mr. Van Dusen:
Are you
27
the one at Hydro One who is charged with overseeing the
28
methodology and making sure that the drivers remain up to
95
1
date and doing all of the other things that we have been
2
discussing?
3
MR. VAN DUSEN:
4
MS. CAMPBELL:
Yes, it is.
All right, thank you.
So there is
5
going to be, on the part of Hydro One, a focus upon making
6
sure that the methodology remains current and accurate?
7
MR. VAN DUSEN:
8
MS. CAMPBELL:
9
Yes, there is.
Mr. O'Brien, with regard to the
methodology, just in general, on a going-forward basis do
10
you anticipate -- I'm assuming, from what you said, this is
11
best practices methodologies for utility, such as Hydro
12
One, with its mix of businesses.
13
Can you anticipate, based upon your experience, or,
14
Mr. Gorman, based on yours, any significant changes in
15
methodology that would occur over the next several years,
16
or can we basically rely upon this methodology as being
17
something that will continue to be a best practices
18
methodology?
19
MR. O'BRIEN:
The methodology, I think, will remain
20
relatively stable.
21
overall methodology where you start out with defining what
22
the company does, how it does it, what it spends to do it,
23
and then identify the direct costs and the direct
24
allocators or general allocators you need to best
25
distribute that to the entity's business units that are
26
going to be charged.
27
28
I don't see any basic change in the
That process is basically in place.
place for a long time.
It has been in
It is a basic cost accounting
96
1
2
3
problem.
MS. CAMPBELL:
So there will be consistency in the
methodology from --
4
MR. O'BRIEN:
5
MS. CAMPBELL:
I would think so.
If they use this on a going-forward
6
basis, the next time Hydro One comes before this Board,
7
there will be consistent allocation between distribution
8
and transmission and the others, because this methodology
9
will assist in keeping that allocation consistent?
10
MR. O'BRIEN:
That would be our recommendation, that
11
if the company does adopt this and feels that it is
12
beneficial to it, which I think it does, as Mr. Van Dusen
13
has testified, and the Board says, We think this allocation
14
process is a reasonable process going through, it should be
15
used.
16
appropriate as you go through, it gives the company a basis
17
on which to distribute its costs.
18
Then any -- and the allocators appear to be
If the company were to, because of some unforeseen
19
change in 2008 where there is a need to charge an expense a
20
different way -- maybe we used a direct plant allocator,
21
gross plant, and for some reason it is determined that a
22
net plant allocator would be better to use for that cost.
23
I would think that if there is an approved method, the
24
company would come in to get that changed or validate its
25
reasons for changing.
26
And in my experience, I've done that in several
27
instances where things have changed, such as deregulation
28
of the telecommunications industry, some re-regulation of
97
1
the electric industry, where you had different functions
2
being performed and different needs for allocation of
3
costs.
4
So once the process has been approved, the burden
5
becomes on the utility when it wants to modify that
6
significantly.
7
and forth, distributing the costs in slightly different
8
ways, because business has changed, but any significant
9
ones should then be part of its next process coming back in
10
11
12
13
There will be annual changes that go back
for review by the Board.
MS. CAMPBELL:
Thank you.
What I would like to move
to now is asset management.
When we started this process, what I'm sure Mr. Warren
14
feels like was weeks ago, we were starting at C1, tab 6,
15
schedule 1, which is an overview of the common corporate
16
costs -- cost-allocation methodology.
17
We looked on page 4 at a table, and that was the
18
allocation to transmission, distribution and other.
There
19
is a paragraph that starts at line 14 that deals with asset
20
management, operating and customer care management costs.
21
Parts of your study, a page and a half of your study, is
22
devoted to that, pages 20 to 21.
23
In this paragraph, it says that the allocation of
24
those three, asset management, operating, and customer care
25
management, were allocated based upon a time study.
26
When I flip the page, I go to table 2.
There is an
27
asset management cost allocation, table 2, which is broken
28
down between operators and non-operators.
The
98
1
non-operators are customer care management and asset
2
management.
3
There is a third table, which is asset management cost
4
allocation, and that is on the following page, which is
5
page 6.
6
So there are a total of three tables that relate to
7
asset management.
8
management, operating and customer care management.
9
is table 1, 2 and 3, and they're on pages 4, 5 and 6 of C1,
10
11
It is table 1 -- sorry, asset
There
tab 6, schedule 1.
Now, if I go to your report, page 20, as I already
12
stated, this is the section that reports on asset
13
management.
14
the part of the pre-filed evidence that states that the
15
allocation of asset management, operating and customer care
16
management costs were based on a time study.
17
see any reference in the text of your report to either
18
operating or customer care management costs specifically.
19
Am I correct, though, that this portion of your report does
20
reference that paragraph that suggests that all three of
21
those groupings were covered in your report?
I just want some clarification.
22
[Witness panel confers]
23
MR. GORMAN:
24
MS. CAMPBELL:
I read to you
But I don't
Yes, that's correct.
Okay.
Thank you very much.
Now just
25
looking at page 20, it describes the asset management
26
group.
27
28
The seconds paragraph states that:
“Hydro One determined the portion of asset
99
1
management costs devoted to capital projects by
2
performing a time study for these personnel for
3
the four-week period ending December 19th, 2004.”
4
And it goes on to state that:
5
“Asset management personnel are able to
6
determine, with reasonable accuracy on a current
7
basis the time they spent on distribution,
8
operations and maintenance, distribution capital
9
projects, transmission operations and
10
maintenance, and transmission capital projects.”
11
You said the reason it is easier is because the
12
projects on which they work are much more clearly defined
13
than the common corporate functions and services that we
14
just spent a very long time discussing.
15
It is indicated that the study was actually set up by
16
Hydro One and that Rudden reviewed time study method and
17
found it to be appropriate.
18
that the time study was undertaken, or is this something
19
Hydro One had already started and you came in and reviewed
20
on an after basis?
21
22
23
24
MR. GORMAN:
Was it Rudden's suggestion
Hydro One performed the time study in
March of the prior year.
MS. CAMPBELL:
So in March 2003 they performed a time
study.
25
MR. GORMAN:
26
MS. CAMPBELL:
I believe that is a correct reference.
27
management?
28
or something else?
All right.
Concerning asset
Concerning the subject matter they were on now
100
1
MR. GORMAN:
Concerning asset management.
2
MR. VAN DUSEN:
3
MS. CAMPBELL:
Same subject matter.
All right.
So you had already -- was
4
it a four-week study, Mr. Van Dusen, so it mimicked the one
5
we're about to discuss?
6
MR. VAN DUSEN:
7
8
9
10
frame.
It was in the same time
It wasn't very much different.
MS. CAMPBELL:
Okay, thank you.
Hydro One had
undertaken that on its own initiative, obviously, because
Rudden hadn't been retained at the time.
11
MR. VAN DUSEN:
12
MS. CAMPBELL:
13
study in December?
14
I believe so.
MR. GORMAN:
That's correct.
Whose idea was it to do the four-week
Was it suggested by Rudden?
We conferred with Mr. Van Dusen and some
15
of his colleagues and they asked us if we thought it was
16
necessary, and so they surfaced the idea, and we said, Yes,
17
we think it is a good idea to refresh that time study at
18
this point in time for the reason that it is always a good
19
idea to have fresher information when you can, when it is
20
reasonable to do it.
21
different times of the year, and we thought it was a good
22
idea to test the concept that those allocation percentages
23
remained relatively stable over the course of a year.
24
was, in fact, as a result of the time study.
25
26
MS. CAMPBELL:
And also they were taking at
All right.
That
Do you have any information
on why that -- those four weeks were chosen?
27
Mr. Van Dusen, could you answer that?
28
MR. VAN DUSEN:
I don't believe there is any
101
1
particular magic about those particular four weeks.
2
believe we had engaged R.J. Rudden in the fall of '04.
3
when we brought the old time study forward and suggested we
4
update it, I think the timing was just that we could do
5
those four weeks.
6
MS. CAMPBELL:
Thank you.
I
And
In the second-last
7
paragraph under "Asset management," it is stated, the third
8
sentence:
9
“It was not practical to perform a full-year
10
study, but any effects of performing the study
11
over four weeks instead of a full year are
12
believed to be minimal.
13
Rudden reviewed the prior asset management
14
study ...”
To support this judgment
15
That is the one in March of 2003, Mr. Van Dusen.
16
MR. VAN DUSEN:
17
MS. CAMPBELL:
18
19
“... performed by Hydro One and found
the results were similar.”
Just picking up on the “not practical to perform a
20
full-year study.”
21
study?
22
That's correct.
MR. GORMAN:
Is it preferable to perform a full-year
I don't think that you would get a
23
difference in when you can't -- when you have information
24
that you can obtain in a reasonable manner over four weeks
25
and you have a strong feeling that it is going to be the
26
same as the information you get over a full year, I think
27
it is preferable to burden people less and to do -- get as
28
much information as you can without devoting the resources
102
1
and the effort to doing it over a full year.
2
case, I think it is fair to say that everybody was better
3
served by having a reliable four-week study.
4
MS. NOWINA:
So in this
Mr. Gorman, can I ask a question on that?
5
So your study was done in December, ending December 19th.
6
The earlier study was done in March; is that correct?
7
MR. VAN DUSEN:
8
MR. GORMAN:
9
MR. VAN DUSEN:
10
MS. NOWINA:
March of the --
I believe it was March '03.
March '03.
Both of those are winter periods?
Do you
11
not have any expectation that there is some seasonality
12
around this work and that if you had done a study covering
13
a summer period, you might come up with different results?
14
MR. VAN DUSEN:
I guess Hydro One doesn't feel that
15
the nature of the activities undertaken by the asset
16
management organization pertain to any large seasonal
17
shifts.
18
They are a planning organization.
Mr. Carlton was here earlier talking about the
19
functions performed by the various units.
20
business integration does a lot of planning and reporting
21
on the detailed OM&A capital, which doesn't have a lot of
22
seasonality, maybe a little extra work load at the year-
23
end.
24
performed by these groups were fairly generic and common
25
throughout the year.
26
MS. NOWINA:
27
MS. CAMPBELL:
28
A lot of it,
But generally speaking, we thought the activities
All right.
Thank you.
Just related to that, there is an
interrogatory, H1, schedule 98.
You don't need to turn it
103
1
up.
2
questions that relate to this, Mr. Van Dusen.
3
It is a one-sentence answer.
The question was:
But just I have some
During the time study, was the
4
level of capital activity, planning or spending considered
5
normal during the four-week test period, or were there any
6
unusually large projects, or were there no unusually large
7
projects?
8
occurred during a time when the level of activity was
9
considered normal.
10
The response was:
The time of the study
Were there ongoing capital projects at that time that
11
were -- that would have affected that answer?
12
says “normal activity,” but there is still -- I was unable
13
to find in the pre-filed evidence anything that assisted me
14
in understanding the capital expenditure programs that were
15
underway during that week, where I would find the numbers
16
so that I can have the comfort from the evidence that, in
17
fact, there is nothing, no volatility, no unusual
18
expenditures in that time period.
19
MR. VAN DUSEN:
Because it
I think what one has to do is take a
20
look at the activities that the whole asset management
21
group is undertaking, the fact that there were capital
22
projects underway at that time.
23
underway in our company virtually 12 months of the year,
24
weather permitting.
25
MS. CAMPBELL:
26
MR. VAN DUSEN:
There are capital projects
Right.
I think what one has to take a look at
27
is the full activities of the group.
The group business
28
integration which does planning and reporting would not
104
1
necessarily be over-influenced by high-level capital
2
activity in the field or not.
3
activity for senior management and giving variance
4
explanations.
5
on variance explanations if there were many projects
6
ongoing that they wish to keep senior management advised
7
of.
8
9
They’re reporting on that
They might have a little bit more work to do
Engineers who are developing asset strategies, which
is also another function in asset management, their work on
10
asset strategies would not necessarily be tied to the
11
specific activities undergoing in that four weeks.
12
Engineers who are developing next year's programs, in
13
either station maintenance or in one of the other major
14
areas, wouldn't necessarily be over-influenced by the
15
amount of activity going on in the field during that period
16
of time.
17
So there are a few small pockets that would have minor
18
impacts of the amount of activity in the field, but it is
19
very few and a very minor impact.
20
basically a planning and strategy and reporting group.
21
summarizing Mr. Carlton's testimony, maybe a little
22
unfairly, but that is what that group does.
23
MS. NOWINA:
put the other side of it on.
25
manage capital projects?
26
MR. VAN DUSEN:
28
Then this group does not
The actual management of the capital
projects is in the field organization.
MS. NOWINA:
I'm
Just to summarize, Mr. Van Dusen, or to
24
27
This is a planning --
Right.
Thank you.
105
1
MS. CAMPBELL:
Finishing off on asset management --
2
sorry, I lost my place briefly.
3
management, you found the time study to be a proper basis
4
for assigning the asset management costs between
5
transmission distribution and the business units.
6
Finishing off on asset
If I turn the page to page 21, you've got table 7,
7
which is the asset management time study, and you have it
8
split between operation and maintenance and capital
9
projects, then distribution, again, operation, maintenance,
10
capital projects, and then a total.
11
asset management and customer care management?
12
13
MR. VAN DUSEN:
Yes, in some of the staff in the
facilities group as well.
14
MS. CAMPBELL:
15
MR. VAN DUSEN:
16
the system.
17
MS. CAMPBELL:
18
And non-operators are
Operators are operations?
Okay.
Yes, yes.
Day-to-day operations of
Thank you.
Now I have some -- I want to get into some specific
19
questions, but, first of all, I would like to get some
20
definitions, because we've used various different terms.
21
We've used “cost studies.”
22
We've had -- at times I've been a little bit confused about
23
how we define some of these things.
24
want to talk about is precision.
We've used “time studies.”
One of the things I
25
I've got -- when I reviewed what was done, I noticed
26
there was a reference to time studies, cost studies, time
27
records, interviews with personnel, interviews with
28
managers.
Do the interviews with personnel and interviews
106
1
with managers fit under “time study,” or do we mean
2
something else when we see “time study” referred to in your
3
report?
4
MR. O'BRIEN:
As we used them, they would fit under
5
the time study category, because you're going to determine
6
what time is being spent on the various activities.
7
can do it by having people keep time reports.
8
it by having people summarize the work that they've done
9
and the time they have spent.
You
You can do
You can have -- you can do
10
that by having the managers or supervisors within the group
11
put down estimates of the time spent for the activities.
12
So all of those activities would fall under the time study
13
umbrella.
14
15
MS. CAMPBELL:
individuals?
16
MR. O'BRIEN:
17
MS. CAMPBELL:
18
MR. O'BRIEN:
19
20
21
22
So time reports kept by the
Correct.
Then managers giving estimates?
Managers and/or their supervisors and
employees providing the estimates.
MS. CAMPBELL:
All right.
A cost study, what is a
cost study?
MR. O'BRIEN:
In the broad sense, a cost study is to
23
determine what your overall costs are for operating the
24
business.
25
separate those costs into the various buckets.
26
That is your beginning point to distribute or
So as I look at a cost study - and these sometimes
27
have different definitions - a cost study is when you are
28
going in and you're determining the overall cost of the
107
1
operation that you're then going to distribute into its
2
appropriate categories to be then distributed to its
3
appropriate business units.
4
MS. CAMPBELL:
Okay.
I'm now going to make reference
5
to Interrogatory 107, which is H1, schedule 107.
6
questions concerning the Rudden report and methods used to
7
obtain the information, which has to do with different
8
things, time records, interviews, estimates, et cetera.
9
That's H1, 107.
10
11
12
13
It has
There are three parts to this interrogatory.
The
first one -MR. ROGERS:
Hold it.
Do you have the exhibit,
gentlemen?
14
MR. GORMAN:
15
MS. CAMPBELL:
Yes, we do.
Okay.
The first question was:
Of the
16
time estimates gathered from Hydro One management, what
17
percentage of the activity time allocation described was
18
based on time records and what percentage relied on the
19
judgment of the managers?
20
The reference to that is the statement "to distribute
21
budgeted labour costs, Rudden interviewed the Hydro One
22
manager responsible."
23
the manager estimated the portion of annual time.
We reviewed this this morning, and
24
So the question is:
25
response was as follows:
How does that break down?
The
26
"The Rudden report identifies the three methods
27
used to obtain the information, concurrent time
28
records ..."
108
1
When you say “concurrent time records,” are you
2
talking about time sheets that the individual employee
3
keeps at their desk?
4
MR. O'BRIEN:
5
MS. CAMPBELL:
6
like that.
Or done weekly or biweekly or something
So it is an employee record?
7
MR. O'BRIEN:
8
MS. CAMPBELL:
9
That's correct.
Correct.
And would you agree that it is one of
the most accurate measures, because it is kept
10
contemporaneously or relatively contemporaneously?
11
people are not as good keeping theirs as others.
12
MR. GORMAN:
13
MS. CAMPBELL:
Some
Exactly.
But suppose you had to do it every two
14
weeks.
15
of the year, Tell me everything you did in 2006 and who you
16
did it for.
17
It is still better than somebody saying at the end
MR. O'BRIEN:
That is true -- I don't want to say most
18
of the time, but some of the time that is accurate.
19
Because I found when you were getting people who had not
20
been used to keeping time reports to start keeping time
21
reports, they felt the obligation to make sure all of their
22
time was charged, that someone was going to be looking at
23
it, and they would put time down and -- on those reports
24
just to have the time put down, which isn't the right
25
thing.
26
review process you have in place.
It goes with the process that you put in and what
27
MS. CAMPBELL:
28
MR. O'BRIEN:
Okay.
So if you preface your question by, that
109
1
the people were informed as to what the reason was, the
2
people were diligent in following through and their records
3
were reviewed, yes, I would agree that would be the most
4
accurate.
5
I also found it to be the least accurate when people
6
were asked to provide work product for what they had on
7
their time sheets.
8
MS. CAMPBELL:
9
Oh, all right.
But if you had a
process in place that made it clear to those who were to
10
keep the time record, whether it is a daily time sheet or
11
weekly or a biweekly, if you said, What we're trying to do
12
is figure out what portion of your work was done for which
13
of these six business units, would that be -- could that be
14
done?
15
Would that be a fairly accurate indicator?
MR. O'BRIEN:
It we depend on -- it would be a more
16
accurate indicator than doing it at a later time, if the
17
activities they were performing could easily be fit into
18
those buckets.
19
MS. CAMPBELL:
I appreciate that.
That's always a
20
prerequisite to this sort of thing, because some don't fit
21
easily into buckets.
22
MR. O'BRIEN:
What I found in my experience when we
23
were doing this is we implemented these time reporting
24
processes around the various entities and around the
25
various operations groups that were later formed as
26
Citizens changed its business structure, that we ended up
27
with anywhere from 50 to 90 percent time going in the
28
general category because people did not want to get
110
1
specific as to what they were doing and it was much easier
2
for these people just to put it in "general" because they
3
knew general was going to be allocated by what was referred
4
to as a four-factor formula, including plant and personnel
5
and expenses, and they felt, Hey, that was better than my
6
charging so much time over to this one unit, and somebody
7
is going to come back and ask me, and there is some benefit
8
to somebody else, so I will just put it in general.
9
10
As an overall premise, having periodic time-reporting
processes is a better thing to have.
11
MS. CAMPBELL:
12
MR. O'BRIEN:
Okay.
Once you get by that, you then say, Who
13
is it better to implement it with?
In other words, what
14
functions are best to have that?
15
function -- in my experience, the legal function, the
16
regulatory function is a little easier to do it than it is
17
with the accounting function or some of the other processes
18
that start to get broader as you look at the benefits.
19
Then you come back.
Some, like the legal
20
So starting out at a small area gives you a way to do
21
it, and also then allows you to go to a more sophisticated
22
time-reporting system.
23
systems where unless you tell me something different, your
24
time is charged in this manner.
25
Some become default time-reporting
Doing something like that requires a payroll system to
26
handle it, which again gets into a cost that might not be
27
prudent for the company to incur.
28
MS. CAMPBELL:
Okay.
So, generally speaking, what we
111
1
can say is concurrent time records, provided that they are
2
crafted in a way that is responsive to the specific
3
business that's being measured or business activity that is
4
being measured and is tailored for that particular group --
5
we're not talking about in general, but for distribution;
6
for example, or transmission or Brampton One, those can be
7
very useful in capturing a picture of how time is spent?
8
MR. O'BRIEN:
9
MS. CAMPBELL:
That would be correct.
Then carrying on to 107, continuing,
10
there were three methods we used to -- you used to obtain
11
the information.
12
concurrent time records.
13
personnel that perform activities and management estimates.
14
There is a note that a combination of interviews with
15
personnel and management estimates was used.
16
We just had a lengthy discussion about
The other two are interviews with
If I flip over, there is a chart, and it shows that
17
concurrent time records were used 4.4 percent of the time,
18
interviews with personnel were used 15.7 percent of the
19
time, a mixture of interviews with personnel and management
20
estimates were used 25.2 percent of the time, and
21
management estimates were used 54.7 percent of the time.
22
One of the things that struck me when I looked at this
23
was that, my first thought - I'm sure you'll correct me if
24
I'm wrong - is that was in descending order, what I thought
25
was descending order of certainty, interviews with
26
personnel and management estimates.
27
incorrect if I think that interviews with personnel are
28
more accurate than management estimates?
Am I correct or
112
1
MR. O'BRIEN:
Again, I think it would depend on the
2
structure and operation you were in.
In some instances
3
where you're dealing with an overhead function, and
4
overhead being some people that provide services to many
5
different entities, some of the people providing the
6
service actually doing the work might not be able to give
7
you a reasonable estimate of what they do over the course
8
of a year.
9
that perform two or three services or activities.
There may be a group of four or five people
And for
10
them to tell you how much they spend on which activity
11
during the course of the year may be very difficult,
12
because that's not the way they operate.
13
Going to their supervisor or their manager becomes
14
much more accurate because they can see that these five
15
people -- one person does 100 percent of this, one person
16
100 percent of that, the other three are mixed, and they
17
can give you a better idea of how that group's time is
18
spent as you go through that process.
19
on the actual function you were looking at, the activities
20
you were dealing with.
21
through the process.
So it would depend
Any one of these is valid for going
22
If you start with the management observations, the
23
management interviews, you can then determine what they
24
think is the best way to do it, and what they have
25
available to support their estimates, which becomes the key
26
to how much more work you do.
27
28
So if I started with a management interview and you
were my manager on these functions, then I would get from
113
1
you what you felt was best, review the activities, and then
2
you would say, I think I could give you these.
3
the estimates.
4
people to have them validated.
5
process.
6
7
You give me
You would then take them back to your
But we would start on that
I think that is why you see these listed.
And in the process, if I'm not mistaken, Howard, we
would go actually up the chart rather than down the chart.
8
MS. CAMPBELL:
9
MR. O'BRIEN:
I see.
We would have started with the
10
interviews with the managers so that we've got a feel for
11
what they did, what they thought was best in order to
12
measure their time, and felt that they were being fairly
13
direct and honest with us as to what they were giving us,
14
but then went a little further where we could to get down
15
to the other people, and some of our follow-on interviews
16
then included more people than just the manager.
17
MR. VAN DUSEN:
I think I can add here as well:
I
18
talked earlier today about the controller's division and
19
the finance activities and the type of detailed analysis
20
that we went there through.
21
As a couple of other examples, the internal audit
22
function has detailed records over the last three or four
23
years of every audit they have done, the number of people
24
assigned to the audit, the type of work that's been done.
25
They had at their disposal very detailed records.
26
talked to the general counsel and secretary, she had at her
27
disposal some fairly detailed records as well, in terms of
28
the type of work that her people were doing over the last
When we
114
1
2
several years.
So when we say managers' estimates, it wasn't just
3
sitting there thinking about it.
4
people had fairly detailed information at their disposal to
5
assist them with the task.
6
MS. CAMPBELL:
I think a lot of these
So time records need not necessarily
7
have 5.0 hours on transmission.
It can actually just be
8
that the work product that's produced during that month
9
makes it crystal clear that 70 percent of your time was
10
spent in a courtroom arguing over something that had to do
11
with transmission and that 30 percent was spent internally
12
advising people in distribution?
13
So I'm correct in saying that time records don't need
14
to have that numerical value.
15
numerical value out of the substance of records?
16
MR. GORMAN:
17
MS. CAMPBELL:
18
MR. O'BRIEN:
They can -- you can draw the
Exactly.
So we're broadening the definition.
When you look at a time report in those
19
examples, somebody could have spent eight hours listening
20
to this cost-allocation process.
21
distribution but transmission also.
22
23
24
MS. CAMPBELL:
And it benefits not only
Isn't it nice you use the word
"benefit," yes.
MS. NOWINA:
I would like to follow up a little on
25
that because I think the materiality of this whole
26
discussion really, to me anyway, hinges a lot on how much
27
these estimates are helping you make the determination
28
between distribution and transmission.
115
1
When the folks are making their estimates of their
2
time, are they asked to stop and consider distribution and
3
transmission, or are they asked to allocate their time
4
among functions and services?
5
MR. O'BRIEN:
The chart that we had established in the
6
beginning, once we went over the activities and the
7
functions, we set up a matrix, and the matrix had -- within
8
it, distribution was one category.
9
had O&M and capital and you had transmission and
Under distribution, you
10
distribution.
I'm sorry, O&M and capital; then you had
11
transmission, which had O&M and capital.
12
As we asked the people to take the activities and
13
estimate or calculate or put their time in, it was with the
14
idea that they would put it in within each one of these
15
categories.
16
MS. NOWINA:
So they were capable of doing that?
17
MR. O'BRIEN:
In some instances, they were; in some
18
instances, they were not.
19
on transmission and distribution.
20
with regard to capital.
21
our group's time is on the operations and maintenance for
22
transmission and distribution for this activity.
23
They said, Well, we know we work
We don't do anything
But we do have -- 20 percent of
In that case, we did not have a direct assignment that
24
we could make.
We would use one of the cost drivers in
25
order to split it between the two.
26
them to the extent possible to make that distribution
27
independently of what we would have, of what was in the
28
prior studies, based on what they were doing in this
But the goal was to get
116
1
particular year.
2
MS. NOWINA:
3
MR. VAN DUSEN:
That's helpful, thank you.
Madam Chair, we have filed all of
4
these time studies in response to Interrogatory H, tab 1,
5
schedule 2 in the back.
6
actually the time study information.
7
clearly articulated how the people filled out the time
8
sheet, but we could take you through that, if that would be
9
helpful.
10
MS. NOWINA:
11
MR. BETTS:
Several pages, 15, 20 pages are
Mr. O'Brien has
Thank you.
Can I ask one question as well?
12
that this isn't one you were going to ask.
13
will save some time.
14
Any one of you can answer it.
I hope
If it is, we
It may be Mr. Van Dusen
15
that can give the corporate position better.
16
of any possible incentive or reason for a manager to not
17
report accurately either for corporate reasons or personal
18
reasons?
19
MR. VAN DUSEN:
Can you think
I don't believe there would be any
20
particular incentive for anyone, especially on something
21
like cost allocation.
22
Is your time, transmission, distribution or O&M and
23
capital, to the extent you can do it, are these the valid
24
activities you undertake; it basically is.
This is my
25
function.
This is how I
26
support the business.
27
in not filling that out correctly.
28
They're just telling them, you know,
This is what I do for a living.
MR. BETTS:
I would see no particular incentive
It couldn't come back to the compensation
117
1
incentives in any way?
2
MR. VAN DUSEN:
3
MR. BETTS:
No, no, it couldn't.
Could it – okay.
You wanted to think
4
about that?
5
personal or corporate goals in any way?
6
formulate their activity or business plans in such a way
7
that it wouldn't look good to have excess spending in one
8
area or other?
9
Could it possibly come back to achievement of
MR. VAN DUSEN:
Could anyone
No, I don't believe that is possible.
10
I mean the business-planning process lays out for each of
11
the managers the goals the corporation is trying to achieve
12
with the managers, then develop the detailed work programs
13
that we discussed on the other panels that help drive us
14
towards that.
15
business-planning process in a rigorous manner, how does
16
this activity support the company's goals?
17
that.
18
That is all tested, and through the
MR. BETTS:
So I don't see
So corporately, someone couldn't come up
19
with a corporate objective to control spending and
20
transmission which might, in fact, incent a person to
21
ensure that they didn't over-report in transmission?
22
MR. O'BRIEN:
If I may.
When you look at getting into
23
a cost-allocation process, all of these things are possible
24
that someone could look to do that as you go through.
25
when you've got, is it 33 different -- 32 different
26
groupings?
27
28
MS. CAMPBELL:
cost drivers.
But
32 different groupings, 66 different
118
1
MR. O'BRIEN:
When you start getting into that much
2
granular data as you go down, it becomes more difficult for
3
anyone to game the process overall because you have to do
4
it in so many different areas in order to do that.
5
Where you have what I would view not independent of the
6
company but independent of the process, Mr. Van Dusen's
7
group is going to be monitoring this.
8
looking at it and seeing that the corporate goals and
9
budget are to do this, and all of a sudden some of these
Well, if he's
10
things are coming in that aren't in line with that, he
11
would, I think, question whether their activities are, in
12
fact, in line.
13
annual process that you go through.
14
That would be during your budgeting or your
If you're going through and start seeing the actuals
15
coming quite away from what you had as budgeted is another
16
symbol, something that you’re doing.
17
happening.
18
through, you have to control a lot of the elements, and
19
that becomes very difficult, in my experience, as you go in
20
and doesn't really serve a purpose, particularly where
21
you've got, in this case, multi - I will call it -
22
jurisdictional interests, transmission, distribution and
23
stand-alone businesses.
24
Something may be
But to actually game a process as you're going
In the case of Citizens, when I did that, we had
25
multi-state interests and, in some cases, different
26
interests between those.
27
28
So as you get into them, you want to be sure your
process is the same going through.
You don't want to put
119
1
the company at risk of having this process adopted here,
2
somebody finding something wrong with it, adopting another
3
one, and you're losing recovery of validly-incurred costs.
4
So keeping the process evenly distributed, making sure
5
people are following it enhances the recoverability
6
process.
7
the company is looking at and that we would strongly
8
suggest become one of the motivating factors going forward.
9
10
I think that is the key underlying factor that
MR. BETTS:
Thank you.
MS. CAMPBELL:
I note, from looking at the clock, that
11
we're approaching lunch-time.
12
Interrogatory 107, but I thought it's going to take me a
13
bit of time to get through, and I thought this might be an
14
appropriate time if you want to consider taking lunch now.
15
MS. NOWINA:
I have more questions on
Maybe we should stop and ask you how much
16
time is a bit of time, to give others a sense of when they
17
would --
18
MS. CAMPBELL:
19
MS. NOWINA:
20
21
You mean how much longer will I be?
How much longer will you be,
Ms. Campbell?
MS. CAMPBELL:
Forty-five minutes to one hour.
I'm
22
walking through certain things.
I'm into specific areas.
23
And because we always estimate poorly - lawyers are
24
terrible about time - I'm saying 45 minutes to an hour, but
25
I know perfectly well that Mr. O'Brien and Mr. Gorman know
26
that that is subject to fallibility, as probably you knew
27
from having had lawyers in front of you, but I think that
28
is a relatively good time estimate.
120
1
MS. NOWINA:
I would like to get estimates from the
2
others now.
3
question that Ms. Campbell has not asked by the time she is
4
finished, can the others here give me a sense of whether
5
they would like to cross-examine this panel and how long
6
you might take?
7
On the assumption that there will be a
MR. WARREN:
I can tell Mr. O'Brien and Mr. Gorman
8
that I've allocated just over a year this morning to cost
9
allocation, but it's been fun.
I don't anticipate being
10
more than six hours -- I'm sorry, being more than 15
11
minutes, Madam Chair.
12
MS. NOWINA:
13
Mr. DeVellis?
14
MR. DeVELLIS:
15
MS. NOWINA:
16
Mr. Scully?
17
MR. SCULLY:
I might have five minutes.
18
MS. NOWINA:
Thank you.
19
Mr. Dingwall?
20
MR. DINGWALL:
Thank you, Mr. Warren.
I anticipate approximately 45 minutes.
Thank you.
Well, as much as I will be
21
anticlimactic after the re-enactment of Adam’s rib, I'm
22
likely to have somewhere in the area of 15 minutes.
23
MS. NOWINA:
24
We will break, then, for lunch and return at 1:45.
25
--- Luncheon recess taken at 12:33 p.m.
26
--- On resuming at 1:48 p.m.
27
MS. NOWINA:
28
All right.
Mr. Adams is gone.
Please be seated.
matters come up at the break?
Fine.
Any preliminary
121
1
PRELIMINARY MATTERS:
2
MR. ROGERS:
Yes, Madam Chair.
It didn't come up at
3
the break, but over the past few days there have been
4
undertakings given, and I am in a position to clear a
5
number of them now, if I could.
6
to my friend and for Staff, and I think the Board has
7
copies as well.
I think we provided copies
8
MS. NOWINA:
We do.
9
MR. ROGERS:
I will go through very quickly so we know
10
11
what we're dealing with on the record.
The first is Exhibit J, tab 2, Schedule A, page 1.
12
This was as a result of a request from Mr. Dingwall
13
concerning a 2002 study which dealt with vegetation
14
management, and yes, indeed – although, the panel, you may
15
recall that day was not aware of the study - Hydro One or
16
its predecessor did participate by providing data, and we
17
produced the entire study result.
18
The second one is Exhibit J, tab 5, schedule 3, page
19
1, and this -- I think Mr. Warren asked for this.
20
a breakdown of legal costs for regulatory affairs for 2004,
21
2005 and 2006.
22
This is
Next, Exhibit J, tab 5, schedule 4, simply a
23
reconciliation of some numbers on different exhibits, and I
24
think it is self-explanatory, Madam Chair.
25
to go through it.
26
Next, J5, schedule 5, page 1 of 1.
I don't propose
The exhibit
27
provides the amount of consultant's costs which are
28
associated with rate hearings.
You see, it is about
122
1
2
$500,000 of the $3 million which was shown on the table.
Next exhibit J, tab 5, schedule 6.
This is a
3
discussion of the approach taken in the calculation of
4
AFUDC, and you will recall there was some debate about
5
whether the correct figure was on a before- or after-tax
6
basis.
7
Hydro One, in its application, employed a pre-tax
8
approach consistent with the US GAAP requirements, G-A-A-P,
9
requirements.
And the evidence, I think, was they
10
considered that to be consistent with the Handbook, but it
11
is debatable.
12
what the company has done here is to show you what the
13
results would be using both methodologies.
14
The Handbook is not precise about it.
So
There is a relatively small difference in the revenue
15
requirement.
16
change would result in a reduction of revenue requirement
17
of $81,000 for 2006, as is shown in the exhibit.
18
If you use an after-tax approach, I think the
Next, Exhibit J, tab 5 schedule 7, simply an
19
explanation clarifying table 3.0 from Exhibit C1, tab 2.
20
think it is self-explanatory.
21
explanation.
22
I
Two or three pages of
Next, Exhibit J, tab 6, schedule 2.
Oh, this you will
23
recall was a request to provide the number of employees
24
that worked in the Toronto area, and I wish to explain this
25
because the company's come back and has come up with an
26
approximation.
27
the Toronto area.
28
So what they have done, you will see, is that they have
But just -- we weren't sure how to define
I'm not sure what data was available.
123
1
taken an area between Bowmanville, Burlington, and
2
Newmarket and defined that as more or less the Greater
3
Toronto Area.
4
full-time employees working in that area.
5
meets the spirit of what was requested.
6
You will see there are 1488 regular
Next, Exhibit J, tab 6, schedule 3.
So I hope that
There were
7
several things covered here.
This has to do with the
8
inclusion of bonuses and pensionable earnings.
9
recall my friend Ms. Lea was asking the witnesses about
You may
10
that.
11
to the Board, but this is a more comprehensive answer; for
12
example, if the company witnesses were asked to clarify
13
whether Enbridge included one-time bonuses in the
14
definition of pensionable earnings.
15
Some of this information has already been provided
Enquiries have opinion made through Mercer, the
16
applicant’s actuarial consultants.
17
indeed, they do.
18
given there concerning the Ontario Public Service Pension
19
Plan, as Ms. Lea requested.
20
there.
21
these bonuses are included but one can't be sure, but it
22
appears not.
23
It appears that, yes,
As well, some further information is
And the definition is given
I think the result of this is that it not believed
Then there is some more information given about other
24
companies, including Bank of Canada, CN, and so on, which I
25
hope will be helpful to the Board.
26
companies do include bonuses and pensionable earnings, and
27
some companies are given there that, although privatized
28
now, were publicly-owned companies, government-owned
A number of these
124
1
2
entities before.
So I hope that that assists.
3
undertakings.
4
fairly much up-to-date.
5
Those are the answers to
There are still a few to come, but we are
Now there are a couple of other oral issues I would
6
like to deal with if I could, Madam Chair, questions asked
7
by Board Members.
8
to provide some information which I hope will be helpful.
I made enquiries and I am in a position
9
MS. NOWINA:
Thank you, Mr. Rogers.
10
MR. ROGERS:
The first has to do with the use of the
11
hiring hall.
12
recall correctly, when panel 6 was here.
13
I think Mr. Betts was asking about this, if I
I think the tenor of the question was whether there
14
was any legal impediments to expanding the use of the
15
hiring hall.
16
Now, I'm instructed that the PWU, which I referred to
17
as the PUC you may recall, PWU collective agreement
18
contains language that would preclude Hydro One from
19
converting regular positions into hiring-hall positions.
20
Firstly, all PWU positions have to be advertised
21
internally; meaning Hydro One has to consider and retain
22
all qualified active Hydro One PWU employees to complete
23
ongoing work.
24
Secondly, I am instructed that appendix A of the
25
collective agreement contains the terms applicable to the
26
hiring hall.
27
classifications can be staffed through the hiring hall and
28
indicates that the parties may add new classifications only
Pages 3 and 4 of that appendix set out what
125
1
when work is required in the classification and, one,
2
regular employees are not available to perform the work
3
and, two, the work is not ongoing in nature.
4
collective agreement precludes going beyond that.
5
So that the
Then, Mr. Vlahos, you asked me a question this morning
6
which I could not answer, sir.
You asked what assumptions
7
are made about vacancies and the filling of them and the
8
budgeting of compensation and benefits for the rate year.
9
I am instructed, sir, that the planned levels of
10
compensation and benefits discussed in compensation -- in
11
the compensation and benefits panel dealt with head count
12
at year-end and their associated compensation.
13
from that point of view, there are no vacancies.
14
in terms of OM&A and capital program expenditures, this
15
company determines the level of work or units output
16
required; for example, the number of hectares of trees to
17
be cut and then determines the hours of work needed -- I'm
18
sorry, the hours of labour which would be needed to do this
19
work.
Standard labour rates are then used to price out the
20
work.
Labour can either be regular staff, hiring hall,
21
contracts, or new regular hires.
22
So I hope that answers your question.
23
MR. VLAHOS:
Go ahead, sir.
24
MR. ROGERS:
Finally one other issue.
Therefore,
However,
Finally --
This has to do
25
with -- Mr. Frank D'Andrea was asked – I’ve forgot by whom
26
- it came up in the cross-examination of a seven- to eight-
27
million dollar figure which was estimated by him, I think,
28
while he was testifying in response to a question as being
126
1
the supplementary pension plan benefits of the 2006 rate
2
application.
3
confirm the six-, seven-, or eight-million-dollar figure
4
was reasonable estimate that he gave.
5
He has checked, and I am instructed that the correct number
6
is actually $5.7 million.
7
in Exhibit C, tab 5, schedule 1, page 4, line 3 relating to
8
labour rates, and specifically the non-pension payroll
9
burden rate adder.
I think he was asked to check and see, to
This number is in the evidence
But to put your mind at ease, I'm
10
instructed that the revenue requirement that we're dealing
11
with here is based on the $5.7 million.
12
That is, it's not the seven or eight million dollars
13
that he estimated in the answer; it is $5.7 million which
14
will be included in the hourly charges.
15
affect -- this clarification does not affect the revenue
16
requirement at all.
17
MS. NOWINA:
18
MR. DINGWALL:
So it does not
Thank you.
Thank you, Mr. Rogers.
One things thing that comes out of that
19
with respect to J2, 8, the benchmarking survey with respect
20
to vegetation management.
21
helpful for the company to answer at some point would be
22
which of the coded identifiers refers to Hydro One, rather
23
than listing the company names in terms of each of the
24
graphic representations.
25
different letter codes.
26
this and see what value it has, knowing which letter code
27
refers to Hydro One would be very helpful.
28
MR. ROGERS:
A question that would be very
There are what appear to be
So in order for us to interpret
I think we can do that.
There are
127
1
certain confidentiality restrictions on these --
2
3
4
5
MR. DINGWALL:
That's why I have only asked for Hydro
One.
MR. ROGERS:
I understand.
I don't think that would
be a problem; and if it's not, I will do that.
6
MS. NOWINA:
Thank you, Mr. Rogers.
7
MR. VLAHOS:
Mr. Rogers, with respect to the J5, 6,
8
Exhibit J, tab 5, schedule 6, I did read the response, and
9
it appears to me that going from $1.4 million change to the
10
-- in the reduction of capital expenditures down to $81,000
11
change in revenue requirement, you may be right.
12
just not sure how we get there.
13
difference.
14
And I'm
It is such a dramatic
So all I want to do is just alert you that I will ask
15
Staff to check the calculation and if anything turns on it,
16
then we will advise you from the dais.
17
18
19
MR. ROGERS:
Would you like me to check it, sir?
I'm
sorry, I missed the -MR. VLAHOS:
I will ask Staff to check that.
If I
20
don't understand it, then I will follow up with you from
21
the dais.
22
MR. ROGERS:
I'm told that it is over 40 years, and so
23
the result is fairly small in the rate year.
But if there
24
is any questions, we'll be glad to answer them after you
25
have checked with Staff.
26
MR. VLAHOS:
I'm sorry, if...
27
MR. ROGERS:
The asset that is put in place typically
28
has a long life of 40 or 45 years, which may explain why
128
1
the result is relatively small in the one year.
2
MR. VLAHOS:
All right.
3
MR. ROGERS:
But, of course, if Board Staff have any
4
questions, we will provide more information.
5
MR. VLAHOS:
All right, thank you.
6
MS. NOWINA:
Mr. Shepherd, I see you have joined us.
7
8
9
Do you plan to cross-examine this panel?
MR. SHEPHERD:
Madam Chair, I had the pleasure of
listening this morning on the edge of my seat at all times.
10
MS. NOWINA:
Glad to hear.
11
MR. SHEPHERD:
As a result of the extensive coverage,
12
I don't think I'm going -- I also know what Mr. DeVellis is
13
going to be asking.
14
anything.
15
MS. NOWINA:
16
MS. CAMPBELL:
17
18
19
20
21
I don't think I'm going to have
All right, thank you.
We're flattered that you came in person
to participate for the rest of the afternoon.
MR. SHEPHERD:
Only for five minutes.
I'm leaving in
a minute.
MS. CAMPBELL:
That was a short-lived feeling of
triumph.
22
CONTINUED CROSS-EXAMINATION BY MS. CAMPBELL:
23
MS. CAMPBELL:
All right.
When we broke for lunch, we
24
were on Interrogatory 107, which is the H1, 107.
25
long discussion concerning the breakdown of the time
26
records and interviews, et cetera, and that related to the
27
first part of the interrogatory.
28
The second question that was asked in this
We had a
129
1
interrogatory was why time sheets weren't used to track all
2
of staff's time involved in work activities that render
3
services to either more than one of the affiliate companies
4
or to more than one stand-alone business within a company.
5
And they give the example of transmission and distribution
6
within Hydro One Networks Inc.
7
8
9
The answer to that is over on the second page, and the
first part is:
"Such detailed time reporting systems are not
10
commonly employed for employees performing common
11
corporate function and service type of
12
functions."
13
Then it states that:
14
"The staff provides services to the whole
15
company, and many times it is not clear how the
16
benefit of their service should be split between
17
the various affiliates."
18
And there is an example given.
And I don't know,
19
Mr. O'Brien, I'm guessing that you might be able to help me
20
with this.
21
benefit of their service should be split between the
22
various affiliates," this lack of clarity is something that
23
would be taken care of by the cost drivers?
24
The phrase "many times it is not clear how the
MR. O'BRIEN:
It would be taken care of by cost
25
drivers or other allocators that would be put in where cost
26
drivers may not be appropriate themselves, where you get
27
into a very general allocator that goes back.
28
doing a time sheet trying to charge time working on the
So somebody
130
1
report would have to charge a number of different things
2
and spread their time over that.
3
A lot of times we take care of something like that by
4
establishing an activity, which is called an activity code.
5
The activity code would have a cost distribution assigned
6
to it.
7
this activity code, the actual five hours might be charged
8
to 15 different subsections down the road --
9
10
So if I were to fill it out charging five hours to
MS. CAMPBELL:
MR. O'BRIEN:
Okay.
-- because that is how the activity is.
11
There are a number of those as you go through an
12
administrative overhead support group such as CCFS.
13
MS. CAMPBELL:
All right.
When asked if Hydro One
14
intended to implement a time-tracking system, they said
15
they weren't going to implement time sheets.
16
talked about using -- I think you used the -- a project
17
code can be also used to track.
18
MR. O'BRIEN:
19
MS. CAMPBELL:
You've just
Right.
I understand, from our discussion
20
earlier - and there's been reference a couple of times -
21
that certain areas of CCFS are not amenable to whatever you
22
want to call it, time tracking, time records, time sheets,
23
a recording by percentage on a biweekly basis.
24
What are the areas that simply could not benefit from
25
that sort of tracking and must always be evaluated by
26
drivers?
27
28
MR. O'BRIEN:
I think, in general, it would differ
between companies, depending on how they're structured.
131
1
MS. CAMPBELL:
2
MR. O'BRIEN:
Using Hydro One as an example -What I have experienced over the years
3
is where you have a company that is implementing this type
4
of a system, you put in the system that you think, based on
5
your initial review, is the right one to start capturing
6
the different types of time being reported or incurred on a
7
different basis.
8
find that there are certain other groups that could also
9
keep time sheets and charge to activity codes or keep time
10
sheets and charge more directly, and you sort of grow into
11
that as you implement this process.
12
As you go through your reviews, you might
So you may start out - and I know we did when I first
13
established the one at Citizens - we started out with about
14
10 percent of our administrative work force using actual
15
time sheets.
16
reviews or other processes.
17
overhaul, about eight years between when we were through,
18
we had about 40 percent of the people doing that.
19
The rest of it was done either on time
And after the second major
As the company continued to change, they eventually
20
were getting more telecom operations as part of the
21
business, went to a more intensive time reporting with the
22
telecom business, because that is how they did things.
23
I would not see that with an electric business as you
24
go through, but the company, I would think, as it comes
25
back, would look to enhance those particular areas that
26
could do it.
27
Everybody do it now, it's just getting established, as they
28
have done or as they plan to do, get it put in.
Rather than have a blanket one to say,
As you can
132
1
see how you can improve the process, then you go in to
2
improve that process by making it more direct, rather than
3
less, if that is the best way to do it.
4
MS. CAMPBELL:
All right.
So the example you gave,
5
the company over time was able to go from 10 percent to 40
6
percent.
7
they work in are simply not amenable to that sort of
8
capturing of time?
9
And 60 percent couldn't do it, because the areas
MR. O'BRIEN:
Yes.
We had a rather large accounting
10
and plant accounting group that were in charge of those
11
facilities, and you knew that the accounting people were
12
maintaining books.
13
books, no matter how big the company was.
14
It took them a certain time to open the
Then they had a certain time to process the various
15
items that would have to be recorded, and review them, and
16
also prepare the various commission reports.
17
would be similar here, where you have that type of group in
18
saying, Look, can somebody really tell how much time
19
they're spending on a distribution versus a transmission,
20
when the processing and invoice may encompass both of those
21
costs.
22
MS. CAMPBELL:
23
MR. O'BRIEN:
I think it
Okay.
So it depends on the individual location
24
that you're dealing with and the -- getting something
25
established first and then looking to improve it as you go
26
forward, and then presenting the improvements the next time
27
you come in would be the logical way to go about it, rather
28
than starting off at the top and saying everybody should do
133
1
it.
I think that, in my opinion, would be burdensome in
2
this type of instance.
3
MS. CAMPBELL:
So if we were starting off -- Hydro One
4
has said, We're not going to implement time sheets.
5
discussed the fact there are many different ways of
6
recording time, not necessarily time sheets.
7
dealing with Hydro One and would like to go from -- and I'm
8
using the numbers you used, but I'm not saying that Hydro
9
One is committed to these numbers or anything like that.
If we're
10
You used a 10 percent growing to a 40 percent over a
11
certain number of years.
12
We
If Hydro One is to implement or to use or try to
13
incorporate more time tracking and recording, however we
14
want to talk about it, what are the areas that are most
15
amenable to that?
16
MR. O'BRIEN:
Based on my experience, I would look at
17
the internal audit group who normally go and do certain
18
functions at a certain time; your legal and regulatory
19
groups would be the first group that I would look at.
20
basically is the first group back when I did it and started
21
it up.
That
22
As you go a little further, you may get into some of
23
your engineering groups to look at that on your second or
24
third phase that you do, just to see what those functions
25
are.
26
MS. CAMPBELL:
What about finance?
Is there -- you
27
mentioned audit group.
28
like, I don't know, corporate controllers, things like
But finance in a broader sense,
134
1
that, is that a group that could be amenable to that too?
2
MR. O'BRIEN:
I think when you get into those types of
3
groups, tax, your corporate controllership some of the
4
other finance groups, you're dealing at a, let me call it,
5
softer level of things being done.
6
MS. CAMPBELL:
7
MR. O'BRIEN:
Okay.
It's not as direct as the internal audit
8
group doing a certain function that they can say, At this
9
point we're going to audit all of the activity within the
10
transmission area.
11
MS. CAMPBELL:
12
MR. O'BRIEN:
Okay.
At this point we're going to do this in
13
the distribution, and this point it is both.
14
identify those things, I think, more accurately than a
15
finance or controller or tax group.
16
into those groups, you want to try to get more to the
17
activity-based codes where you can say, if you're doing
18
this type of a function, Here is how it's going to be
19
allocated.
20
So they can
I think when you get
The person recording the time in that instance is not
21
really looking at how it gets allocated.
22
recording the time for the activity that they're working
23
on.
24
MS. CAMPBELL:
25
MR. O'BRIEN:
They're just
I see.
It takes time to build up those types of
26
relationships and then develop the activity codes and
27
allocators to go with them so that you can support them
28
then in a regulatory proceeding.
135
1
MS. CAMPBELL:
So what we're talking about, this is --
2
I appreciate that what you're saying is -- this takes time
3
to implement, but it can be done.
4
tracking or recording mechanisms of some sort -- and we
5
don't need to work on the details today, but of some sort
6
implemented in certain areas?
7
MR. O'BRIEN:
Right.
So there can be time-
And up to some percentage of
8
what you're doing.
Eventually you come to a group of
9
things that are just generally allocated and Citizens had
10
adopted a four-factor formula that was found by the
11
California commission back in the ‘50s to be a reasonable
12
distribution method for general stuff.
13
MS. CAMPBELL:
14
MR. O'BRIEN:
I see.
So the percentage that it can be, that
15
can be 10 percent, 50 percent, depending on the functions
16
of the administrative or overhead group you're looking at.
17
18
19
MS. CAMPBELL:
So this is something, in your opinion,
Hydro One could do?
MR. O'BRIEN:
I would have them look at it.
I haven't
20
gone that far down to see exactly what it would be, but it
21
would be something to look at as they did the reviews in
22
the next three to five years.
23
MS. CAMPBELL:
24
MR. GORMAN:
Okay.
Excuse me, if I may elaborate on
25
Mr. O'Brien's word.
The internal audit department did, in
26
fact, have fairly specific time reporting, but even within
27
that they found a good 27 percent of their time they
28
couldn't distinguish between transmission and distribution.
136
1
So while in many areas this will help to provide more
2
specifics, I don't think it really relieves the company of
3
-- it's not going to get us completely away from cost
4
drivers.
5
assignment and not using cost drivers, but it won't really
6
have a significant -- it won't really overcome the problem.
7
It is a little bit closer to not -- to direct
MS. CAMPBELL:
Okay.
The problem is that at certain
8
points we simply can't take things apart with the precision
9
that we would like to.
10
MR. GORMAN:
11
MS. CAMPBELL:
12
MR. GORMAN:
Yes.
13
MS. NOWINA:
Ms. Campbell, can I clarify that?
14
Yes.
So we have to use cost drivers.
Maybe
Mr. Van Dusen can answer my question.
15
MS. CAMPBELL:
16
MS. NOWINA:
Certainly.
Am I correct in understanding that most
17
of the functional areas and departments of Hydro One and
18
personnel, for that matter, serve both distribution and
19
transmission?
20
MR. VAN DUSEN:
21
MS. NOWINA:
22
That's correct.
Maybe even on a daily basis they're
serving both.
23
MR. VAN DUSEN:
24
MS. NOWINA:
Absolutely.
So if you have an administrative function
25
that is providing a service to those customers or those
26
internal customers, it is difficult to break up whether or
27
not it is for distribution or transmission, because it's
28
done for that individual who does both kinds of work; is
137
1
that correct?
So this is different than companies where
2
you're trying to base it on functional or department or
3
company.
4
transmission, distribution really integrated throughout the
5
company; is that correct?
In this case, we have both -- we have
6
MR. VAN DUSEN:
7
MS. NOWINA:
Yes, that's correct.
So, Mr. O'Brien, the examples you use of
8
other companies you've dealt with, have you dealt with any
9
other companies that have this level of integration?
10
MR. O'BRIEN:
We did at Citizens when we were doing it
11
there, and several others I reviewed.
What you try to do
12
at that point gets a little more granular, where you have
13
someone keep track of time based on some -- what are called
14
activity codes.
15
and I'm working on processing invoices, that that is being
16
charged to an activity code.
17
cost driver that spreads my time to the various business
18
units, based upon my study that I did before.
I know that if I'm in the accounting area
The activity code will use a
19
So I get a little more granular in having somebody
20
keep time to an activity code, which is the same as you get
21
when you step up and have the manager estimate the time and
22
spread it based on those cost drivers.
23
So what you're trying to do is get a little more
24
granularity.
At some point, the cost of getting the data
25
doesn't provide you any more detailed or accurate
26
distribution of the cost and becomes not prohibitive, but
27
it becomes something that you really don't want to just
28
incur the cost to get some further data that you can
138
1
reliably get at a higher level.
2
MS. NOWINA:
Thank you.
3
MR. VAN DUSEN:
As an example, Madam Chair, my
4
day-to-day accountabilities are for corporate policies.
5
I'm working on a business expense policy, as an example.
6
That business expense policy is applicable and to all of
7
the employees in the corporation.
8
difficult for me, even with the time sheet, to say how much
9
of my work on the business expense policy was associated
It would be very
10
with transmission or distribution.
11
thing that is handled through a driver.
12
MS. NOWINA:
13
MS. CAMPBELL:
That's the sort of
Thank you.
So just to finish off this area we were
14
talking about where you might move on an ongoing basis into
15
the future, Mr. Van Dusen - you being, of course, Hydro
16
One, not you personally - and from what Mr. O'Brien said,
17
there is a capability, there is -- not a capability.
18
apologize.
19
that Mr. O'Brien has and the experience he has had, to get
20
more certainty in certain areas through implementing
21
different types of time recording.
I
There is the ability, using the information
22
Now, the number sheets were 10 and 40 percent.
I'm
23
not suggesting that is anywhere what Hydro One could do,
24
but would I be correct in saying that Hydro One would look
25
into implementing such time-tracking, time-recording
26
activities if they were able to be implemented using the
27
methodology that has been provided to you by the Rudden
28
group?
139
1
MR. VAN DUSEN:
I think that, yes, we would take a
2
look at whether there could be more implemented than it
3
already is.
4
detailed time studies.
5
functions and services areas did partial time studies.
6
know in the regulatory affairs group, certain sections
7
within regulatory affairs actually did do time studies to
8
provide input for the whole regulatory affairs area.
9
Once again, the asset management area, the
Many parts of the corporate
I
So various groups did various forms of time studies.
10
Would we look to improve on that and expand use where
11
possible?
Yes, I would say we would be open to that.
12
MS. CAMPBELL:
13
is the Inergi contract.
14
bunch of things, and I know it is included in this group.
15
I was thinking something like the customer service
16
operations, as I understood them, might be amenable to time
17
tracking or recording, perhaps more than other areas.
18
One of the things that springs to mind
The Inergi group took over a whole
I just raise that as -- Mr. O'Brien, are you familiar
19
with that, the Inergi contract and the customer services
20
operations area?
21
MR. O'BRIEN:
22
MS. CAMPBELL:
23
24
No.
Mr. Gorman handled most of that.
I'm just using it as an example.
Mr. Gorman, would that be -MR. GORMAN:
I think it is possible to use time
25
tracking.
That is probably an example we would cite as an
26
area which we could use time tracking to get a different
27
take upon it.
28
estimates -- we already have some fair good estimates of
But we already have some fairly good
140
1
the customer service orientation.
2
In fact, all of those costs get put in the distribution
3
bucket.
4
change the results of this study?
5
it is something which could be looked at.
So would that change or would that improve or even
But
6
MS. CAMPBELL:
7
I was going to go to another interrogatory but -- that
8
relates to assignment and time studies, but I think we have
9
basically beaten that one to death, so I think we might
10
Okay.
I don't think so.
Thank you.
just move on.
11
What I would like to talk to you about now are the
12
drivers.
13
2.
14
chart.
15
because you probably thought no one would ever look at it.
16
It is H1, 2, attachment A.
17
It's something that is found in interrogatory H1,
It's the chart.
The question requires that you use the
Whoever created the chart is going to be thrilled
It is five pages.
This question has to do with the variability of
18
drivers.
19
capturing time is variable, and estimates and that sort of
20
thing.
21
variability of a driver.
22
We talked about the fact that time is variable,
And this has to do with what we think is the
It is actually quite a simple question.
It just
23
appears that when you track some of the calculations, the
24
application of the same driver produces a different
25
percentage.
26
I'm going to give you some examples.
27
28
I was wondering if you could explain that.
If we go to H1, schedule 2, attachment A, the first
page, if you go down to the fourth group, which says
141
1
"external relations," we've got the activities performed.
2
We've got the cost driver, which is non-energy REV,
3
underscore, asset blend.
4
to distribution, on my calculation it came out to -- when I
5
apply that cost driver, I get 48 percent allocated
6
distribution.
7
And when I look at the allocation
Then I go to the one under it, using exactly the same
8
cost driver; but when I look to the allocation to
9
distribution, out of 279,000, 200,000 is allocated, which
10
11
means 72 percent.
I am using the same cost driver.
I've got other
12
examples, but I don't think we need to go through them.
13
I'm just trying to understand variability of cost drivers
14
and why it can lead to a different result.
15
Mr. Gorman?
16
MR. GORMAN:
Yes.
The cost drivers always have the
17
same values throughout.
The percentages are exactly the
18
same.
19
purpose, if I could turn your attention to the Rudden
20
report, Exhibit C, page 1.
What is happening, though, is -- I think for this
So that would be page C1.
21
MS. CAMPBELL:
Sorry, the report itself?
22
MR. GORMAN:
23
MS. CAMPBELL:
24
MR. ROGERS:
Exhibit C1, tab 6, schedule 1.
25
MR. GORMAN:
It is Exhibit C1 to our report, I
The report itself, yes.
The report itself.
Are we there?
Thank you.
26
believe.
In that page, we see the amounts
27
which were directly assigned to the different business
28
units.
142
1
MR. ROGERS:
2
MS. CAMPBELL:
3
MS. NOWINA:
What page?
4
MR. ROGERS:
C1 to his report.
5
MR. GORMAN:
The exhibits in the back of the report.
6
MS. CAMPBELL:
7
8
right.
Hold it.
I'm not with you either.
Sorry, sorry.
Thank you.
MR. GORMAN:
I'm not with you.
Exhibit C, C1.
All
Got it.
It's captioned on the upper right
9
“Exhibit C,” and the title is "Hydro One Common Corporate
10
Cost Model, Activity Cost Assignments to Business Units."
11
Then on the left-hand side, it has got the name of the
12
functions and services.
13
The fourth one is external relations.
The first
14
activity there is support customer strategy, rate strategy,
15
distribution generation strategy, benchmarking external
16
relations.
17
the distribution business.
We see $162,000 has been directly assigned to
18
MS. CAMPBELL:
19
MR. GORMAN:
20
MS. CAMPBELL:
21
MR. GORMAN:
182,000.
I'm sorry, 182,000, yes.
Right.
The driver itself applies -- the cost
22
driver is used for the costs which could not be directly
23
assigned.
24
that, 182,000 was directly assigned to distribution.
25
balance of the costs were split using the cost driver.
So in that activity, we had $1,093,000.
26
MS. CAMPBELL:
27
MR. GORMAN:
28
Of
The
And that is why there is variability?
Yes, exactly.
If you go down to the next
activity, which was develop working relationships with
143
1
customers, regulator, shareholder, lenders, we have
2
$279,000.
3
distribution, 48,000 or 49,000 was directly assigned to
4
transmission.
5
using the same cost driver, yet the aggregate percentages
6
are different.
Of that, $181,000 was directly assigned to
The balance of those costs were assigned
7
MS. CAMPBELL:
8
MR. GORMAN:
9
10
All right.
So, again, the cost drivers are used only
for the costs that could not be directly assigned.
MS. CAMPBELL:
Okay, thank you.
Now I would like to
11
deal with some specific numbers.
This is going to use an
12
interrogatory we already looked at.
13
of going to the face page, I'm going to go to the back
14
page, which has the total 2002 to 2006 CCFS costs and the
15
2006 allocation to distribution.
16
2004, 2005, and 2006.
17
MR. GORMAN:
18
MS. CAMPBELL:
It's H1, 59.
Instead
It has an allocation to
We have that now.
Mr. Van Dusen, some of this may be
19
directed to you.
20
we don't have the 2002/2003 distribution allocation.
21
I look at 2004 and 2005, I would just like to confirm that
22
those are comparable to one another, because they use the
23
same methodology?
24
We've canvassed already this morning why
MR. VAN DUSEN:
When
They use the same basic methodology,
25
but, once again, we would have updated the costs in any
26
given year and also the drivers.
27
using the basis of allocation in '04, would have been
28
somewhat different in '05, reflecting the additions from
So the net book value,
144
1
2
'04, just as an example.
MS. CAMPBELL:
When I look at 2004, it is roughly 20
3
percent is allocated to distribution, and the same in 2005;
4
it is 27 percent.
5
As I go down, I did the math, and it is roughly the
6
same all the way down, except for a blip that occurs in
7
human resources.
8
down, there is not that much difference.
9
consistent methodology.
10
But when I track those numbers going
So that means a
So then I get to 2006 and the difference between 2005
11
and 2006, there is an increase of 40 percent in the
12
distribution allocation.
13
And just moving down, 40 percent corporate management.
14
And just moving down the 2006 column, the jump between 2005
15
and 2006 for corporate management is 40 percent; for
16
finance, it is 43 percent; for human resources, it is 47
17
percent; and for corporate communications, it is about 58
18
percent.
19
year.
20
21
22
And those are up significantly from the 2005
First of all, is that, Mr. Van Dusen, directly
attributable to the difference in allocation?
MR. VAN DUSEN:
Some of it is attributable to the
23
change in allocation methodology.
24
attributable to the more detailed split of activities, and,
25
therefore, we were able to identify tasks which were more
26
specifically identifiable with the distribution business.
27
28
Some of it may be
So part is an allocation methodology change, but part
is a change in the amount of work being done for
145
1
2
distribution.
MS. CAMPBELL:
How do we know which is which?
How do
3
we know which out of that jump of 40 percent is because of
4
increased work on the distribution side and which is
5
accounted for by a change in methodology?
6
MR. VAN DUSEN:
The closest I can come to answering
7
the question - I'm not too sure I can do it as precise as
8
you have asked it - in the response to H5, 37, so it's
9
Exhibit H, tab 5, 37 --
10
MS. CAMPBELL:
11
MR. VAN DUSEN:
Yes.
-- we provided a high-level impact
12
analysis of the change in the allocation to distribution
13
merely based on cost allocation changes.
14
For the CCFS area, we came up with an estimate of $5.7
15
million, was roughly the impact in the change in
16
methodology from going to '05/’06, all other things being
17
equal.
18
So if you take a look at the total change in dollars
19
over that period, there is a total change in dollars, and,
20
therefore, there would be a higher total dollar allocated
21
to distribution, because there's more cost.
22
So taking you back to your interrogatory, the total
23
costs go from '05 of 71 million to '06 of 79.5.
24
looking at the total CCFS cost line.
25
MS. CAMPBELL:
26
MR. VAN DUSEN:
I'm
Yes.
The percentage increase in allocation
27
distribution is partly due to -- in terms of total, the
28
shift of distribution, 5.7, would be roughly from merely
146
1
the shift in allocation, and part of it would be additional
2
work.
3
like approximately 4 or 5 million is work related and 5
4
million is related to impact and methodology, roughly
5
speaking.
6
rounding numbers and the information I have in front of me.
7
So using those numbers in this example, it looks
That is at a very high level.
MS. CAMPBELL:
All right.
I am just
When I look at the change
8
between the allocation between 2004 and 2006, the changes
9
are really marked in those two years, the growth -– the
10
percentage allocated to distribution is quite significant.
11
There is a 94 percent change between 2004 and 2006.
12
And if you go to corporate communications -- that was
13
corporate management that I just discussed.
14
communications --
15
16
MR. ROGERS:
Can you slow down.
Corporate
I'm having trouble
following this.
17
MS. CAMPBELL:
18
Going back, when I look at the difference between the
19
allocation, the percentage between 2004 and 2006, there is
20
a significant difference.
21
management and I look at 2004, it is 1.8 million.
22
it is estimated to be 3.5.
23
That's about 94 percent.
24
I apologize.
I'm sorry.
If I look at corporate
In 2006,
That's a significant increase.
If I go down, I can track and see those increases, and
25
the most striking one, to my mind, is corporate
26
communications; although the number is not huge, we're
27
talking roughly 118 percent change.
28
MR. VAN DUSEN:
Yes.
I think I can partly help you.
147
1
If you take a look at the first example you used.
2
MS. CAMPBELL:
3
MR. VAN DUSEN:
Yes.
The total change in corporate
4
management cost went from 6.6 to 8.8.
5
million change in the total costs.
6
So there is a $2.2
So the total amount, in absolute dollars, you had said
7
it was almost a 100 percent increase.
8
amount in absolute dollars also went up.
9
expect there would be more dollars allocated to
10
11
Well, the total
So one would
distribution.
Then in addition, I think I indicated to the Chair
12
earlier today that a net-book-value driver had been
13
utilized in the 2004 and 2005 approach.
14
driver favoured the transmission business, if I can use
15
that terminology in terms of the allocation of costs.
16
The net-book-value
When the -- Mr. Gorman and Mr. O'Brien looked at it
17
from their perspective, they said, You haven't broken down
18
these activities in as much detail and nor have you used as
19
many or better drivers that we would recommend.
20
accounted for the part of it.
21
That has
So it's the total increase in activities, the
22
allocation drive change, and also the change in the amount
23
of work being done in distribution which drives that
24
change.
25
MS. CAMPBELL:
Okay.
Thank you.
You mentioned and
26
you referred to H5, schedule 37.
In there, you made a
27
comment concerning what changes occurred and why the change
28
occurred.
148
1
2
You point out that while the analysis -- this is the
last sentence:
3
“While the analysis also indicates that about six
4
million of the change in the distribution
5
allocation of asset management cost is related to
6
methodology changes, it should be noted that this
7
change was caused by revised estimate of the
8
distribution allocation, based on a new time
9
study rather than by a true methodology change.”
10
MR. VAN DUSEN:
11
MS. CAMPBELL:
Right.
But am I not correct that the numbers
12
in 2005 were based upon the old methodology and what's new
13
in the asset management is strictly that -- is the decision
14
to use a time study which hadn't been used previously?
15
MR. VAN DUSEN:
I think what you're seeing is exactly
16
the phenomena that I have been talking about, about more
17
work being done in distribution.
18
study done in 2002 and 2003 that indicated a certain amount
19
of work done by the asset management organization for the
20
distribution business.
21
There had been a time
The most recent time study has obviously shown a shift
22
in the amount of work being done for the distribution
23
business.
24
methodology, the base methodology that was employed.
25
the current results are showing more work being done for
26
the distribution business.
27
28
So once again, the time study is the
MS. CAMPBELL:
But
Now I would like to go to some
questions that, in the words of one my colleagues, were
149
1
punted to the Rudden panel.
2
have been asked previously and everyone has said, No, no,
3
save them for the Rudden panel.
4
Rudden panel.
5
Then you will be happy to know you won't be hearing my
6
voice much longer.
7
So first one:
8
9
So these are questions that
So they get saved for the
So I have a handful of those questions.
This is Board Interrogatory -- Staff
Interrogatory, rather, 46.
So that is H1, 46.
You also need for this - because you can never have
10
too many pieces of paper open - Exhibit C1, tab 2, schedule
11
4, page 4.
12
13
So that is C1, tab 2, schedule 4, page 4.
MR. VAN DUSEN:
numbers.
14
MS. CAMPBELL:
15
MR. VAN DUSEN:
16
MS. CAMPBELL:
17
MR. VAN DUSEN:
18
MS. CAMPBELL:
19
I'm sorry, could I have you repeat the
Second one, first one, or both?
Both.
H1, 46.
Got it here.
All right.
The next one you need is
C1, tab 2, schedule 4, page 4.
20
MR. VAN DUSEN:
21
MS. CAMPBELL:
Yes, I have those.
Sorry.
So in response to Interrogatory 46,
22
Hydro One provided the allocations of operations costs
23
between transmission and distribution between 2002 and
24
2006.
25
original evidence and not the operation support amounts.
26
The table shows only the operations line of the
So if I turn the page and I go to C1, tab 2, schedule
27
4, page 4, which is table 1, it shows operating support.
28
I'm just wondering if -- where that is found, or if it is
150
1
found in schedule 46 -- sorry, is found in Interrogatory
2
46.
3
4
MR. VAN DUSEN:
Just one moment.
Yes, I think I can
help you.
5
MS. CAMPBELL:
6
MR. VAN DUSEN:
Thank you.
If I could take you to the response,
7
this is where I think it will be best illustrated.
It is
8
in a diagram form.
There
9
is several attachments that are pictures.
10
11
12
13
Exhibit H, tab 5, schedule 41.
Once again, for the Board, we're looking for something
that looks like this, H -- Exhibit H, tab 5, schedule 41.
MS. CAMPBELL:
It is titled:
“2006 distribution OM&A
costs”?
14
MR. VAN DUSEN:
15
MS. CAMPBELL:
16
MR. VAN DUSEN:
Yes.
Thank you.
One of the intervenors asked us to
17
break down in some sort of simple chart form the total OM&A
18
costs for 2006 which of those costs are directly charged,
19
which of those costs are energy charges, and where do they
20
appear and what are the common costs.
21
So when you take a look at the response at page 146,
22
what it is showing you is the amount which is the common
23
cost part of the operations budget for 2006.
24
You will see over under "direct charges" there are $3.8
25
million, which corresponds to your $3.8 million on table 1,
26
which is the operating support area.
27
support area directly charges T or D directly/
28
are other parts of the operations function which are
So that operating
Then there
151
1
handled through cost allocation through the time study, and
2
that is the $10.5 million.
3
MS. CAMPBELL:
Okay.
Staying on Interrogatory 46 and
4
just looking at the allocation to distribution, which seems
5
to increase, it goes up in 2004, comes back down in 2005,
6
and then goes up again in 2006.
7
reflection of methodology change, or are they just a
8
reflection of growth and distribution, or once again, are
9
we looking at both?
10
MR. VAN DUSEN:
11
Are those bumps a
You're primarily looking at the change
in the work business, because --
12
MS. CAMPBELL:
13
MR. VAN DUSEN:
Oh, I see.
Because this part of the allocation
14
methodology is based on the time studies.
So what you're
15
seeing here is the people saying, This is what we're
16
working on.
17
flow of the work on the distribution versus transmission
18
business over this period of time.
So I would say by and large it is tracing the
19
MS. CAMPBELL:
20
The next interrogatory has to do with -- it's H1,
21
Okay, thank you.
schedule 55, and these are customer care management costs.
22
MR. VAN DUSEN:
23
MS. CAMPBELL:
Yes, I have that.
And it -- there are significant changes
24
in the allocation, as you go across.
25
2005 to 2006 is a change in allocation of 55 percent to 71
26
percent.
27
MR. VAN DUSEN:
28
MS. CAMPBELL:
The change between
Right.
Underneath, it says:
152
1
"The primary reason for the increase in
2
distribution customer care management costs is a
3
growing distribution allocation, which increased
4
from 24 percent to approximately 70 percent
5
throughout the time period.
6
established through the application of the
7
corporate cost allocation method."
8
9
The allocations are
And then there is a reference to the Rudden study, but
that only tells me about 2006.
10
MR. VAN DUSEN:
11
MS. CAMPBELL:
12
MR. VAN DUSEN:
Yes.
I think I can be helpful here.
Okay, thank you.
The allocation that was used in 2005
13
would have considered the customer care costs, this portion
14
of the customer care costs as part of the larger asset
15
management function.
16
As part of the larger asset management function, their
17
allocation to distribution would have been more evenly
18
balanced between transmission and distribution, given that
19
the asset management function services both transmission
20
and distribution.
21
As we went forward to the test year - and this is one
22
of the things we took at a look at - we said, That isn't
23
the most appropriate way to handle customer care.
24
much more largely allocated or servicing the distribution
25
business.
26
treating them at the average, we pulled them out and
27
treated them quite specifically.
28
They are
So for the time study results, rather than
So in this case, there is a large percentage of this
153
1
change, which is due to an allocation -- a more appropriate
2
use of the information that we had available, which is the
3
time use information.
4
5
6
MS. CAMPBELL:
Thank you.
The next interrogatory I
would like to go to is H1, 58, and specifically page 2.
If you look on page 2 of schedule 58, and specifically
7
towards the bottom, I would just like some explanation of
8
this.
9
the beginning of that paragraph - I'm sorry, I am confusing
It indicates that for 2006 -- sorry.
Beginning at
10
myself - it talks about an increase in asset management
11
costs of 12.6 million, or 47 percent, which relates to the
12
impact of a cost allocation methodology change for field
13
facility costs, as well as a general escalation.
14
And skipping to the second paragraph, it says:
15
"Consistent with the direction of the Rudden
16
report to directly attribute costs where
17
possible, the allocation methodology for field
18
facility costs was changed for 2006."
19
And the change is explained as prior to 2006, field
20
facility costs were included in costed rates and the cost
21
charged to distribution and transmission work programs
22
based on where labour was charged to.
23
For 2006, the field facility costs were not applied to
24
rates, but were directly attributed to distribution through
25
cost allocation based on an assessment of which business
26
each facility supported and, as a result, the -- because it
27
is now direct allocation, there is a 71 percent increase in
28
the field facility costs being allocated.
154
1
2
3
So there is this -- quite a significant increase as a
result.
MR. VAN DUSEN:
Sorry, if I could just correct one
4
thing:
5
talks about 71 percent to the fuel facility costs being
6
allocated to distribution.
7
It doesn't talk about a 71 percent increase.
MR. ROGERS:
It
It doesn't refer to --
Excuse me.
I'm sorry.
I should just
8
point out that one of the things we just filed this
9
afternoon was Exhibit J, tab 5, schedule 7, and there is a
10
three-page explanation of table 3.0, which is referred to
11
here, so that may assist.
12
but I just wanted to refer you to it.
13
MS. CAMPBELL:
Right.
I'm not sure where you're going,
It is a fairly radical shift.
14
I'm just wondering what it was that -- it's direct
15
assignment; am I correct, Mr. Gorman or Mr. O'Brien?
16
what happened:
17
is an area where there was a very significant change in
18
methodology; am I correct?
19
I apologize.
20
Rudden, but this is an area where we can really see an
21
impact, a significant impact, because of a significant
22
change in the way it's allocated?
23
So
When you looked at field facilities, this
The impact of the methodology,
The methodology is consistent as applied by
MR. VAN DUSEN:
Let me step back to the highest level.
24
Mr. Gorman and Mr. O'Brien did not specifically tell us,
25
Change the approach for charging facility charges.
26
direction to us is, Things should be charged in a direct
27
basis or as directly as possible.
28
Their
We had previously -- as explained by Mr. Carlton when
155
1
he was here on panel 4 and also, I think, as articulated in
2
our transcript undertaking response, we previously charged
3
the facility cost to the labour rate, and they got into the
4
work program through the labour rate; i.e., if hours were
5
spent on certain work programs, those costs got charged or
6
embedded in those work programs.
7
We now have said we have a better way of allocating
8
the same dollars to transmission and distribution.
9
do a detailed review of all the facilities and we will say,
10
This facility is more T than it is D, or this is T and this
11
is D.
12
We will
So what we did is we took the same bucket of dollars
13
and sent it to T and D on what we considered a more direct
14
basis than putting it through labour rates, that is, at a
15
highest level, the explanation of the change.
16
say, it is covered in more detail in the transcript
17
undertaking.
18
19
20
21
MS. CAMPBELL:
Thank you.
And, as I
Turning to C1, tab 2,
schedule 6, page 48.
MR. VAN DUSEN:
This is table 4.0, information
technology?
22
MS. CAMPBELL:
23
MR. VAN DUSEN:
24
MS. CAMPBELL:
Yes.
Yes, I have that.
The question has to do with regard to
25
the allocation of IT services to distribution.
26
looking, you can see the -- that there has been a
27
substantial increase between 2002 to 2006.
28
And
And from numbers in the pre-filed evidence, the
156
1
calculation has been done.
2
2002, and now it is 49 percent approximately.
3
that the major change is due to the application of Rudden?
4
Or when I see those changes, is it, again, because of
5
increase in business at the distribution end?
6
7
MR. VAN DUSEN:
Am I correct
Yes, you're correct in your second
proposition, that it is --
8
MS. CAMPBELL:
9
MR. VAN DUSEN:
10
It was roughly 33 percent in
It's an increase in business?
-- an increase in IT-related business
associated with the distribution business.
11
Once again, as I think I witnessed to on panel 4, the
12
government legislation, in terms of the price changes,
13
industry structure changes, so on and so forth, had
14
prompted us to need to make changes to our IT system.
15
there is clearly more distribution-related IT work.
16
addition, there's a small impact related to the methodology
17
being applied.
18
MS. CAMPBELL:
19
MR. VAN DUSEN:
20
MS. CAMPBELL:
21
MR. VAN DUSEN:
22
In
So most of it is because of business?
Um ...
Or can you be that precise?
I don't think I can be that precise.
I'm sorry, I don't have that with me.
23
MS. CAMPBELL:
24
-- one question to go.
25
137.
26
MR. VAN DUSEN:
27
MS. CAMPBELL:
28
So
Okay, thank you.
Two questions to go
This one requires that you have H1,
Yes, I have that.
Okay.
Now, in response to this
interrogatory, Hydro One says that the investment in the
157
1
customer information system was allocated 100 percent to
2
distribution.
3
expenditure was not undertaken, that the distribution share
4
of IT capital would be about 53 percent.
5
The response also mentions that if the
Does that mean that the Rudden findings will yield in
6
the future, on a going-forward basis, a continuing
7
approximately 50 percent allocation to distribution,
8
barring special projects because if you take that out, that
9
is what you get?
10
MR. VAN DUSEN:
11
MS. CAMPBELL:
12
MR. VAN DUSEN:
13
MS. CAMPBELL:
14
MR. VAN DUSEN:
No, that is not quite correct.
That's not it?
No.
Okay.
Let me take you to the study which was
15
filed by R.J. Rudden, Exhibit C1, tab 6, schedule 3, which
16
is --
17
MS. CAMPBELL:
C1, tab 6 --
18
MR. VAN DUSEN:
Schedule 3, the common asset
19
allocation.
At the very end, on page 6, there is a summary
20
of results.
So once again, C1, tab 6, schedule 3, the last
21
page.
22
MS. CAMPBELL:
23
MR. VAN DUSEN:
24
25
26
Sorry.
C1, tab 6, schedule 3, the last page
is called “Summary of results.”
MS. NOWINA:
It's a table.
It's the last page of the Rudden report
that is called "Report on shared asset methodology review"?
27
MR. VAN DUSEN:
28
MR. ROGERS:
Yes, Madam Chair.
It should just be at the end of tab 7 in
158
1
your book.
2
MS. NOWINA:
3
MS. CAMPBELL:
4
MR. VLAHOS:
5
Yes, just at the end -No.
Ms. Campbell, you're welcome to my copy
right here.
6
MS. CAMPBELL:
7
MR. VAN DUSEN:
8
9
10
Uh-huh.
Found it.
So in terms of -– sorry, may I
continue?
MS. CAMPBELL:
MR. VAN DUSEN:
Please, go ahead.
So in terms of allocating the capital
11
costs, which is what this interrogatory is talking about
12
and the proper allocation of shared capital cost -- in much
13
of the discussions we've been talking about the shared OM&A
14
costs, and this is the shared capital costs.
15
specific programs being planned for 2006, which were 100
16
percent identifiable as being distribution projects.
17
These were IT-related projects.
There were
And so what we did,
18
we said, These are 100 percent to service the distribution
19
business.
20
distribution business.
21
They should be allocated 100 percent to the
The remainder get allocated -- the remainder of the
22
common costs in that year will be allocated using the
23
percentages which came out of the Rudden methodology.
24
The Rudden methodology gave us three sets of
25
percentages.
At the top of the page, for major assets,
26
they gave us a TD split.
27
for minor fixed assets, they gave us a TD split.
28
the bottom of the page, for transported work equipment,
For -- in the middle, the payment
Then at
159
1
which is the specific interrogatory you asked about, they
2
gave us a specific split for T and D as well.
3
So once you have eliminated those items which are 100
4
percent T or 100 percent D, you then, to the rest of the
5
common capital expenditures, apply these percentages where
6
appropriate.
7
MS. CAMPBELL:
8
Now I really am at the end.
9
10
11
Thank you.
That was very helpful.
Thank you very much for
your patience and help, gentlemen.
appreciated.
It was much
Those are my questions.
I note that I was an hour and six minutes, and I
12
estimated 45 to minutes to an hour, but we all know that
13
estimates are flawed and I gave myself roughly a ten
14
percent window, so I am right within where I should be.
15
MS. NOWINA:
16
MS. CAMPBELL:
17
MS. NOWINA:
Dually noted, Ms. Campbell.
Thank you.
Thank you.
Before you begin, Mr. Warren, I just
18
wanted to comment that although we may be in striking
19
distance of concluding this panel today, I do want to
20
finish by 4:30 so everyone can get out and vote.
21
that should be our first priority today.
I think
22
So, Mr. Warren, go ahead.
Mr. DeVellis, go ahead.
23
And we will take what time we need.
24
resume tomorrow with this panel in order to make that
25
provision for voting.
26
Mr. Warren.
27
CROSS-EXAMINATION BY MR. WARREN:
28
MR. WARREN:
But it may be we will
Panel, my questions are in a much loftier
160
1
2
level of generality than my friend Ms. Campbell's.
My starting point, Mr. O'Brien and Mr. Gorman, is
3
this:
As I understood what you told us during the course
4
of the day, is that you started your work with what I would
5
describe as a revised cost-allocation methodology.
6
what I mean by that is that there was one that the panel of
7
the Board considered in 1998.
8
CapGemini/Ernst & Young phase.
9
change.
And
It then went through the
There was a business
And around the time of the business change,
10
Mr. Van Dusen said you went to a modified cost allocation.
11
Have I roughly got the chronology right, Mr. Van
12
Dusen?
13
MR. VAN DUSEN:
14
MR. WARREN:
Yes, yes.
So I want to start, Mr. O'Brien, Mr.
15
Gorman, with the state of the art when you first came in
16
the door.
17
What I am trying to get a sense of is how close was
18
what you saw there when you came in the door to what we
19
have before us today?
20
MR. O'BRIEN:
I think, as we've been discussing it and
21
looking at the granularity that we were talking about, you
22
were maybe 60 percent down the road of getting to where we
23
are today.
That's my number, looking at it.
24
We found that the number of functions that were
25
performed could be expanded, as we've discussed, in order
26
to get a little more direct assignment and a little more
27
clarity as to what each of the functions did.
28
The activities within the functions we also expanded a
161
1
bit, as we talked about, I think, in the tax group mainly,
2
where they get down into more detail.
3
As Mr. Gorman talked about, the cost drivers then
4
became much more precise, as we could get them down to
5
those levels.
6
MR. WARREN:
7
MR. O'BRIEN:
I'm sorry.
I think what Mr. Van Dusen had in his
8
modified was to take it and start down that road, but did
9
not go as low or as deeply as we did in order to try to
10
identify areas that we thought could be more directly
11
assigned with cost drivers or with direct assignment.
12
MR. WARREN:
Would I be right in making this
13
distinction:
The basic conceptual or analytical framework
14
was in place, and what you folks did was you drilled down
15
further using that basic analytical framework?
16
fair distinction?
17
MR. O'BRIEN:
Is that a
As long as -- we did not use what was
18
there.
19
the stuff that had been put in place was useable to us in
20
getting the distribution.
21
functions broken out, and it had certain activities that we
22
were able to, as we went down, find that those were a good
23
starting point for us to use.
24
We started more or less from scratch.
MR. WARREN:
But a lot of
The company had already had
Referring briefly to an interrogatory
25
response my friend Ms. Campbell has referred to, which is
26
H5, schedule 37.
27
estimate the degree of impact of the revised methodology
28
and the -- as I do the calculation, it was about a 5
This was the one where you were asked to
162
1
percent difference in numbers from 2005 to 2006 as a result
2
of the methodology.
3
Am I right in that calculation, Mr. Van Dusen?
4
MR. VAN DUSEN:
5
I will take that subject to check,
yes.
6
MR. WARREN:
Take it subject to check.
7
Turning back to you, Mr. O'Brien, is a 5 percent
8
change in the numbers as a result of the methodology,
9
should the Board conclude from that that the existing
10
methodology was fundamentally flawed, or turn the question
11
around; is that an indication, is 5 percent a material
12
change as a result of methodology changes?
13
MR. O'BRIEN:
In my opinion, that would not be
14
material.
15
down to, I think we're much more precise than what we have
16
now, but a 5 percent change, I would not be concerned about
17
as being a problem.
18
50 percent, then maybe you would.
19
20
21
As you go through with the level that we went
If you had something that changed to
Howard, what do you
have -MR. WARREN:
Then let me return to you, Mr. Van Dusen.
22
The decision that my friend Ms. Campbell started with this
23
morning, which was the 1998/'99 decision -- you don't need
24
to turn it up, Mr. Van Dusen, but it -- the Board, the
25
Panel of the Board in that case asked you to come back with
26
some more information about your methodology.
27
require you, by the wording of it, to come back with an
28
outside opinion or independent expert review of your
It did not
163
1
methodology.
Would you agree with that?
2
MR. VAN DUSEN:
3
MR. WARREN:
Not necessarily.
Yes, I would agree.
Can you then tell me -- I don't mean by
4
this question to suggest that it's not a pleasure to see
5
the two of you folks here from Rudden, but why did you feel
6
it necessary, Mr. Van Dusen, to engage an outside expert
7
firm, particularly when it turns out that you were only 5
8
percent off in the method you were using?
9
MR. VAN DUSEN:
I guess to answer the last part first,
10
I would never have known I was 5 percent off had I not
11
engaged an expert consultant.
12
it was appropriate to bring back an independent study.
13
had become -- we had come before the Board in 1998/1999 and
14
the Board in its decision was quite clear that they were
15
somewhat confused by what we did; they had some
16
apprehensions about the consistency between the various
17
units and how we did the allocation.
18
appropriate manner to respond to that recommendation was to
19
go and bring an outside, external expert firm in to bring
20
before you industry standards and to make the comments that
21
they're making in terms of the changing approach.
22
MR. WARREN:
We felt - Hydro One felt We
We thought the most
So is it fair for me to conclude that
23
what Rudden has done is to validate, in large measure, your
24
methodology according to industry standards, and from the
25
Board's perspective and, I suppose, the intervenors' as
26
well, is to put its -- if you wish, its stamp of approval,
27
its imprimatur, on what you've done.
28
summary of what Rudden is doing in this case?
Is that a fair
164
1
MR. VAN DUSEN:
No, I wouldn't say that.
They were
2
hired to bring to us an independent methodology.
3
our methodology as a basis of seeing what we did, and I am
4
gratified to hear the comments they have about the
5
methodology.
6
judgment and their industry knowledge to bear and bring us
7
the methodology, and that's what they did.
8
9
10
They had
But they were told to bring their independent
MR. WARREN:
Sorry, Mr. Van Dusen, I didn't mean to
suggest that you had skewed their thinking in any way.
Mr. O'Brien, the methodology which you have described
11
for Hydro One Networks, would it generally be applicable to
12
LDCs in the electricity sector, or are there unique
13
characteristics to Hydro One that would require a
14
fundamentally different methodology for other LDCs?
15
MR. O'BRIEN:
I think there are unique characteristics
16
to any company that would require you to look at it to see
17
which of the components you would use in distributing your
18
costs.
19
I think I said earlier that we start at the same basic
20
point as to what three things you're trying to accomplish,
21
and you've got mechanisms to accomplish that.
22
you use depends on the company's operation, what data they
23
have available, and what costs they're looking to
24
distribute.
25
Which ones
So, in general, I would say that the same methodology
26
can be used.
But as you start getting down into how
27
granular you get, into what costs you're looking to
28
distribute, and what processes you're looking to put in
165
1
place, I think that then starts to determine the uniqueness
2
to every company.
3
different sets of drivers and different methods for
4
capturing its costs, but the methodologies would be
5
basically the same.
6
MR. WARREN:
I think each company would have
We have some -- in this province, we have
7
some 80-plus local distribution companies in the
8
electricity sector.
9
Is it the case that the Board, for example, would have
10
to look at the application of the Rudden methodology with
11
particularity to -- in 80 different ways to those?
12
I appreciate you haven't looked at those, but what I'm
13
trying to get a sense of is to what extent this is a
14
template that can be used for other -- what you've done is
15
a template for what might be done with other distribution
16
utilities.
17
MR. O'BRIEN:
I mean,
I think you could very easily do that,
18
and I think most of the consulting firms that would come in
19
to do it are people who do this as a regular business, as I
20
did when I started with Citizens, would start at the same
21
point.
22
You would start at the point of trying to get the
23
three prongs in place, to adhere to whatever regulatory
24
criteria were involved, and you would then start looking at
25
what drives the business, and they're set up pretty well.
26
Utility claims is not going to differ from most of the
27
companies, and it should be used in basically the same
28
areas of distribution: employees, wages, O&M expenses, all
166
1
of the same process.
2
company to determine how it -- how it uses each one of
3
those and that it follows it appropriately for his
4
business.
5
It's just a matter of looking at the
So if you look at it from that aspect, the Board could
6
establish this basic parameter of going through where the
7
first three or four steps may be the same or basically the
8
same for each company, and then, when you get down to it,
9
you would not want company A to use everything the same as
10
11
12
13
company B if its operations were different.
From that aspect, it's got to go with its own costs
and its own allocators.
MR. WARREN:
Could I ask you to turn up page 4 of your
14
report, gentlemen, under the heading E, "Scope."
15
see that?
16
MR. O'BRIEN:
17
MR. WARREN:
Do you
Yes.
It reads:
18
"Consistent with standard practice for consulting
19
assignments, we rely on the genuineness and
20
completeness of all documents presented to us by
21
Hydro One and we accept that factual statements
22
made to us by Hydro One, example, counts of work
23
stations, counts of FTEs, budgeted amounts,
24
subject only to overall and reasonableness and
25
actual contrary knowledge but without independent
26
confirmation."
27
28
At a high level of generality, gentlemen, to what
extent did you rely on Hydro One data?
And, as a corollary
167
1
of that, to what extent did you do your own independent
2
verification of the accuracy of the Hydro One data?
3
MR. O'BRIEN:
I think in general, as we were
4
presented, for example, with the square feet that we used
5
in one of our cost drivers, we would have relied on Hydro
6
One to give us the appropriate number of square feet that
7
was being used by each one of the elements going in.
8
same would be true for each one of those items used as a
9
driver.
10
The
In addition, when we were provided with the budgeted
11
data that had to be distributed, we relied on them for the
12
budgeted data and did not do any independent verification
13
of that budgeted data, other than to see that it was
14
budgeted data the company had built up as we went through.
15
Where we had historic data, we would check that
16
historic data to the actual filed reports of the company.
17
That, again, gave us some security that the numbers that
18
were being provided were provided to outside sources,
19
followed the normal auditing review process.
20
21
22
MR. WARREN:
To what extent does the -- I'm sorry, go
ahead, please.
MR. GORMAN:
If I may add to that.
In the sections,
23
we discussed each task, which we went through before.
We
24
identified the source.
25
source of the information.
26
budget from Hydro One.
27
interviews with managers.
28
of Mr. Van Dusen, some of his colleagues, at meetings to
For each task, we identified the
So we said we obtained the
We obtained the time studies from
And we relied on the attendance
168
1
2
help substantiate it.
So we have attempted to set forth for you the source
3
of each of the pieces of information that are incorporated
4
in our methodology.
5
MR. WARREN:
The large question I wanted to get to,
6
panel, is this:
7
this utility and other utilities, to what extent does the
8
Board have to rely on independent verification of the data
9
that goes into these cost-allocation studies, or to what
10
extent can it simply rely on the data that is provided by
11
the utilities?
12
As the Board goes down the road both with
Is it a utility-specific issue?
MR. O'BRIEN:
In my experience, yes.
I think that the
13
utilities are required by the Board or other regulatory
14
commissions to provide data that is accurate.
15
in my mind, is not going to provide inaccurate data to
16
present its information.
17
sources, which gives another level of confidence.
18
MR. GORMAN:
A utility,
It is also reviewed by external
In addition, I believe that you phrased
19
your first question with regard to LDCs.
LDCs don't have
20
the issue we have before us.
21
distribution bucket.
22
perhaps some of them are just distribution, where they will
23
have an issue of class cost allocation.
24
the issue of transmission versus distribution.
25
extent, they wouldn't need this type of study.
It all goes into the
So if there are 80 LDCs in Ontario,
They won't have
So to that
26
MR. WARREN:
Briefly, in conclusion, two issues I
27
wanted to cover off:
28
report and in some of the interrogatory responses to the
There are references both in your
169
1
question of need, that is, whether or not the distribution
2
sector needs a particular service which is provided by the
3
affiliate.
4
What, if any, role does the question of the
5
determination of need play in an allocation study?
6
other words, do you make an assessment, gentlemen, of
7
whether or not -- let's take the example of distribution --
8
needs a particular cluster of services which it is getting
9
from an affiliate?
10
MR. GORMAN:
In
Well, the types of services that we're
11
dealing with here, the types of services that almost every
12
business needs in some fashion, we need controllership
13
activities, we need a tax department, we need a
14
communications department.
15
So, in general, any company that we would go to, we've
16
seen not exactly the same, of course, but similar types of
17
functions being performed.
18
address the need for the various departments that are
19
included in the CCFS.
20
MR. WARREN:
That's the level at which we
My understanding - and correct me if I'm
21
wrong - is that you were presented with a list of services
22
which were being provided.
23
assessment of that list to see whether or not those are
24
actual services that were actually needed by transmission
25
or distribution, or do you take that, as you've put it,
26
Mr. Gorman, in comparison with what the industry generally
27
needs and leave it at that?
28
MR. GORMAN:
Now, did you make any
We relied on our general industry
170
1
experience.
Mr. O'Brien and I deal with between probably
2
50 different companies in the electricity business, and so
3
we've seen enough companies.
4
When we got down to the activity level, we had an
5
understanding of what we were expecting activities would be
6
performed, and actually, you know, rather than -- what we
7
found was that when people were given this activity, they
8
tended to forget about activities.
9
person, Well, don't you do a little bit of this?
10
11
So we reminded the tax
Do you do
anything toward construction activities?
So I think that we had an idea of what we were going
12
to find, and we didn't find anything that struck us as
13
being, Well, why are they doing that for this kind of a
14
company?
15
MR. VAN DUSEN:
I just want to add that, as Mr. Gorman
16
indicated earlier in his testimony, he did meet with the
17
representatives of Hydro One Brampton, remote communities,
18
and Telecom on several occasions to talk to them about the
19
need for the services.
20
on behalf of the transmission and distribution business
21
internal to Hydro One, that was handled through both the
22
director of business integration, Mr. Carlton, and the
23
chief financial officer, Beth Summers, in reviewing the
24
allocation and the appropriateness of those services being
25
provided.
26
MR. WARREN:
And the benefit of the services and
My final question, gentlemen - and I
27
should apologize in advance for this - this question arises
28
from my terrible note-taking.
171
1
One of you - I apologize, I can't remember who said it
2
- said that:
3
to determine whether or not the methodology reflected best
4
practices.
5
of whether the costs were prudent.
6
As part of the -- what Rudden was doing was
Then there was a reference to a determination
I don't quite understand that reference.
I don't see
7
anything in the Rudden report which is an assessment about
8
whether the quantum of the costs being allocated is
9
prudent.
10
Is that part of your analysis?
MR. GORMAN:
Yes, it was.
We undertook an examination
11
we considered when we evaluated the costs -- I believe
12
you're referring to the question of whether the aggregate
13
costs are prudent.
14
the costs in the aggregate, the $235 million that we were
15
presented with, made sense.
16
O'Brien and I relied on our general industry experience.
17
We also undertook a limited study of comparable
We undertook an examination of whether
And to establish that, Mr.
18
companies in the United States and a second one of roughly
19
comparable companies in Canada, and we found that in the
20
benchmarks that we used or the -- I don't want to call them
21
benchmarks.
22
it a benchmark -- the comparators we used, Hydro One was
23
just about in the middle.
I don't want to glorify what we did by calling
24
In dollars per customer month, they were slightly
25
lower than the average that we had established, and in the
26
dollars per gigawatt hour distributed, they were slightly
27
higher.
28
By “slightly,” we mean 5 to 10 percent either way.
So we were comfortable that the costs, the overall
172
1
bucket of costs that we looked at, were in the reasonable
2
range.
3
MR. WARREN:
Mr. Gorman, there is a mountain of
4
evidence in this case.
5
you tell me where in the report that analysis of the
6
prudence of the costs in comparison to others is found?
7
MR. GORMAN:
I apologize if I missed it.
Can
We referred to that generally, and when
8
we make the statement that we're addressing the three-prong
9
test, we did not provide any documentation for any -- for
10
11
12
13
14
15
that statement.
MR. WARREN:
Is there documentation or just that you
didn't -- it's there and you didn't provide it?
MR. GORMAN:
There are worksheets that we've -- that
we have.
MR. WARREN:
The reason I ask the question,
16
Mr. Gorman, is not just apropos the issue of your reference
17
to prudence, but one of the issues that we wrestle with in
18
dealing with Hydro One is the very issue of its
19
comparability, because Hydro One says often that it is sui
20
generis, can't be compared to anything else.
21
that you had done some comparisons is a point of some
22
interest.
23
24
Let me ask this question.
So the fact
If I were to -- I'm sorry,
Mr. O'Brien, you want to say something?
25
What I want to ask is whether or not if I and the
26
Board were to look at those worksheets, are they -- I don't
27
mean to be insulting by this, but are they intelligible?
28
Could we read them and make sense of them if we look at
173
1
2
them, or are they just your notes?
MR. GORMAN:
Well, the report that you see before you
3
is in one stage in the format that my current notes on
4
comparability are in.
5
a little bit easier for somebody to follow us.
6
presented it in a formal report.
7
have are in that very, you know, un -- illegible stage, but
8
they could be transformed into something a little more
9
readable.
10
MR. WARREN:
We are, you know, put -- we made it
We
The stage of the notes I
Before we get to the question, how
11
material -- I took it from the answer that was given
12
earlier that it -- it is an essential step in
13
cost-allocation methodology to make this determination of
14
prudence.
15
is material to the value or the reliability of the
16
conclusions about the cost-allocation methodology?
17
fair?
18
So am I right that a determination of prudence
MR. VAN DUSEN:
Is that
I'm going to jump in here, and I will
19
agree with you that is fair, and I think that is what panel
20
4 was here to address.
21
the total common costs functions and services.
22
filed all sorts of evidence, all sorts of interrogatory
23
responses with respect to the level of costs.
24
about the detailed business-planning process that ensures
25
the rigorous analysis of those.
26
Board has much of that information in front of it already.
27
28
MR. WARREN:
We were here to take you through
We had
We've talked
So I would argue that the
I didn't want to get into an argument
with you, Mr. Van Dusen.
I was really asking the question
174
1
of the Rudden people, whether or not it is material to
2
their conclusion.
I take it it is.
3
And the difficulty I have - maybe others share it - is
4
that there is no way to examine the analysis without having
5
the worksheets or the basis on which the conclusion is
6
reached.
7
First of all, can I just ask this question:
Do you
8
agree that it is a material element of your conclusion that
9
the cost-allocation methodology is the appropriate one?
10
MR. O'BRIEN:
Yes.
As we went through our process, we
11
had looked at the costs that were being incurred by each
12
one of the original areas that Hydro One has.
13
examined those and the people that they had doing them, and
14
were satisfied on that basis.
15
We had
What Mr. Gorman is talking about is trying to get some
16
more detailed comparison with other companies that may or
17
may not be comparable, may or may not have the same
18
administrative functions that are being distributed, may
19
not operate in the same way.
20
detailed study with a lot of assumptions and comparisons
21
that have to be made.
22
And that becomes a very, very
What Mr. Gorman did in his review was take some
23
published data for several companies and take two very
24
high-level elements:
25
costs per customer; the other was a cost per
26
kilowatt-hour.
27
ballpark of that, but without going into the detail of
28
saying, How did company A, B, C, D, E operate, what was
I think one was per customer, the
And say, Okay, we're somewhere in the
175
1
their administrative function, did they have centralized
2
services, did they go down at any number of elements on it,
3
you cannot give something to somebody and say, This is our
4
opinion that it is reasonable.
5
The reasonable and prudence level came from looking at
6
each one of the departments that we reviewed, what the
7
costs were for those departments, and taking a very broad,
8
high-level look at some of these other things which would
9
not be deemed as a study.
10
I would say that it would take Mr. Gorman quite a bit
11
of time to put something together that we would testify to
12
as being a reasonable comparison study.
13
For our level, I think I can say that, with the data
14
that we had, looking at each of the individual departments
15
and adding up to the total of cost, we think they're being
16
prudently incurred and what Mr. Gorman did was sort of
17
validate our initial impression.
18
MR. WARREN:
May I just add this one further fillet to
19
it.
49 percent of the costs that we're dealing with are
20
Inergi costs; is that right?
21
MR. GORMAN:
Yes, roughly.
22
MR. WARREN:
And we had a witness here from one of the
23
other panels.
We were asking about Inergi.
And Inergi
24
agreements has a provision in it for benchmarking.
25
they said that of the six lines of business in the Inergi
26
contract, five of them could not be benchmarked.
And
27
Now, against that broad context - I think I've got my
28
recollection of their evidence reasonably accurately - did
176
1
you undertake any comparison of the Inergi component of the
2
costs when you were looking at this prudence question?
3
4
MR. GORMAN:
We looked at the overall buckets of
costs.
5
MR. WARREN:
Overall buckets of Inergi costs.
6
MR. GORMAN:
No, the overall buckets of common costs
7
8
$235 million.
MR. WARREN:
Madam Chair, while I think it would be
9
interesting to have this data in light of what they told us
10
about the degree of difficulty in manufacturing it, I’m not
11
going to ask for an undertaking to produce it, and those
12
are my questions for this panel.
Thank you.
13
MS. NOWINA:
Thank you, Mr. Warren.
14
Mr. DeVellis.
15
MR. DeVELLIS:
16
CROSS-EXAMINATION BY MR. DeVELLIS:
17
MR. DeVELLIS:
Thank you.
Good afternoon.
My first area actually touches on one
18
of -- questions touches on one of the last areas Mr. Warren
19
was asking you about.
20
in your table 5, in the Rudden report -- that has to do
21
with how the -- I guess the bucket of common costs is
22
developed or was developed by Rudden.
That has to do with how, with task 1
23
Now, I'm not going to go through the whole list of
24
tasks on the table, but if you could turn to page 10 of the
25
Rudden report.
26
A, task 1, in the last sentence:
You say there, in the third paragraph under
27
“This information was obtained from Hydro One
28
Inc. internal documents, the Inergi scopes of
177
1
work, and discussions with Hydro One Inc.
2
personnel.”
3
Now, do I take that to mean that Rudden took -- that
4
the definition of the CCFS bucket was provided to you by
5
Hydro One?
6
MR. O'BRIEN:
7
MR. DeVELLIS:
8
9
10
11
Yes.
Okay.
And if we just -- you didn't
review the components of that budget in any detail?
MR. O'BRIEN:
Can you restate your question, please?
MR. DeVELLIS:
You didn't review the components of
that, whatever that bucket was that was provided to you?
12
MR. O'BRIEN:
13
MR. DeVELLIS:
What do you define as “components”?
Well, let me put it to you this way:
14
If you look back to the three-pronged test, you have cost-
15
incurrence test, cost-allocation and the cost-benefit test.
16
Now, I take it from your previous answer that what you
17
were given is, Here's the bucket of CCFS costs and we need
18
a way to allocate that to the affiliates.
19
MR. GORMAN:
Yes.
Is that right?
Task 1 discusses the list of common
20
functions and services, which you see listed in detail in
21
Exhibit A, and the budget dollars themselves were in
22
another task.
23
MR. DeVELLIS:
What I'm not clear about, though, is
24
how that process meets the cost-incurrence test, if what
25
you're doing is taking a bucket of costs given to you by
26
Hydro One and just finding a way to allocate.
27
how it goes to the cost-allocation test, but how does the
28
cost-incurrence test fall into that analysis?
I can see
178
1
MR. GORMAN:
Yes.
Perhaps I could expand that a
2
little bit.
The cost-incurrence test is not directed
3
towards the dollars; it's directed towards whether the
4
services are actually needed.
5
conclusion, we looked at Exhibit A, in addition to looking
6
at the particular activities that were developed, where it
7
said -- for instance, Exhibit A to our report said:
And to reach that
8
"Board of directors' strategic direction and
9
implementation results for Hydro One Inc. and for
10
each subsidiary."
11
12
So that is what a board of directors does and that is
what we understand they're doing.
13
If that had also said “pursue IPO,” we would have
14
realized that some of those costs would be in a shareholder
15
bucket, but it didn't say that.
16
costs were necessary for the transmission, distribution and
17
the other businesses that we were looking at.
18
So we concluded that those
So the incurrence test speaks to what are these people
19
doing in those services that are needed by the
20
transmission, distribution, you know, Brampton, remotes,
21
telecom and general business units that were receiving the
22
services.
23
MR. DeVELLIS:
Is that analysis that you just
24
described, is that set out in your report anywhere?
In
25
other words, you just described the procedure where you
26
look at various services and you decide whether or not this
27
should be -- it should be allocated to the affiliates or
28
not.
179
1
Is that set out in your report?
2
MR. GORMAN:
3
detailed information.
4
professional judgment that those are necessary services for
5
these business units.
6
Exhibit A is -- Exhibit A sets out the
It is our conclusion, it is our
I think by extension we can say that by and large when
7
you go down those activities we concluded those appear to
8
be necessary and useful services for the T and D
9
businesses.
Do we have a list where we check off each one
10
and enumerate each one and say, This is necessary, this is
11
necessary?
12
exhibit that does that.
13
MR. DeVELLIS:
No, we didn't present you with a report or an
To the extent that there are
14
duplication in, say, a service provided by Hydro One Inc.
15
to Hydro One Networks, does your report set out whether or
16
not Hydro One Networks, as a stand-alone entity, would
17
require a service from Hydro One Inc. that it is already
18
providing for itself?
19
MR. GORMAN:
I don't think we addressed that issue
20
specifically, but, again, the cost-duplication issue would
21
have been an issue that arose in the examination of the
22
overall level of costs.
23
MR. DeVELLIS:
I have some questions on the specific
24
cost drivers that you use in your valuation -- or your
25
methodology, sorry.
26
I'm going to refer to Exhibit C of the Rudden
27
methodology.
Now, you have a number of allocators there,
28
such as full-time employee -- sorry, do you have it?
180
1
MR. GORMAN:
2
MR. DeVELLIS:
3
MR. ROGERS:
4
5
Yes, sir.
And total capital.
I'm confused.
Are you talking about
appendix C?
MR. DeVELLIS:
Unfortunately, they're both called
6
exhibits, so Exhibit C to the Rudden methodology.
7
also called an exhibit; although, I guess it should be
8
called an appendix.
9
10
MR. ROGERS:
I have it.
MS. CAMPBELL:
Thank you.
Sorry.
Actually, it is C2, because there were
11
no direct assignment activities, only drivers and
12
allocators.
13
MR. GORMAN:
14
MR. DeVELLIS:
It's
Right.
So, yes, the indirect allocators start
15
on C2.
The ones I'm referring to are -- for example, the
16
full-time employees are total capital, and what those are
17
are -- well, I will put this to you.
18
basis of allocation that assumes that an affiliate's use of
19
an activity is based on their proportion of a given
20
allocator for full-time employees or capital; is that fair?
21
MR. GORMAN:
22
MR. DeVELLIS:
You're using the
Yes.
Okay.
Now -- but with some of these
23
functions or services, there are economies of scale.
24
would be, would there not?
25
MR. GORMAN:
26
MR. DeVELLIS:
There
Hopefully, yes.
But like, for example, if you look at
27
labour relations function on C2, page C2, all of the
28
activities there are allocated on the basis of FTEs.
181
1
Now, what using that allocator does is remove the
2
economies of scale for the particular entity.
3
up.
4
Let me back
The labour relations function is one where you would
5
expect to have economies of scale; would you agree with
6
that?
7
MR. GORMAN:
8
MR. DeVELLIS:
9
Yes.
Okay, yes, likely.
So the more employees covered by a
collective agreement, the less you would --
10
MR. GORMAN:
11
MR. DeVELLIS:
Sure, right.
-- expect to pay per employee; would
12
you agree with that?
13
MR. GORMAN:
14
MR. DeVELLIS:
Yes, that's correct.
But by using a straight percentage of
15
the total employees, aren't you removing that economy of
16
scale from that particular entity?
17
For example, if Networks has a higher percentage of
18
employees, obviously, than the other affiliates, they would
19
be paying on a percentage of their employees.
20
what I'm saying?
21
MR. GORMAN:
Do you see
Are you suggesting -- excuse me for
22
putting words in your mouth, but every business unit would
23
get a sixth of the total, because everybody needs its own
24
labour relations person?
25
suggesting, that wouldn't in fact be the way it works,
26
because that is not the way -- a small company might not
27
have its own labour-relations person.
28
subcontract to another firm that would allocate just a
If that is what you're
They might
182
1
2
small portion of the costs to them.
MR. DeVELLIS:
I wouldn't necessarily suggest they
3
would take a sixth, but what I'm suggesting to you is that
4
by using a straight percentage basis, that they're getting
5
a higher percentage than they would normally -- if they
6
were a stand-alone company, they wouldn't necessarily pay
7
that much for labour relations.
8
9
MS. NOWINA:
Mr. DeVellis, can I just clarify, because
I think some of the terminology you're using is confusing
10
me a little.
11
Networks is one company and distribution and transmission
12
are intertwined throughout, unless you're referring to
13
Hydro One Telecom or something like that.
14
15
16
17
You used the word "affiliates," but Hydro One
MR. DeVELLIS:
Yes, I apologize.
I understand that
distribution and transmission is one company.
MS. NOWINA:
You're thinking of the other affiliate
companies when you're making these comments?
18
MR. DeVELLIS:
19
MR. O'BRIEN:
Yes, that's correct.
Let me see if I can understand what your
20
question is.
21
incurred $10,000 worth of costs of this service, I would
22
have a cost of $100 per employee in doing that.
23
1,000 employees to provide the same service, it's likely
24
that I would not have $100 per employee, but it might be
25
$50 per employee, getting my economies of scale.
26
If I had a company with 100 people and I
If I had
Now, by going -- if my firm was 100 employees, I would
27
have a $10,000 charge.
If I'm now going to 1,000
28
employees, at $50 an employee, the total charge is $50,000,
183
1
and my share at 10 percent would be 5,000.
So my share,
2
although it is a straight percentage as we have here, is of
3
a much smaller overall bucket.
4
less than they would be as a stand-alone business.
Therefore, my costs are
5
If my business had ten employees, and I couldn't
6
afford to have my own internal service to do that, I would
7
contract it out, and it's likely that my stand-alone cost
8
would have been $200 per employee.
9
included in the bigger group, I have a lower per unit cost,
Because I'm now
10
which should correctly be distributed on a straight
11
percentage basis.
12
13
14
I don't know if that answers your question, but that
is how I see the difference.
MR. DeVELLIS:
I'm afraid to admit that you lost me at
15
some point there.
16
I think you may have -- you may have actually answered it,
17
that the smaller affiliates will be paying less than they
18
would be, and the bigger affiliate networks would be paying
19
more than they should be because they're all allocated on
20
the same basis even though a larger one would have a lower
21
cost per employee.
22
MR. O'BRIEN:
I guess my point of my question is that
They both have the same cost per
23
employee being included in the same group.
Now, if you
24
broke them out as to separate entities, the larger the
25
company may have had just a small change in that example.
26
It may go from $50 to $51.
27
would have a substantial increase, because they would then
28
be getting the same services, assuming the services are the
But the two smaller companies
184
1
same at a much higher cost, because their risk pool or the
2
pool they spread it over is much smaller.
3
them into the bigger group, everybody gets a little bit of
4
a benefit.
So by putting
Some get significant benefits.
5
MR. DeVELLIS:
Thank you.
I'm going to move on, then.
6
My next area is to try and get a breakdown of how much
7
of the common costs are retained by Hydro One Inc. and how
8
much are allocated to Networks.
9
I would refer you to Exhibit A of the Rudden report.
10
And also, I think Board Staff Interrogatory No. 92 also
11
applies to this line of questions, that is, Exhibit H, tab
12
1, schedule 92.
13
MR. GORMAN:
14
MR. DeVELLIS:
Yes, we've gotten it.
Now, I've added up the activities
15
listed in Exhibit A under “Hydro One Inc. corporate
16
office.”
17
those activities.
And I've used the numbers shown in Exhibit F for
18
MR. VAN DUSEN:
19
MR. DeVELLIS:
Yes.
And I get, subject to check - I don't
20
want you to do the math now - 9,376,218 in total excluding
21
donations.
22
office.
23
So from board of directors to treasurer's
Okay.
Before I give you the total -- now for treasurer's
24
office, if you look at Exhibit F of the Rudden methodology,
25
there is no activity called treasurer's office, but there
26
is one called treasury.
27
listed in --
28
MR. GORMAN:
Is that the same activity that is
No, that's not.
I believe the
185
1
treasurer's office costs that you see in Exhibit A were
2
removed and put into the company's cost of capital, charge
3
to interest expense.
4
Is that correct, Mr. Van Dusen?
5
MR. VAN DUSEN:
6
MR. DeVELLIS:
7
MR. GORMAN:
Yes, that's correct.
Okay.
So that doesn't belong there?
So the treasury line that you see in
8
Exhibit F, that is not part of -- that's not the same as
9
treasurer's office.
The treasury line in Exhibit F is part
10
of the financial group, financial management group, and
11
there are dollars in the CCFS for that.
12
office function that we see in the CCFS, there are no
13
dollars related to that in the CCFS study.
14
MR. VAN DUSEN:
That's correct.
The treasurer's
The dollars you see
15
here for treasury on page F1 are associated with the claims
16
and insurance unit which is handled through the cost-
17
allocation methodology.
18
MR. DeVELLIS:
Okay.
Well, then all of my numbers on
19
my sheet here are going to be off.
20
you remove the treasurer's office is 5,521,100, and of
21
that ...
22
23
MR. VAN DUSEN:
Are you trying to see how
much is shareholder funded?
24
MR. DeVELLIS:
25
MR. VAN DUSEN:
26
MR. DeVELLIS:
27
MR. VAN DUSEN:
28
Excuse me.
So the total I get if
Yes.
If I could take the Board -Thank you very much.
-- and everyone to page 52 of the
Rudden model, which is Exhibit H, tab 1, schedule 2.
Once
186
1
again, page 52.
2
Rudden model.
3
attachment.
4
5
6
This is the big Rudden model, the 108-page
H, tab 1, schedule 2, page 52, the big
MR. DeVELLIS:
Is this the spreadsheet that was
provided.
MR. VAN DUSEN:
This is filed as part of the
7
interrogatory response to this question.
8
version of the model was requested, and this is just a
9
printout of it.
10
Do you have that now, sir?
11
MR. DeVELLIS:
12
A full working
I don't seem to have it, but go ahead
with your answer.
13
MR. VAN DUSEN:
14
MS. NOWINA:
15
MR. VAN DUSEN:
Madam Chair, do you have this?
I do.
On this table - this is the one-page
16
-- another version of the one-page summary - you will see
17
the total of 235 million in the bottom right-hand corner,
18
which if you look at the Rudden report, the page F1 we had
19
been looking at, you see the same 235 million.
20
more the detailed allocation to the other subsidiaries; the
21
Rudden actually filed exhibit just showed you T, D and
22
other.
23
shareholder, and material surcharge.
24
This shows
This breaks the other out into remotes, telecom,
You will see in the shareholder-only category, the
25
very bottom of the page, $944,011 representing the amount
26
that was not passed on to ratepayers but was funded by the
27
shareholder.
28
The majority of that, you've correctly pointed out,
187
1
sir, is the donations, which -- the cost for donations
2
which we incurred which was not passed on.
3
other small parts of that, mainly the executive office, the
4
holding company, which is what HOI stands for.
5
There are some
So this gives you a breakdown of the holding company
6
costs of the 7.3 million total holding company costs of
7
approximately 944,000 shareholder funded.
8
answers your question, sir.
9
MR. DeVELLIS:
That was my question.
I hope that
Thank you.
10
So the remainder would be distributed to the affiliates,
11
including Networks, telecom, et cetera?
12
MR. VAN DUSEN:
Yes, I guess in the examination which
13
R.J. Rudden did - and they can talk to this themselves if
14
they need to - one of the things that we saw, in terms of
15
the -- even the holding company, the very small holding
16
company we have, is that we are now a core transmission and
17
distribution business.
18
non-regulated-related business that occupies their time,
19
and therefore, most of the costs are passed on to the
20
shareholder.
21
MR. DeVELLIS:
We don't have -- very little
I get approximately 2 percent of the
22
holding company's costs are retained by the shareholder,
23
and the rest are allocated to the affiliate?
24
MR. VAN DUSEN:
25
MR. DeVELLIS:
26
MR. VAN DUSEN:
27
MR. DeVELLIS:
28
I will take that subject to check.
144,000 on 7.3 million.
Yes.
Okay.
Now, would you agree with me
that in running a corporation with multiple affiliates
188
1
there are certain management and governance costs that
2
exist over and above each individual entity; costs that
3
should be retained by the shareholder in other words?
4
MR. O'BRIEN:
If all of the entities are regulatory
5
businesses, then all of the costs of running those
6
businesses should be charged to the regulated entities.
7
You would not have a shareholder benefit cost under that
8
aspect.
9
MR. DeVELLIS:
Well, there would be costs, for
10
example, if Hydro One Inc. had its own board of directors
11
and its own president and the affiliates also have their
12
own boards of directors and own chief executive officers.
13
Isn't there duplication there?
14
MR. O'BRIEN:
Not necessarily.
It would depend on the
15
functions of those board members and what they were
16
supposed to accomplish in their tenure.
17
The board members for a subsidiary could be
18
responsible for running that subsidiary, which has nothing
19
to do with financing.
20
activities that are required by a larger company but were
21
installed just to make sure they managed their individual
22
company correctly.
23
MR. DeVELLIS:
It has nothing to do with other
Now, part of your answer to Board Staff
24
Interrogatory No. 2, you gave a table which sets out how
25
the managers estimated the time for their various
26
activities.
27
28
I have actually provided a copy of the table to your
counsel.
189
1
MR. VAN DUSEN:
2
MR. DeVELLIS:
Oh, okay.
I also have copies for Board Staff,
3
rather than have everybody look it up.
4
somewhere in the spreadsheet.
5
6
MS. CAMPBELL:
It's buried
I take it, Mr. DeVellis, you would like
the panel members to have a copy?
7
MR. DeVELLIS:
Yes.
8
MS. CAMPBELL:
All right, thank you.
9
Thank you very much.
should give this an exhibit number.
Perhaps we
So it would be -- K7.3
10
would be the exhibit.
It is Hydro One, common corporate
11
cost model, estimated time distribution.
12
EXHIBIT NO. K7.3:
TABLE ENTITLED "HYDRO ONE, COMMON
13
CORPORATE COST MODEL, ESTIMATED TIME DISTRIBUTION"
14
MR. DeVELLIS:
I see also in table 6 of your -- the
15
Rudden report, page 12, you have one of the business units
16
identified as “shareholder.”
17
MR. ROGERS:
18
MR. DeVELLIS:
19
Sorry, table 6?
Of the methodology.
Page 12 of the
Rudden methodology.
20
MR. GORMAN:
21
MR. DeVELLIS:
That's correct, yes.
And the description given is it
22
represents activities performed exclusively for the benefit
23
of the sole shareholder of Hydro One Inc.
24
there?
25
MR. VAN DUSEN:
26
MR. DeVELLIS:
Do you see that
Yes.
If you go to the table that I have just
27
referred to, which has been marked as an exhibit, we have a
28
column there, the second-last column -- or I guess the
190
1
third-last column, “shareholder only.”
2
MR. O'BRIEN:
3
MR. DeVELLIS:
4
5
6
7
Yes.
These were -- tables were filled out by
Hydro One managers?
MR. O'BRIEN:
Hydro One managers or others within the
heads of the department of Hydro One.
MR. DeVELLIS:
And they were asked to estimate what
8
percentage of their time would fall under the various
9
business units there?
10
MR. GORMAN:
11
MR. DeVELLIS:
That's correct.
Now, if you look -- in particular, with
12
respect to the shareholder column, shareholder only.
13
guidance were the managers given as to what should go into
14
that column as opposed to others?
15
16
17
18
19
MR. GORMAN:
What
The activities performed exclusively for
the benefit of the shareholder.
MR. DeVELLIS:
Is that it?
Were you given any context
to make that evaluation, is my question.
MR. GORMAN:
Well, the departments that charged some
20
time into that area were the executive office.
21
those charges were discussed with Ms. Formosa, who is the
22
legal counsel for the corporation, and we had a discussion
23
with her.
24
activities would qualify as being exclusively for the
25
benefit of the shareholder.
26
27
28
Most of
So I believe she had an understanding of what
MR. DeVELLIS:
Okay.
And those judgment calls were
made by Hydro One personnel?
MR. GORMAN:
By Ms. Formosa, in consultation with
191
1
Mr. Van Dusen.
2
it was her judgment in speaking with Mr. Van Dusen and some
3
of the executives that are in the corporate office.
4
5
6
And I'm not sure who else she spoke to, but
MR. DeVELLIS:
And what was Rudden's role in reviewing
that, those allocations or those estimates?
MR. GORMAN:
We had a discussion as to -- we asked,
7
Are you pursuing any IPOs?
8
we dropped the IPO business.
9
And the answer to that was, No,
We asked if there were any non-regulatory businesses.
10
Is there anything which you feel is not really being
11
performed for the purpose of guiding or providing direction
12
to or helping to manage one of the other five entities that
13
we have listed here?
14
Really very little.
15
And the answer we got back was,
Really very little.
And the resulting estimates of the time reflected
16
really very little time is spent on those shareholder
17
activities.
18
MR. O'BRIEN:
As we started our process, there was a
19
shareholder box, bucket set up because of the transition
20
that had been taking place where there were a number of
21
non-regulated activities that the company had gotten into.
22
And in looking at the functions and the activities that
23
were being performed on an ongoing basis, those had pretty
24
much gone away.
25
is still somewhat regulated, was the only one that fell out
26
of the total regulated entity.
27
28
The telecom business, which I understand
So as we started to get into it, there was a question
of whether there would be a number of costs that went in
192
1
there, and the determination was there should not be.
2
And the results of the studies, as we started getting
3
them back, was there were not a lot of costs that were put
4
in there.
5
several people there to make sure it was an accurate
6
presentation of the company's direction as it stood today.
7
8
9
And this was reviewed, as Mr. Gorman said, with
MR. DeVELLIS:
Does Hydro One Networks have its own
president or CEO?
MR. VAN DUSEN:
10
MR. DeVELLIS:
11
its own president?
Yes, it does.
It does.
And Hydro One Inc. also has
12
MR. VAN DUSEN:
13
MR. DeVELLIS:
14
MR. VAN DUSEN:
15
find the reference.
16
interrogatory, to provide the details of the makeup of the
17
board of directors.
It's in -- let me make sure I pull up
18
the right one here.
Part of the response is in Exhibit H,
19
tab 5, schedule 6.
20
MR. DeVELLIS:
21
It's the same individual, but, yes.
What about board of directors?
Yes.
I'm actually going to try to
We were asked that in an
I hope I have that one.
That's my
client's.
22
MR. VAN DUSEN:
23
desperately looking for.
24
know, there is another interrogatory response that does
25
provide them all.
26
There is another reference I'm
This doesn't have them all, but I
I believe the response I just noted to you notes the
27
Network's board of directors.
28
other one quickly.
I can't seem to find the
193
1
2
3
MR. ROGERS:
attachment A.
It might be easier, tab 5, schedule 4,
Is that what you're looking for?
MR. VAN DUSEN:
No?
This page 5, Exhibit H, tab 5,
4
schedule 6 gives you the Hydro One Networks board of
5
directors.
6
participation on the senior executive teams.
7
sorry, I can't find that other interrogatory response,
8
which I think talked to the other boards for the other all
9
small subs and who sat on them.
10
11
It also, then, delineates some of the
MS. NOWINA:
Dusen?
Perhaps in your annual report, Mr. Van
Is it in that?
12
MR. VAN DUSEN:
13
MS. NOWINA:
14
15
And, I'm
That's a very good thought.
What's the exhibit number of the annual
report, Mr. Van Dusen?
MR. VAN DUSEN:
The exhibit number for the annual
16
report is Exhibit A, tab 10, schedule 1.
17
I've been successful, looking at it quickly, to see whether
18
the boards of directors of all the subs are listed here.
19
20
21
MS. NOWINA:
But I can't say
First, Mr. DeVellis, is it material
enough that you want to have it as an undertaking?
MR. DeVELLIS:
I don't know if we have to have -- I
22
can turn to the actual members, but my general question is:
23
To the extent that there is duplication between, say,
24
Networks’ board of directors and incremental costs for
25
Hydro One Inc.'s board of directors, is that something
26
where Rudden would have decided, that is, a shareholder
27
cost, because that is a cost of managing the affiliates or
28
managing the enterprise and not a cost that Hydro One
194
1
2
Networks would incur if it was a stand-alone entity?
MR. VAN DUSEN:
I will answer one part of the question
3
and let my good friends answer the second part.
4
of incremental costs, these boards are almost exclusively
5
internal to members of the senior management team put
6
together in compliance with the Affiliate Relations Code in
7
terms of the independence rules.
8
9
In terms
So whatever costs there would be for the board
meetings themselves would be extremely minimal.
I see it
10
as a very minimal -- additional costs, if you want to say
11
that.
12
MR. O'BRIEN:
As we reviewed it, as I recall, you were
13
looking at a structure that was set up so that each of the
14
companies had boards that ran their company.
15
company, Hydro Inc., was in charge of the whole operation.
16
In total the
If you look at it, those costs, then, are normally
17
borne by the group that they oversee.
18
just said, we didn't see that there were any additional
19
costs with the make-ups.
20
was done to comply with certain activities that were taking
21
place.
22
see it as being out of line.
23
24
And as Mr. Van Dusen
As I understood the structure, it
And the company had that in place, but we didn't
MR. DeVELLIS:
Thank you very much.
questions.
25
MS. NOWINA:
Thank you, Mr. DeVellis.
26
Mr. Scully, did you have questions?
27
MR. SCULLY:
28
CROSS-EXAMINATION BY MR. SCULLY:
Yes, thank you.
Those are my
195
1
MR. SCULLY:
2
your report.
3
CCFS costs.”
4
Gentlemen, if you could turn to page 4 of
I'm looking at table 2 on that page, “Total
I just tripped over the fact that back ahead of that,
5
at tab 6, schedule 1, page 4, 66 in that same binder, I
6
couldn't make the costs match.
7
235,443.
The total on your table is
The total on the other table is 210,000.
8
Can you help me with that?
9
MR. VAN DUSEN:
Yes, I think I personally should help
10
with that.
11
costs that Rudden looked at, the total common costs they
12
looked at were the $235 million.
13
the update is we realized some of the dollars that we had
14
listed on table 1 on page 4 were actually in the asset
15
management organization.
16
building and security function and strategic planning
17
function, those dollars were actually already in there.
18
we actually double-counted the total dollars, so we removed
19
them out of the CCFS nest.
20
It was an errata that we had filed.
The total
What we did when we filed
Some of what we called the lands,
But in terms of what the Rudden study looked at, they
21
did look at the 235, made up of 210 you see in the total,
22
then the remaining $25 million is in the asset management
23
area.
24
So
MR. SCULLY:
This is just my curiosity, but you have
25
used FTEs, full-time employees, in a number of places in
26
your study as a cost driver.
27
told us that Ontario Hydro or Hydro One didn't keep
28
statistics on the basis of FTEs.
The panel that preceded you
I wonder if you would
196
1
2
just enlighten me on that.
MR. VAN DUSEN:
Yes, I can.
Probably, I guess, for
3
total precision, it should have been some asterisk to say
4
"approximated FTEs."
5
numbers is we took a look at the total number of bodies in
6
the company, then we had the detailed work program results
7
that tell us how much is spent on transmission OM&A and
8
capital and how much is spent on distribution OM&A capital,
9
and we used the high-level percentage to split the total
The way we came up with the FTE
10
number of people, and we called that FTEs, which is the
11
basis of which I provided to R.J. Rudden for their
12
allocator.
13
MR. SCULLY:
So you gentlemen from Rudden Associates
14
weren't aware of this problem?
15
with a number.
16
MR. GORMAN:
You just were presented
We were aware how the FTEs were -- we
17
were aware of this problem.
18
this mechanism.
We would just say it is a proxy for the
19
number of FTEs.
I believe it is discussed before.
20
We were aware of this issue,
You can have the same individual working part of the
21
time on transmission, part of the time on distribution.
22
it is really -- it is impossible to say whether it’s T FTE
23
or D FTE, so we used the proxy which we believe is really
24
an excellent proxy because it is based upon what people are
25
actually spending their time doing.
26
MR. SCULLY:
Thank you.
So
Gentlemen, I was left with
27
some confusion about what years you were working with to do
28
what, and let me try to put it in context.
197
1
The end of your task was to allocate these common
2
costs for 2006.
You look back at 2005, I believe, largely
3
speaking, as a starting point; is that correct?
4
MR. GORMAN:
Yes, that's correct.
5
MR. SCULLY:
Okay.
6
of the 2005 figures.
7
anywhere how you decided if there was a nice fit once you
8
looked at 2006.
9
MR. GORMAN:
So you went through the analysis
I didn't hear you say or describe
Did you go through that process?
Yes, we did have a discussion.
When we
10
met with the individuals that would be filling out the time
11
sheets, we did discuss the context of, We need this to get,
12
the company needs this to get its books right, and it will
13
also be used in the 2006 rate filing.
14
estimates for 2005, but be aware of the fact that this will
15
be used to estimate 2006 budgeted costs.
16
So give us your
So the people that gave us the time estimates were
17
aware of that, and we discussed with Mr. Van Dusen whether
18
it was reasonable to anticipate any significant changes in
19
the business during that time, and he informed us that the
20
'05 activities were a reasonable estimate that would be
21
useful for '06.
22
MR. SCULLY:
Okay.
If you would just turn over to
23
page 18 of your study and look down at financial drivers,
24
at the bottom.
25
“When the 2006 budgeted data is available".
26
were -- that was the second step, that you had 2005 and you
27
had 2006.
28
in later or ...
You say there, in the second sentence:
I thought you
I just -- is there something here that is coming
198
1
MR. GORMAN:
Well, for the spending dollars, $235
2
million or $210 million, that reflects the 2006 budget.
3
For the financial drivers, items such as assets, utility
4
plant, total capital, that uses the 2005 budgeted data,
5
which was the best data that we had at the 20th of May when
6
we finalized our report.
7
8
9
10
11
MR. SCULLY:
So you didn't have any 2006 budgeted data
to do this comparison?
MR. GORMAN:
Not for these types of numbers, not for
the balance sheet type of numbers.
MR. SCULLY:
Maybe you could tell me just in general
12
terms where that was missing when you went to do the
13
comparison of 2005 to 2006.
14
MR. VAN DUSEN:
Sorry, just to be clear.
Mr. Gorman,
15
Mr. O'Brien had our detailed 2006 common costs that are
16
part of this application.
17
of their application.
18
information we didn't have up to date.
19
That's what they used in terms
It is just some of the driver
Ideally for 2006 allocation, you would have had year-
20
end 2005, or year-end 2004, FTEs and net book values and
21
revenue information.
22
date at the time Mr. Gorman was doing his detailed work.
23
So there are some drivers which are -- you know, if you
24
wanted to, you could plug in the new information right now
25
to, you know, bring it totally up to speed.
26
the information that he had available at the time.
27
28
MR. SCULLY:
Some of that totally wasn't up to
But this is
I'm just trying to get a feel for how
much wasn't available.
199
1
MR. O'BRIEN:
When the report was completed and filed,
2
I believe, in May of ’05 -- in May of ’05, we would not
3
have had the budgeted ‘06 data for the drivers.
4
probably would not have been available until late ’05, when
5
the company would complete its budget.
6
itself was not updated, but we recommend that the drivers
7
be updated annually and use the most current data when it
8
is available as the company implements this process.
9
MR. VAN DUSEN:
They
So our report
In the exhibit filed by R.J. Rudden,
10
Exhibit D, D1 - I think we read this earlier - it goes
11
through each of the drivers and indicates at what time
12
frame the drivers -- what data -- what time frame the data
13
information was available for each of the drivers.
14
explains to you what information was available at the time
15
they did the work.
16
MR. SCULLY:
So it
But for both 2005 and 2006, were you
17
dealing with estimated figures - is that correct - on a
18
general basis, these drivers aside?
19
MR. O'BRIEN:
20
MR. SCULLY:
Yes, that would be correct.
And I'm just wondering just to what
21
extent -- what the checks you imposed on that were.
22
seems to me that the first thing I would want to do is go
23
back to 2004 and say, Okay, let's just see how this fits.
24
MR. GORMAN:
It
Well, we did review the financial drivers
25
for a period of two or three years when the data was
26
available.
27
and I believe we did have '02 values.
28
that the ratios were fairly steady over that three-year
We did look at the '04 values, the '03 values,
We did make sure
200
1
period, in addition to which we have recommended a true-up.
2
So at the end of the day it is not an estimate, but it is
3
the actual incurred numbers that would get into the books
4
of Hydro One.
5
MR. SCULLY:
Right.
But this Board isn't going to be
6
able to deal with the actual incurred numbers.
7
got to deal with estimates here?
8
9
MR. GORMAN:
They have
Again, we did check the stability of the
allocators over time, and, in fact, it is a criteria of
10
ours that we try to choose cost drivers or allocators that
11
are reasonably stable over time.
12
MR. SCULLY:
Okay.
And did you go beyond that and
13
take a look at the results that were yielded by the cost
14
drivers - in other words, the end numbers - and do a
15
comparison of 2004, 2005, 2006?
16
MR. GORMAN:
I don't recall doing that explicitly, but
17
we could certainly do that.
18
in one year 48 percent versus -- you know, 48 percent T and
19
51 percent D, and the next year it is 48-1/2 half percent
20
versus 50-1/2 percent, 51-1/2 percent, we concluded that
21
the end result would not be significantly -- we can go
22
through the mechanical exercise of doing that again.
23
might be a valid exercise once the final numbers come in.
24
From our point of view, we saw the cost drivers
25
themselves were stable over a two- to three-year period,
26
and so we were satisfied we were selecting the best cost
27
drivers that we could in the circumstances.
28
MR. SCULLY:
But when we see that we have
That
Could you turn to the final page of your
201
1
cost allocation, the common corporate cost model?
2
Exhibit F, the last page of that exhibit.
3
summary of CCFS costs.
4
MR. VAN DUSEN:
5
MR. SCULLY:
It's
This is your
Yes.
I just wondered:
Human resources seems
6
to pop up as number 1 on the list, and then I see it down
7
towards the bottom, just above the board and chair.
8
you tell me why it would be there?
9
human relations twice.
10
MR. GORMAN:
Sure.
Can
I'm presuming that is
The first is the human resources
11
activity, such as labour relations, contract management and
12
so forth, communications with employees.
13
see at the bottom, which is referred to as HR, is a
14
transactional piece, basically getting people paid.
15
is performed by Inergi.
16
MR. SCULLY:
Okay.
The one that you
That
When I look at this table and see
17
the totals down at the bottom, my instinct is to say, by
18
way of a check.
19
way of a gross check on what is happening with this split
20
between the two major entities?
21
of, What are the total assets of the two entities or what
22
are the total number of employees?
23
like that?
24
MR. GORMAN:
Is there anything outside that I can do by
I tend to think in terms
Did you do anything
No, we did not do that.
I think that if
25
you picked a single allocator for the -- as a check, you
26
would wind up with an answer which was misleading, because,
27
as you know -- and the reason we drill down and we had - I
28
forget how many it is - 60 or more allocators, whereas the
202
1
previous model of that the company used had a much smaller
2
number, was to give a greater level of precision.
3
certainly don't want to do is take a step backwards and
4
rely on one or two allocators.
5
benchmark really wouldn't be fair to the company or to the
6
effort that was put into completing this study.
7
MR. SCULLY:
Even to use that as a
I wasn't suggesting that it would be
8
definitive or whatever.
9
to measure where you are in the compass.
10
MR. GORMAN:
What we
It is just another way of trying
I believe, with all due respect, that
11
that would be -- it would be a -- create a false issue and
12
it would be a disservice to the work that we put into this
13
to say, Well, I'm going to just look at FTEs or assets.
14
The purpose of having a disciplined, detailed study is
15
because those single allocator types of studies, really
16
they're not appropriate for a business as complex and
17
unique as Hydro One.
18
MR. SCULLY:
Those are all of my questions.
20
MS. NOWINA:
Thank you, Mr. Scully.
21
Mr. Dingwall?
22
MR. VLAHOS:
19
Thank
you.
Madam Chair, if I could follow up on this
23
one for a minute before we move on to the next portion
24
there.
25
Mr. Gorman, if you look at page 9 of your report, the
26
tenth task, the tenth and last task, talks about reviewing
27
the inputs and results for reasonableness and consistency.
28
Just going back to Mr. Scully's questions, I would
203
1
just like to know what was contemplated here, what was done
2
here under task 10.
3
MR. GORMAN:
Well, again, we wanted to make sure the
4
total level of cost was appropriate.
5
sure that the incurrence of the aggregate costs were
6
reasonable, especially for the smaller business units.
7
MR. VLAHOS:
We wanted to make
Just let me go back to what the question
8
was from Mr. Scully, then.
9
anything, by way of a gross check, as to the numbers coming
10
out of this exercise.
11
that.
12
MR. GORMAN:
He was asking if you've done
Your answer was, no, you did not do
Yes, that's correct.
We did not look at
13
a single value, such as FTEs or total assets.
14
through each of the cost levels and review each of the
15
drivers that were assigned, and we believe that this is a
16
fair assignment of the driver, and so forth.
17
MR. VLAHOS:
We did go
But if you go back to the transcript,
18
Mr. Scully's question had to do about the total allocation.
19
After you've done it all, then you look at the results and
20
say, Do they look reasonable?
21
whack or are they within a reasonable range?
22
is what his question was.
23
MS. CAMPBELL:
Are they totally out of
I think that
In any event, thank you.
Just on that point, just if this
24
becomes important at some point in time, on page 16, under
25
task 10, page 16 has an outline of the steps that were
26
taken by Rudden concerning task 10, which was to review
27
inputs and results.
28
MS. NOWINA:
Thank you, Ms. Campbell.
Mr. Dingwall?
204
1
CROSS-EXAMINATION BY MR. DINGWALL:
2
MR. DINGWALL:
Well, here I am at the end of the day
3
and this most relaxing topic, and I've got, as I crossed
4
off my list with each of Mr. Scully's questions, two
5
questions.
6
that Mr. Scully and, subsequently, Mr. Vlahos made.
7
The first of these is following up on the point
Did you make reference to the relative revenues of the
8
business units and the affiliated companies as a check to
9
review the effectiveness of your methodology?
10
MR. GORMAN:
11
MR. DINGWALL:
12
No, we didn't do that.
Do you know whether Hydro One Telecom
is in a profit or loss position?
13
MR. GORMAN:
14
MR. DINGWALL:
I don't know that.
Is the approach of looking at relative
15
revenues something which would be of value in assessing the
16
effectiveness of the cost-allocation model?
17
MR. O'BRIEN:
18
MR. DINGWALL:
No, not generally.
Okay.
You also answered a number of
19
questions with respect to the timing of the report versus
20
the forecasting of 2006 expenses.
21
that again briefly as well, this being my fourth of my
22
second question -- my two questions.
23
-- I guess it is 18 of your report, that's the area where
24
you make the suggestion as to what elements should be
25
updated on an annual basis.
26
rates for May of the coming year, is there a particular
27
time frame that you think these updates should take place
28
within -- when you're making reference to "annual"?
I wanted to follow up on
With respect to page
Given that we're trying to set
205
1
MR. O'BRIEN:
In general, what I would look at annual
2
references is once the data is available for the company to
3
review.
4
looking at a review of 2005 data, I would say it should be
5
done maybe in the second quarter.
6
year-end closing work that has to be done.
7
of other activities that need to be done.
8
should set up a review when it would have its data
9
available and be able to change its allocators and make
10
11
For example, if we were now in 2006, and going --
There is a lot of
There is a lot
The company
such modifications.
It may be best to do late in the year, when the
12
company is going through its budgeting process.
13
companies would be different as to when they would best set
14
it in.
15
should be done in that time frame each year.
16
17
18
Individual
But I think once they establish the procedure, it
MR. DINGWALL:
So they should be done in time to meet
the obligations of setting rates for the subsequent year?
MR. O'BRIEN:
If you had an annual rate-setting
19
process, I would look at doing that review in time so you
20
can do it and to have that available.
21
Now, depending on when the rates would go into place,
22
you may not have all of the data necessary in order to
23
update all of the allocators with the most recent period.
24
But then you would have to gear that to what you wanted the
25
review for.
26
for annual rate updatings; they're really reviews for the
27
process to make sure that it is accurate in what it is
28
doing with changes in the business requirement.
The reviews that I speak of are not reviews
206
1
MR. DINGWALL:
Is it not conceivable as a result of an
2
annual review you might find out that the process is
3
putting forward inaccuracies?
4
MR. O'BRIEN:
It is possible, but it would not be
5
likely that if it did need to be changed, there would be a
6
significant change to be made over an annual basis if you
7
did your review fairly thoroughly the first time.
8
9
MR. DINGWALL:
Okay.
Now, there is one particular
contract which you made some mention of which is the Inergi
10
contract which forms a significant portion of the annual
11
costs.
12
Were you aware, gentlemen, that that -- that all of
13
the costs in the global basis of that contract are to
14
decrease on a year-over-year basis?
15
MR. GORMAN:
16
MR. DINGWALL:
Yes.
So with respect to the numbers put
17
forward for 2006 for cost allocation, does that take into
18
account that decrease, or was it done at the 2005 level?
19
20
21
MR. GORMAN:
It's done to -- the numbers that are
built into the company's 2006 budget.
MR. DINGWALL:
Okay.
And then with respect to the
22
annual updates that you've suggested, are there sufficient
23
annual updates within here to cover all of the changing
24
cost structures under the Inergi contract going forward?
25
MR. VAN DUSEN:
I can answer, I think, that question.
26
As part of our business-planning process, we annually
27
update our estimates for the future three or five years,
28
depending on what the business-planning process covers for
207
1
the Inergi contract.
2
base contract, COLA adjustments as per the contract, OPEP
3
adjustments as per the contract, any volume adjustments as
4
per the contract.
5
we would pay Inergi in any given future year and use the
6
basis of the basis of our business plan.
7
MR. DINGWALL:
So in that, we would build in the
So we would get the actual dollars that
My final question, which I will be held
8
to, is for the purposes of this filing year, Mr. Van Dusen.
9
I take it that the annual updates will not make it into
10
material before this Board before the Board has the time to
11
render a decision; is that correct?
12
MR. VAN DUSEN:
13
update to its evidence.
14
corrections.
15
not planning on filing a global update to our evidence.
16
Hydro One is not planning to file an
I mean, we filed some error
But a global update to our evidence -- we're
MR. DINGWALL:
Okay.
I lied.
One more:
Going
17
forward, if we're continuing to have rate filings under the
18
same time frame, will we be subject to an annual lag in
19
addressing the annual updates to the cost allocation?
20
one-year lag?
21
MR. VAN DUSEN:
Or
It's a little hard to be definitive
22
about that.
The issue facing the Rudden & Associates when
23
they did their work is we didn't finalize our numbers until
24
June.
25
methodology to allocate costs to get into my business plan
26
to put together a rate case.
27
current file numbers for overall OM&A and capital, et
28
cetera.
So they were in a position of giving me a
I couldn't give them the
208
1
So they were caught in that position, in terms of
2
that.
3
stakeholder session in the third week in June.
4
That information we readily shared with the
Ideally, you don't want to have a lag, I agree.
You
5
try to set up your process that you don't have a lag.
6
it is a large company.
7
planning and prioritization process.
8
in the year.
9
push between having the most up-to-date information versus
10
11
But
We do a thorough job in our
We start that early
So there is always going to be a bit of a
having information ready on a timely basis.
So I know that doesn't directly answer the question.
12
We will do our best to make sure we don't have that type of
13
lag, but I can't guarantee that that is always going to be
14
possible.
15
MR. DINGWALL:
As much as I would like to go on, this
16
being the most fun thing I've done in recent memory, I am
17
finished my questions.
18
19
Thank you, Madam Chair for your indulgence, and thank
you very much for your answers, panel.
20
MS. NOWINA:
Thank you, Mr. Dingwall.
21
Mr. Rogers, do you have redirect?
22
MR. ROGERS:
No.
23
MS. NOWINA:
Thank you, Mr. Rogers.
24
Mr. Betts.
25
QUESTIONS FROM THE BOARD:
26
MR. BETTS:
I think -- thank you very much.
I think I have, I do have one question.
27
don't think it has been answered clearly.
If it has,
28
please forgive me and try to answer it again for me.
I
209
1
But with respect to subsequent reviews or updates of
2
the allocation information - and that goes to the cost
3
drivers and that kind of a thing - would it be Hydro One's
4
intent to somehow reconcile the changes over a previous
5
study?
6
information, different numbers?
7
the Board in understanding why those changes occurred?
8
9
How would you see the Board dealing with different
MR. VAN DUSEN:
What can be done to assist
I understand some of the frustration
on the Board in terms of tracking the exact detailed
10
changes from '98 through to now.
But coming out of this
11
proceeding, we're hoping to have a methodology approved for
12
distribution, a very detailed level with detailed support.
13
I would see it incumbent upon the company when it brings
14
back an application in this forum or in the transmission
15
forum to say this is the previously approved methodology;
16
it dealt with this level of cost; these levels of costs
17
have changed for these good reasons; the drivers have
18
changed in this regard; here are the drivers that it
19
changed.
20
something in the industry or somewhere, we would be able to
21
say, Of the 64 drivers --
And assuming there is no massive overhaul of
22
MS. CAMPBELL:
23
MR. VAN DUSEN:
66.
66 drivers, we have changed these
24
four.
25
is the impact associated with that.
26
stability and some regulatory of appearing before this
27
Board, I would think we would be able to do that.
28
Here are the reasons for changing these four.
MR. BETTS:
Here
Assuming some level of
So I think you've answered that very well
210
1
for me.
You've indicated there would be reasons given for
2
the differences.
3
MR. VAN DUSEN:
4
MR. O'BRIEN:
Yes, sir.
I think to take it just one step
5
further:
Once the process is in place, if the 66 drivers
6
are used and those drivers do not change for the purpose
7
that they were established - those are allocating the same
8
activities - the only change you should need is an update
9
in the amounts in the driver.
For example, if the driver
10
is net utility plant, that net utility plant will change
11
every year to the company's last filed data.
12
So the overall level of the costs may change the
13
amounts of the driver, but that net utility plant should be
14
used as one of the drivers for the activities that it is
15
currently used for.
16
company all of a sudden decides that it should use gross
17
plant, it would be incumbent on the company then to say,
18
We've changed the driver for these six activities from net
19
plant to gross plant because ... and that would be
20
something it could direct to the Board.
21
review it at that point.
22
I think having a process established where you clearly
23
define what you are going to do, the company may come back
24
in and say, We have gone away from drivers for these five
25
activities because we have implemented time studies.
26
then you could see that that is a change, and you could
27
say, If we had used the drivers, here's what it would have
28
been.
As Mr. Van Dusen just said, if the
The Board could
Here's what we got from the time studies.
And
This is
211
1
why we believe it's better.
2
MR. BETTS:
3
MS. NOWINA:
Mr. Vlahos?
4
MR. VLAHOS:
Thank you, Madam Chair.
5
6
Thank you.
Gentlemen, just
a couple of areas.
The uses of this cost allocation study, they're
7
two-fold.
8
allocate the costs in a reasonable fashion, so user-pay
9
theorem.
10
For regulatory purposes, you want to be able to
The second one is financial, for financial
presentation; is that fair?
11
MR. VAN DUSEN:
12
MR. VLAHOS:
13
MR. VAN DUSEN:
Yes, sir, that's correct.
Any other uses for it?
At the highest level, you've hit them.
14
When you say "financial," we use it in our business
15
planning process, you know, to yield the bottom lines for
16
transmission and distribution, OM&A and capital, which
17
eventually funded into financial data, yes.
18
19
MR. VLAHOS:
You would use that data for things like
-- for credit rating requests?
20
MR. VAN DUSEN:
21
MR. VLAHOS:
Yes, sir, that's correct.
So the gentlemen from Rudden, then, this
22
is pretty standard analysis, as far as cost allocation is
23
concerned for utilities, when we're talking about all --
24
almost all businesses being regulated, except the telecom;
25
is that fair?
26
MR. O'BRIEN:
27
MR. VLAHOS:
28
Yes.
It is.
So this is probably as good as
you've seen it for a while.
212
1
MR. O'BRIEN:
2
MR. VLAHOS:
3
4
I'm sorry?
This is probably as clean as you've seen
it for a while, in terms of the challenges?
MR. O'BRIEN:
Within the electric industry, yes.
It
5
is a single jurisdiction where you have very few external
6
entities, and most of your costs are dealing with
7
distribution and transmission.
8
9
MR. VLAHOS:
And the results, I guess, which you are
coming up with in terms of methodology, that is pretty
10
standard based on your other studies in other
11
jurisdictions?
12
MR. O'BRIEN:
Yes.
We pretty much start out at the
13
same top of the umbrella, as I like to call it.
14
then start seeing what specific items are best fitting this
15
specific company.
16
MR. VLAHOS:
Then you
So there is nothing unusual about the
17
Hydro One study compared to some of the other ones you've
18
done?
19
MR. O'BRIEN:
From a personal aspect, the -- as
20
Mr. Gorman and Mr. Van Dusen talked about, the FTEs was a
21
little bit unusual.
22
through is very precise.
23
through a business, and this is just a slightly different
24
budgeting process that doesn't necessarily do that.
25
MR. VLAHOS:
Their budgeting process that they go
But usually we can trace FTEs
It's something for us to be concerned
26
about - this Panel, that is - when we look at the -- when
27
we review the testimony and what we need to do by way of
28
approval?
213
1
MR. O'BRIEN:
Not from what I see, no.
As Mr. Gorman
2
said, he thinks it gives him a little more accuracy,
3
because you're actually dealing with the costs that people
4
actually charge into the various buckets, and then saying,
5
All right, if I know I've got 1,000 employees and I know
6
that 20 percent of my cost went into distribution capex,
7
well, I'm going to take 200 FTEs and say there's
8
distribution capex when all 1,000 of them may have worked
9
some piece of their time on distribution capex.
10
So to try to get that data from each person coming in
11
is sometimes easier to get in the way they've done it here,
12
but it is just a way that I'm not used to seeing it.
13
So from a personal thing, it caused me a little bit
14
taking back, but once you look at it, it provided data that
15
at least is as good, if not better, than some of the
16
others.
17
MR. VLAHOS:
What's your track record with respect to
18
other jurisdictions when new studies have come forward for
19
scrutiny before other tribunals?
20
at large?
21
been accepted or accepted with some modifications?
22
Have they been accepted
Have you had any situations where they have not
MR. O'BRIEN:
From my personal experience, when I was
23
with Citizens, I developed the cost-allocation model back
24
in the late 1970s and presented it to all ten commissions
25
that regulated Citizens in ten states, as well as the FCC
26
and the FERC.
27
It was then input into five other jurisdictions.
28
I started with was modified over the times all of this
At the time, it was adopted by all of them.
Now, what
214
1
2
happened, but the premise was basically the same.
Since I've been with Rudden, I have reviewed three or
3
four different studies and presented testimony on two of
4
them that I think were adopted.
5
went through the cases, so we never had to appear.
6
MR. VLAHOS:
They were settled as we
As I understand it, the recommendations
7
that you are making, they're acceptable to Hydro One, so
8
there are no issues there?
9
MR. O'BRIEN:
I haven't felt anything, but, yes, I
10
understand from Mr. Van Dusen that they're looking at doing
11
them.
12
they go through and get the methodology so that it is
13
working.
14
15
16
Again, they will get into the actual procedures once
MR. VAN DUSEN:
to Hydro One.
I can confirm, sir, they're acceptable
Hydro One accepts the study.
MR. VLAHOS:
Mr. Van Dusen, I believe you said that
17
you are going through the process now of identifying as to
18
what ought to be the updates or -- I wasn't sure exactly
19
what your testimony was.
20
Should this Panel have any say into this matter as to which
21
way you are going to go by way of updates?
22
question make sense?
23
MR. VAN DUSEN:
The note that I have here is,
Does that
I heard two things, sir.
One was, as
24
part of our annual business-planning process, we do update
25
our cost-allocation information where appropriate.
26
we now are going back and talking to each of the common
27
cost leaders in their areas, we're sending them the
28
material which is filed in front of you saying, This is the
So when
215
1
type of information that you provided to us for '06
2
business-planning process.
3
planning process.
4
We're now in our '07 business-
Please take a look at that.
And that information culminates on about the same
5
timing as last year.
6
that information will come together for the corporation for
7
its '07 business-planning process.
8
down the line, but as part of the process, we update that
9
information.
10
11
12
So sometime in May or June all of
So it is still a ways
The other part of your question was:
Globally is
there an update being contemplated by the company?
MR. VLAHOS:
And --
Like every three years or five, or
13
whether we have a third, a third, a third, that kind of an
14
options discussion that we had today.
15
16
MR. VAN DUSEN:
Oh, in terms of doing a detailed
review at a very detailed level?
17
MR. VLAHOS:
Yes.
18
MR. VAN DUSEN:
I must admit, sir, senior management
19
is aware of kind of the need to kind of make a decision on,
20
Is it every three years we do everything, or do we do it a
21
third, a third, a third?
22
that.
23
24
25
26
They haven't come to ground on
I can't give you a precise answer.
MR. VLAHOS:
Is there an expectation this Panel will
say -- would need to say anything on this matter?
MR. ROGERS:
I can answer that.
While we welcome your
comments, there is no need for you to comment on that.
27
MR. VLAHOS:
28
[Laughter]
Okay.
That's clear, Mr. Rogers.
216
1
MR. VLAHOS:
Okay, back to the Rudden people.
2
Gentlemen, I can tell you one area I had a lot of problem
3
is this area of prudence review that you have undertaken.
4
I have looked at the terms of reference, at least the
5
introduction of your report.
6
to any prudence review but, rather, strictly a cost-
7
allocation exercise.
8
9
It doesn't make any reference
I must tell you that if you're here to testify on
prudence, you would have been here from day 1 with every
10
other panel.
11
don't think that you're here to advocate prudence of those
12
costs that you've been given?
13
Do you understand what my question is, that I
MR. O'BRIEN:
Right.
I think, as we've discussed it
14
today, Mr. Van Dusen has said they had a separate panel to
15
discuss the level of costs, the prudence of them being
16
incurred.
17
have to feel that they are reasonable and that you're not
18
looking at a company that is -- has a lot of expenditures
19
that go beyond what we believe would be necessary to run
20
the business.
21
From our point of view, in looking at them, we
And we did that on a very high level.
As Mr. Gorman said, we started to look at some of
22
these benchmarks -- no, we can't use that.
23
other comparative data that we had available to us, to get
24
a feel for, Okay, we're in the right ballpark.
25
testified to, the actual prudence was presented by the
26
company witnesses who are familiar with those costs, and we
27
have accepted most of those as we've gone through.
28
MR. VLAHOS:
Some of the
And as was
Okay, I understand that explanation, and
217
1
that is the process you're going through, but you're not
2
here to recommend to this Board that every dollar that's
3
been given to you is reasonable for acceptance by the
4
Board.
5
altogether, which we have gone through from day 1.
6
You must realize that is a different process
MR. GORMAN:
I think the prudence review is a
7
necessary part of our work, but it was not sufficient to
8
support the company's application.
9
evidence that the company presented with regard to
10
prudence.
11
12
13
There was other
MR. VLAHOS:
Yes, thank you for that.
That clarifies
it.
But just as a matter of curiosity, have you gone back
14
to Hydro One on any of the items that were given to you and
15
indicated that this may not be prudent?
16
MR. O'BRIEN:
I think the only areas that we have
17
spoken of were the -- when you get into the donations or
18
other items that were excluded from the costs that we had
19
gone through, and then we looked at the treasurer's group
20
as being -- should be handled someplace else.
21
most of the other ones, we didn't see anything that was out
22
of line or different from what we normally experience.
23
24
25
26
27
28
MR. VLAHOS:
Thank you very much.
I think in
Those are all of my
questions, Madam Chair.
MS. NOWINA:
I only have two questions, and one
directly follows from Mr. Vlahos'.
If you had found something out of line, based on your
reasonable check and your experience, what would you have
218
1
2
done?
MR. O'BRIEN:
We would have started back up the chain
3
of command from the contract we were working on, gone to
4
Mr. Van Dusen and to the people to whom we were working
5
with and said, This doesn't look right.
6
wrong.
7
mistaken, we questioned two or three areas we just didn’t
8
understand; and once they were broken out into the
9
components, we separated them and they made a little more
Let's find out about it.
Something looks
I think, if I'm not
10
sense.
11
up and talk about these particular costs that caused us any
12
problems.
13
But I think the normal thing we would do is go back
MS. NOWINA:
All right.
Thank you.
My only other
14
question, I think, is for you, Mr. Van Dusen.
It follows
15
from one of those other panels, the compensation panel.
16
They asked this question be put to your panel, so I will do
17
that.
18
Regarding the allocation of direct charges in your
19
operations areas, the one in fact that we were just talking
20
about, those direct charges based on labour rates, one of
21
the points that came up during our examination of that
22
panel was that Hydro One labour rates are fairly high; you
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have a collective agreement.
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One of the reasons for the high labour rates was the
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work that your staff do that requires a great deal of
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skill, particularly in the transmission area.
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highly skilled employees to be able to do all of that work.
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So you have
I think the point was made in a distribution area you
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might not need as high a level of skill.
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those costs, is that taken into account at all?
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MR. VAN DUSEN:
So in allocating
Yes, it is, Madam Chair.
The area
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where it is taken into account is in the various labour
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rates that we have.
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on costing of work, we gave an example of -- one, of
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approximately 80 different labour rates.
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labour rates for the type of work we do broken down into a
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fair bit of detail.
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I think, as presented in the evidence
So we have the
When people are doing detailed engineering work
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associated with transmission-related plants, the labour
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billing rate is that rate applicable to that type of work.
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So the transmission-related work programs are being
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charged through the labour rate using that particular
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standard labour rate for that type of work.
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Now, that is not to say that the 80 standard labour
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rates are broken down T and D specifically.
They're broken
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down by the type of work.
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by the specific demands of the transmission and the
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specific demands of the distribution business.
But the type of work is driven
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So some line maintainer work which is – sorry,
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forestry work which is predominantly in the distribution
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business has its own standard labour rates for its
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particular type of work, to ensure that those work programs
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are charged with the appropriate costs.
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MS. NOWINA:
I am impressed, Mr. Van Dusen, with the
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depth of your knowledge, that you could answer that
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question that clearly.
Thank you very much.
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That completes our examination of this panel.
Mr. Rogers, I assume you have no further questions?
MR. ROGERS:
Chair.
No that's correct.
Thank you Madam
Thank you very much.
MS. NOWINA:
Thank you very much, panel.
It was very
informative.
We had planned tomorrow afternoon for this panel.
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will no longer need that.
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prefer that we stand down tomorrow afternoon.
We
I think the Board Panel would
We've been
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driving pretty hard.
We have a number of other proceedings
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going on, and that we resume on Thursday with panel 7, as
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scheduled.
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MR. ROGERS:
Very well.
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MS. NOWINA:
With that, we are adjourned for today.
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encourage everyone to exercise your right and
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responsibility to vote.
We will see you Thursday morning.
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MR. O'BRIEN:
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--- Whereupon the hearing adjourned at 4:33 p.m.
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Thank you.