050527 BCUC IR Response F · 1. Reference: Application p.ii Preamble: “The customer care...

May 27, 2005 British Columbia Utilities Commission Sixth Floor - 900 Howe Street Vancouver, B.C. V6Z 2N3

Attention: Mr. Robert J. Pellatt, Commission Secretary RE: Terasen Gas (Vancouver Island) Inc. (“TGVI”)

Application for a Certificate of Public Convenience and Necessity (“CPCN”) Customer Care Conversion Response to Commission Information Request No. 1

Terasen Gas (Vancouver Island) Inc. respectfully submits the attached responses to Commission Information Request No. 1 which was received on May 20, 2005. Twenty hard copies of the attached will be sent to the Commission office on Monday, May 30, 2005. Yours very truly, TERASEN GAS (VANCOUVER ISLAND) INC. Original signed by Tom Loski

For: Scott A. Thomson Encl. c. Registered Intervenors

Scott A. ThomsonVice President, Finance & Regulatory Affairs 16705 Fraser Highway Surrey, B.C. V3S 2X7 Tel: (604) 592-7784 Fax: (604) 592-7890 Email: [email protected] www.terasengas.com

B-4

CCMACDON

TGVI-CCC

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Terasen Gas (Vancouver Island) Inc. Application for a Customer Care Conversion CPCN

Response to BCUC Information Request No. 1

____________________________________________________________________________ 1. Reference: Application p.ii

Preamble: “The customer care functions for the Terasen Gas (Whistler) Inc. (“TGW”) customers will also be transferred to CustomerWorks through the proposed Schedule H.” 1.1 Given that TGW is a separately regulated utility company, does TGVI require

formal confirmation from TGW showing that TGW accepts the above proposed actions? If yes, please file the documentation. If not, why not?

Response

TGVI does not require formal confirmation from TGW of TGW’s acceptance of the proposed actions. The provision by TGVI of the customer care functions for TGW is pursuant to arrangements between the two utilities that originated with a Shared Services Study filed by Centra Gas British Columbia Inc. (now TGVI) with the Commission. The services addressed in that study include the customer care functions that will be transferred to CustomerWorks, but there are no prescribed means by which TGVI is to provide the shared services to TGW. Under the proposed arrangements, TGVI will still be responsible for providing the customer care functions to TGW, the only change being that TGVI will have the customer care functions performed by CustomerWorks rather than through the prior arrangements with other service providers.

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2. Reference: Application p. 8 Preamble: “The Retain Banner CIS Option also assumes technology

sustainment…Under this alternative, interfaces will continue to be facilitated manually. The costs also include an expectation of increasing staff to accommodate customer growth.”

2.1 Identify the expected number of increased staff and the associated costs

resulting from retaining Banner CIS for each year from 2006 to 2015. Response: The following staff increases are estimated from 2006 to 2015 to support customer growth while maintaining customer service and collections at service levels consistent with other Terasen Gas operations. The increases projected include five headcount over the 10-year period related to call handling, two to support back office collections and three to handle the increases in meter-reading activities.

Year

Call Centre and

Collections

Staffing Cost

Increase Meter

Reading

Staffing Cost

Increase 2006 2 $124,440 $0 2007 1 $190,393 1 $70,747 2008 1 $258,935 $72,162 2009 $264,113 $73,605 2010 1 $336,745 1 $150,154 2011 $343,480 $153,157 2012 1 $420,419 $156,221 2013 1 $500,298 1 $239,018 2014 $510,304 $243,798 2015 $520,511 $248,674

Costs are calculated on a base cost in 2005 of $61,000 for call handling and collections staff and $68,000 for meter-reading staff and have been adjusted annually for inflation at 2% per year.

Preamble: “The Customer Care Conversion Option will result in an annual cost-per-customer of $45.40 in 2006 compared to $58.33 under the Retain Banner Option.” 2.2 Has TGVI initiated any negotiations with its existing Customer Care providers

(i.e., ADS, Symcor, Kubra) to provide a cost per customer of continuing the use of the Banner System which would meet or be even better than the price offered by CustomerWorks? If not, why not. If yes, please provide details of the negotiation and supporting details of this negotiation.

Response: No, TGVI has not formally initiated renegotiation discussions with ADS, Symcor or Kubra as the contracts with ADS and Symcor are ten-year contracts expiring in December 2008. However, ADS was one of the respondents to the DLAI 2005 Market Assessment

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Study. The results of the study indicate that although ADS is interested in undertaking the significantly broader scope of services outlined in the TGI Client Services Agreement, their current experience in the industry does not confirm their capabilities to the same level demonstrated by CustomerWorks. Additionally, the reference pricing provided by ADS through the market assessment, excluding capital recovery, does not provide assurances that lower prices would be possible even for the significantly larger customer base of 880,000 customers. TGI and TGVI also believe that moving to a common Customer Information System environment is required in order to achieve the benefits of integration envisioned under the Utilities Strategies Project. TGVI did not therefore pursue an extended relationship with ADS. The Utilities Strategies Project was tasked with moving to common systems and processes in all areas of utility business including meter management, facilities and land-based management, financial reporting and fieldwork dispatch. If the Banner CIS system is retained for TGVI and TGW, then the full benefit contemplated under this separate initiative will not be achieved. Under the much larger scope and scale of the TGI customer care initiative referred to as “Program Mercury” completed in 2002, automated interfaces were designed and implemented to streamline business processes and provide more timely and accurate data management. These interfaces would not be justified for TGVI operating on an independent CIS application for 84,000 customers. Through the proposed data conversion, these interfaces will be available to support the same business processes as are currently available to TGI customers.

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3. Reference: Application p. 8, TGI Customer Care January 26, 2005

The 2006 annual cost per customer for the conversion option is $45.40 while CustomerWorks supports TGI customer care activities on the same technology platform for $54.54 as indicated in Terasen Gas Inc.’s (“TGI”) Customer Care presentation to the Commission on January 26 2005. 3.1 Please provide a table which compares the relevant customer care components

and corresponding cost for CustomerWorks to support TGVI and TGI. Response:

TGI - CWLP TGVI/W - CWLPCost/Customer Components Client Services Agreement Schedule H *Outsourced Base Cost $54.54 $35.29Outsourced Bill Print & Postage Included in Above $7.23Depreciation and Support Cost - $2.88Shared Services ($4.94) -Industrial Billing Services ($0.37) -

$49.23 $45.40Note:* Schedule H is evaluated over 10 years

3.2 Explain any variances.

The TGI / CustomerWorks Base Cost price per customer of $54.54 includes the capital recovery of costs associated with the Mercury project that was transferred to CustomerWorks through the 2001 Disposition of Assets. The costs related to both Shared Services and Industrial Billing Services in the amounts of $4.94 and $0.37 have been deducted from the Base Cost, as they are not applicable for the purpose of comparison to TGI. The TGVI costs include the fixed-price Base Cost for 2006 of $35.29 as well as the cost for printing and mailing as a flow-through of $7.23. The Depreciation and Support Cost in 2006 is $2.88.

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4. Reference: Application p. 19, Lower Costs

Preamble: “As part of the analysis of whether to proceed with the Customer Care Conversion, TGVI developed models to compare the revenue requirement of the two options..” 4.1 Please provide the complete models on a CD which show the calculation of

these two options with supporting schedules for the revenue impact for the years 2006 to 2015 identifying the various components such as rate base, expenses, taxes, levelized savings, etc.

Response:

The complete financial models are provided in the attached CD.

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5. Reference: Application p. 3 Preamble: “If this project is not approved, the synergies expected through the integration of TGVI and TGW with Terasen Gas will be impacted and the benefits associated with a common customer environment will not be achieved. These benefits are the result of common customer systems, interfaces, and business processes…” 5.1 In support of the above statement, list the annual financial benefits associated

with the conversion option over this 10 year evaluation for items such as the following:

• Reduction in core operating costs • Reduction in system operating costs • Avoided system enhancement / upgrading costs

Response: Reduction in core operating costs

OPERATING COSTS (excluding deprec, taxes and interest)Average Customer 87,677 90,643 93,504 96,186 98,973 101,939 104,800 107,482 110,109 112,731

Operating Costs 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Retain Banner -$ 4,789$ 4,981$ 5,254$ 5,500$ 5,690$ 5,932$ 6,160$ 6,375$ 6,622$ 6,785$ Banner to Energy -$ 4,176$ 4,391$ 4,566$ 4,739$ 4,934$ 5,131$ 5,321$ 5,509$ 5,703$ 5,899$ Difference - Convert / (Retain) -$ 613$ 590$ 688$ 761$ 756$ 801$ 839$ 866$ 919$ 886$

Reduction in system operating costs The reduction in system operating costs, excluding the contractual commitment to Alliance Data Systems is detailed in the response to BCUC IR No. 6. The CustomerWorks Customer Care outsourcing proposal will provide the Peace Computer System, call centre technologies, meter reading hardware and software required to support the services going forward. Avoided system enhancement/upgrading costs No capitalized Banner CIS system enhancement/upgrading costs have been assumed in this analysis. However, an increase of 5% in operating costs beginning in 2009 has been included to reflect a moderate increase upon renegotiating the outsourced Alliance Data Systems Banner CIS contract.

5.2 Identify which company, TGI or TGVI will recognize these financial benefits.

Response:

TGVI will recognize the financial benefits.

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6. Reference: Application p. 9 – Reduced Risks

Preamble: “Additionally, TGVI will avoid a significant on-going investment in maintaining and upgrading the call centre technologies and other customer care systems.” 6.1 Provide the on-going investment costs in maintaining and upgrading the call

centre technologies in each year from 2006 to 2015. Response:

The table below indicates the projected investment costs required for the maintenance and upgrade of the Meridian telephone system including the IVR technology. The summary also includes the cost of upgrades to desktop workstations and applications, application servers, and the Itron meter reading handheld terminals.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015$231 $125 $212 $152 $486 $221 $80 $269 $108 $512

Note: The costs above are stated in thousands of dollars and do not include any enhancements or upgrades to the Banner CIS application over the term of the analysis. Costs are inflated at 2% annually and exclusive of overheads capitalized.

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7. Reference: Application pp. 11, 32 - Employee Impact

Preamble: “Conversion of TGVI and TGI customer care activities to CustomerWorks will result in employee impacts in three areas: meter reading, customer contact centre, and billing.” 7.1 Provide the expected cost and savings resulting from the impact on the

employees for each of the years from 2006 to 2015. Response: Assuming the services are transitioned as proposed in the CPCN Application, all of the severance costs of $0.76 million will be incurred in 2005. The savings associated with the impacted employees for the years 2006 to 2015 are included in the analysis in the CPCN Application on page 8.

7.2 Have the cost / savings been included in the 10 year analysis table shown on

page 8. If not, please update the table for each of these years.

Response:

Yes.

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8. Reference: Application pp. 11, 30 – Capital Request

Should capital overhead and contingency cost be included in the total capital request of $6.31 million? If not, why not. If yes, please provide the amounts and the revenue impact for each year for 2006 to 2015.

Response:

Capitalized overheads have not been included in the total capital request of $6.31 million as this is not standard practice in financial analysis throughout the Terasen Gas companies. For significant projects such as this, TGVI considers it appropriate that only incremental overhead costs be charged to the project. TGVI is of the opinion that it would be inappropriate to allocate non-incremental overheads to this project at this stage, as that would distort the evaluation of the project since these non-incremental overheads would be incurred regardless of the outcome of the project. A contingency of $125,000 has been included in the capital request related to the cost components not included in the fixed-price arrangement with Accenture Consulting. As with any significant capital project, there is a risk that the project scope may need to be adjusted once the work is underway based on the discovery of new information. TGVI believes the level of contingency requested for this project is reasonable at less than 2% of the total project cost.

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9. Reference: Application pp. 7, 8, Doug Louth and Associate Inc. Report

The report from Doug Louth and Associate Inc. has identified viable alternate service providers for TGI’s Customer Care activities, yet TGI has indicated continuing with the existing agreement with CustomerWorks for an additional 3 to 4 years. Given TGI’s relatively short commitment horizon on the current outsourcing contract with CustomerWorks, and the conversion option for TGVI does not provide a payback until 2013, explain the advantage of this conversion now as compare to delaying the conversion until TGI has finalized a longer term commitment for its Customer Care activities. Response:

The DLAI 2005 Market Assessment Study confirms that there are potentially comparable service providers available should TGI choose to move to another provider. However, none of these providers has indicated significant excess capacity, and all providers acknowledge that they will need to enter into substantial third party arrangements in order to provide the full scope of services required by Terasen Gas. The study also does not conclude that moving to an alternate provider would provide additional value to ratepayers at this time nor does it address the risks associated with the transition or the capital costs of the change. The current service provider is meeting or exceeding the service levels established in the Client Services Agreement and there are no indications that they are either unable or unwilling to provide both the existing as well as additional services as required, so there is little motivation to move away from a stable environment to an alternate provider at this time without significant cost savings. None of the respondents to the market questionnaire indicated they would offer any material additional services or benefits to customers at this time. We believe the reference costs of the viable alternate providers to be comparable but not advantageous. The decision to move to an alternative provider will also likely eliminate some of the contract conditions that TGI values in the current arrangement. TGI does not believe for example that it will be able to renegotiate a fully fixed price per customer arrangement capped at one-half of inflation going forward. It is likely that TGI would have to take on at least some of the volume risk associated with customer activity levels going forward. As well, most new outsourcing arrangements require a ten-year commitment for the initial term. Under the current arrangement, TGI will retain the flexibility to go to market at any point after 2006 should conditions or market opportunities arise. TGI believes that the marketplace will continue to evolve and that better opportunities will become available as providers streamline their operating models and as capacity is built by competing service providers to support long-term business objectives. TGI does not believe there is significant advantage at this time in entering into a different long-term commitment given that the current service provider is required to continue to provide services under the price cap in perpetuity or until TGI is motivated to make a change. The advantages to TGVI to proceed with the conversion now rather than delaying until TGI has renegotiated a long-term commitment is that, in addition to the immediate benefits to customers stated in the CPCN Application and the operational synergies inherent in common systems and processes for all Terasen Gas customers, there may be no change to the current TGI Client Services Arrangement for many years. It is

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possible that the current arrangement may continue to be the best option for customers. TGI sees no benefit at this time in entering into a long-term contract, given the flexibility of the current arrangement. A final consideration related to the TGVI conversion is largely the fixed-cost data conversion project that has been proposed. TGVI does not believe this cost arrangement will be obtainable in the future and it is TGVI’s expectation that this cost will increase over time. In summary, TGI and TGVI believe it is in the best interests of all customers to convert TGVI customers to the CustomerWorks customer care environment at this time and remain with the current service provider. The fixed-price arrangement will ensure cost certainty and well as leaving volume risk with CustomerWorks into the future. Additionally TGVI retain the flexibility to move to an alternative service provider at any time in the future should a better opportunity arise that benefits all customers.

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10. Reference: Application pp. 20, 31 Preamble: “Depreciation of the new software over 5 years (The 5 year term was used as this period was agreed to as part of the TGVI Settlement…” 10.1 Describe the new software that is required for the conversion option, the

associated costs and the vendor. Response: There are no specific system enhancements or improvements planned through this data conversion project. The only addition in the software category will be the cost of the Peace Software licenses required to support the additional TGVI and TGW customers in the amount of $0.47 million.

10.2 Is the computer software cost of $0.47 million identified on page 31, solely for

licenses from Peace Software for the additional customers converting to the Energy CIS Application? If not, please provide a breakdown of the components and the applicable cost.

Response: Confirmed. The $0.47 million identified on page 31 is for the Peace Software licenses.

10.3 Identify the terms and provisions of the incremental licenses to be acquired from

Peace Software. Provide a copy of the Agreement from Peace Software. Response:

The Peace Software licenses required to support the TGVI and TGW customers will be purchased from CustomerWorks. In anticipation of customer growth as well as the attraction of new customers, additional licenses were purchased by CustomerWorks in 2001 under a preferential pricing arrangement. The purchase price of these licenses is based on the book value at the time of the original purchase including a one-time cost for support and maintenance totaling $5.53 per customer.

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11. Reference: Application p. 20

Section 3.2.1 indicates that the remaining capital cost balance of $434,000 for retaining the Banner CIS option would be depreciated over its remaining life of 4 years, while Section 3.2.2 for Customer Care Conversion Option indicates that this balance is fully depreciated in 2006.

11.1 Please explain the different treatment under these 2 options. Response:

In the Retain Banner CIS option, the remaining Banner CIS capital cost balance continues to be in rate base and it is depreciated over its remaining life of 4 years. The capital cost balance therefore continues to earn a rate base return until it is fully depreciated. Under the Convert to Energy option, the entire remaining balance is expensed in 2006 and the capital cost is removed from rate base, therefore it is no longer earning a rate base return. 11.2 Given that under the Conversion Option, the capital balance of $434,000 is fully

depreciated in 2006. Identify when this capital balance was written off? Response:

Under the Conversion option, the remaining capital cost is expensed in 2006. For modeling purposes, the remaining capital balance is assumed to be removed from rate base as of December 31, 2005, so it does not factor into the mid-year rate base calculation for calculating a return on rate base. 11.3 Identify and discuss the factors that determined this write off.

Response:

Under the Conversion option, the entire remaining capital balance is expensed in 2006.

This is based on the assumption that the existing Banner system will no longer provide any future value to customers since a new system will take its place.

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12. Reference: Application pp.23 – 26 Risk Transfer, Appendix 1 p. 13

The Application outlines a reduction of financial risk due to a fixed based fee of $35.29 (2006) per customer with an annual increase of 50% of CPI. The Client Services Agreement in Appendix 1, Section 8.1 indicates that “Subject to Financial Adjustments BC Gas shall pay CustomerWorks the Base Fees whether or not actual activity levels for Client Services are less than the Forecasted Activity levels set at the beginning of each year of the Term.” 12.1 Based on the above statement, ratepayers are provided with price stability but

not cost effectiveness. Discuss the merits of this arrangement for the ratepayers. Response: The analysis of core operating costs projected over the ten-year analysis period and described in the response to BCUC Information Request No. 5.1 confirms costs under the Retain Banner scenario are expected to increase significantly more than under the Convert to Energy option. TGVI believes this confirms the conversion is the more cost-effective option for customers. The value to ratepayers in the fixed price arrangement is that the risks associated with changes in activity volumes are the responsibility of the service provider. The activity forecasts that formed the basis for the TGI Client Services Agreement were based on activity levels as measured in 2001. At that time, TGI believed that customer expectations were changing and that greater demands would be placed on the utility to meet these demands. The service provider is incented to manage the systems and processes cost-effectively, as any benefit in terms of cost savings will accrue to them. As well, any cost pressures resulting from higher than forecasted volumes are also the responsibility of the service provider. Ratepayers are guaranteed price certainty under this arrangement. If activity volumes increase or as operating costs escalate, ratepayers are protected from a flow-through of costs as they relate to the services defined in the Client Services Agreement. Cost-effectiveness related to the provision of the services is more a concern for the service provider than for the client in an outsourced environment. The utility’s responsibility is to ensure that neither the scope nor quality of service is compromised over time under the fixed price arrangement and that the price paid for the services continues to be market value or better. The intent of the DLAI 2005 Market Assessment Study was to ensure that this continues to be true. The reference prices provided by the respondents to the market survey indicate that the current price paid to CustomerWorks for customer care services is comparable to the alternatives available in the marketplace at this time.

12.2 Identify what the base fee would be if the actual customer activity level exceeds

the forecast level and discuss how the base fee would be determined. Response: There is no provision in the Client Services Agreement to adjust the base fee based on activity levels exceeding forecast levels for any services identified within the scope of services to be provided under the original agreement. Adjustments to base fees can only

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be facilitated through the scope change process whereby either a new service is added or a substantial change, initiated by TGI, is made to the business process resulting in more work being required which was not contemplated in the original scope. The purpose in establishing annual forecasts for key business volumes is to assist the service provider in ensuring staffing levels are appropriate. The annual forecasts do not represent fixed caps in activity volumes and are not drivers for changes to fixed price fees. 12.3 Is there any activity level cap or ceiling for this fixed based fee? If yes, please

provide this activity level cap for each Customer Care activity for the years 2006 to 2015.

Response: No, there are no activity level caps related to the services identified in the existing Client Services Agreement.

12.4 Provide a table which compares TGI’s forecast of Client Service requirements

which is provided to CustomerWorks as part of the annual planning process compared to the actuals for the years 2001 to 2005.

Response: The activity forecast contemplated in the Client Services Agreement as an annual input into the provision of the services began in 2003, the first year where the services were provided under a single system for the full year. 2002 was a transition year with the Lower Mainland customers converting to the Energy CIS platform on July 2, 2002. The nature of the previous outsourcing agreement with BC Hydro for the Lower Mainland customers did not give TGI adequate statistical data with which to forecast activity volumes prior to repatriation. The original intent of the annual activity forecast was to provide the service provider with information to support their need to provide for staffing to support the services required under the Client Services Agreement. The forecasts were not a commitment on the part of the utility to maximum activity levels in reference to the fixed price arrangement. Any variances in activity volumes would remain the responsibility of the service provider. TGI’s responsibility was to ensure the provision of as much information as available on initiatives that could impact activity levels in key business areas and to provide input based on historical experience in providing customer care. Given the breadth of services that were required to be provided, the long time horizon (12 months) and the lack of historical data, the process did not prove to be valuable to either organization. As TGI progressed through 2003 using the annual forecast prepared by the utility, an agreement was reached jointly between TGI and CustomerWorks to move away from an annual process, except at a very high level and work together to develop monthly and seasonal forecasts in key business areas. This included call handling, meter reading and collections. Currently call handling volumes in the three inbound call handling queues are forecasted monthly over a ninety-day planning horizon. Through experience TGI have determined this is the level of detail that is needed to ensure adequate staffing

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levels to meet service levels in each of the call-handling queues. In the collections area, TGI meet and review activity forecasts over the next month based on early-stage collections events and historical experience. Meter reading activities are forecast and reviewed quarterly. Because of the change in the nature of the forecasting process, TGI does not prepare or maintain annual forecast data as originally contemplated in the Client Services agreement and therefore the information requested is not available.

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13. Reference: Application pp. 5-6, Appendix 1, pp. 16, 29

A scope change process would be triggered as indicated in Appendix 1, page 29 when, “increase/decrease in Customer base exclusive of increase due to natural population growth.” This would constitute additional fees over and above the base fees as indicated on page 16 of Appendix 1.

13.1 When TGI implemented the new initiatives of commodity unbundling for

commercial customers and a stable rate option for residential customers, was this considered a scope change requiring additional fees to CustomerWorks? If so, please identify the associated costs and the factors which contribute to that determination.

Response:

Yes, both commercial commodity unbundling and the implementation of the stable rate alternative for residential customers were considered scope changes under the Client Services Agreement. The specific costs associated with these were submitted on January 27, 2004 to the Commission for approval as Schedules F and G amending the Client Services Agreement, and were approved in Commission Order No. G-25-04 dated March 12, 2004. These schedules were attached with the inclusion of the complete agreement as Appendix 1 to the TGVI CPCN Application for Customer Care Conversion. The pricing is included in section 5.1 of the respective schedules.

13.2 If these initiatives were extended to TGVI, would TGI or TGVI bear the costs of these enhancements considered to be a scope changes.

Response:

If the opportunities related to commercial commodity unbundling and stable rate were to be extended to include TGVI, TGVI would bear any incremental operating costs associated with the extension. Additional capital costs would also accrue to TGVI customers related to customer education, statement design and system configuration required to support these initiatives if they were approved by the BCUC to be offered to customers. TGVI will file separate applications at a later date with the BCUC if extension of these services to TGVI customers is required.

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14. Reference: Application p. 30, Appendix 2 – Consulting Agreement Schedule C Please reconcile Accenture’s development cost of $4.13 million indicated on page 29 of

the Application in comparison to the fees outlined in Appendix 2, Schedule C of $3.4 million.

Response:

The $4.13 million development cost on page 29 is comprised of the following: Accenture contract Appendix 2, Schedule C $ 3.33 million ABSU Transition cost Appendix 2, Schedule C, Page SCC-2 $ 0.55 million Alliance Data Support Costs $ 0.25 million TOTAL $ 4.13 million

The Alliance Data Systems support costs of $0.25 are an estimate of their fees to build

the data extract programs required to support the conversion from the Banner CIS application to the Energy CIS application currently used by TGI. The final cost of these services will be negotiated only if this CPCN Application is approved and TGVI is in a position to give termination notice to Alliance Data Systems under the existing contract.

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15. Reference: Application p. 31 – AFUDC

Provide a detail calculation of how the $0.19 million of AFUDC and the cost of capital of 6.1% are determined.

Response: The AFUDC estimate assumes a 6-month period to complete the conversion and a cost

of capital of 6.1%. Therefore:

• 6 months (or 0.5 of a year), • multiplied by the total conversion costs of $6.1 million, • multiplied by the cost of capital of 6.1%, • equals $0.19 million. The Cost of Capital of 6.1% is determined as follows:

Tax rate 34.50%Equity 35% 9.53%Debt 65% 6.49%

6.10%

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16. Reference: DLAI Report – Section 7

Would the Peace System continue to be the CIS platform of choice for TGI in the next five years? If yes, discuss the advantages, flexibility and robustness of this technology in meeting the future business requirements of TGI. If not, what other CIS platform that is currently available would TGI consider?

Response:

When TGI made the decision to outsource all customer care functions in 2001 as well as transferring responsibility for the ongoing maintenance of the CIS application, TGI became indifferent as to the specific future CIS application to be used, as long as the system being used continued to support then-current business functions and ensured that service levels would continue to be met. In 2001 TGI was confident in the CIS selection and continues to be satisfied with the performance of the product. At this time TGI does not see any reason why the current CIS application could not continue to meet its needs over the next five years. Going forward TGI believes the responsibility for selecting and implementing the CIS solution is largely the responsibility of the service provider. If either the current or an alternate provider believed that the services could be provided more efficiently or more cost-effectively using a different application rather than the existing platform, the utility would expect the current provider to initiate a change through the scope change process provided in the Client Services Agreement, or a potential provider to propose a change in CIS as part of their response to either a market assessment or RFP request. Based on an analysis of the risks associated with converting to a different platform and the benefits to ratepayers resulting from the change, the utility would evaluate the options presented. The response to BCUC Information Request No. 9 discussed the results of the DLAI 2005 Market Assessment Study. In the case of all respondents, the preferred CIS to be used in support of the services required was the Peace Energy application. This indicates their confidence in being able to use this application to meet the service levels required by TGI. TGI continues to be committed to a package CIS solution versus a customized CIS development. We currently track the evolution of Tier-1 CIS applications to better understand enhancements and improvements in the industry. At the present time TGI believe there are possibly four applications available that would meet the functional needs of TGI. These are the Peace Energy CIS, the Banner CIS supported by ADS, the SAP Customer Care and the SPL Customer Care and billing systems. These four systems lead the industry and all currently support customers similar in scope and scale to TGI.

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17. Other than status quo and conversion to the Energy System, what other alternatives have TGVI considered for supporting its Customer Care Activities. Discuss these alternatives and explain the reasons why they have not been included in the CPCN business case. If no other alternatives have been considered or evaluated, explain the reasons why.

Response:

Through the Customer Care conversion and outsourcing analysis, TGVI did not look at any alternatives for supporting Customer Care Activities other than status quo and conversion to Energy. The purpose of the analysis was to evaluate whether there would be benefit to TGVI customers in moving to a common customer care platform for all Terasen residential and commercial customer groups. The utility believed that the scope of services and service levels for TGVI customers could be improved through the move to a common platform and that the services could be provided over the long term at a lower cost. TGVI also believes that new opportunities are more likely to be made available in the future given the larger bargaining power and more robust systems integration of the current TGI outsourcing arrangement. While understanding the integration limitations of the current Banner implementation, TGVI has nevertheless been satisfied with the current outsourcing arrangement. Given the scope and scale of the current customer base TGVI believes that the functionality is adequate and the cost is reasonable. At this time, TGVI sees no benefits to be gained from transitioning the TGVI and TGW customers to another standalone application. Regardless of whether TGVI remains on Banner or converts to another application, TGVI sees limited opportunities for improvements to either the scope or the quality of service provided to TGVI customers, as long as the services are not integrated with TGI with respect to the Customer Information System. The CIS is the key application in the provision of customer care and, without the integration of this application with other utility systems, the business processes will continue to be unique for this smaller customer base and the interfaces will continue to be largely manual. In addition the synergies associated with shared operational support will be minimal.

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18. Reference: Application p. 8, DLAI Report p. 13

Based on DLAI’s report on page 13, “Addition of a further 85,000 customers should not affect service levels once the conversion process is complete.” 18.1 Identify the incremental growth for TGVI and TGI for the years 2006 to 2015.

Response:

Incremental customer growth for the period of 2006-2015 is set out in the following table. This information is based on the latest forecasts, which have updated information from the most recent Resource Plan filings with the Commission.

Cumulative 2006 - 2015 TGI 95,924TGVI 35,758Total 131,682

18.2 What is Peace System’s capacity in meeting this total incremental growth?

Response: The Peace Energy system is currently in production serving approximately 8.4 million customers. The largest utility installation running as a single instance supports 5.1 million customers. TGVI has no doubt that the application is scalable to meet the expanded TGI/TGVI customer base. In terms of operational capacity, CustomerWorks has committed to continue to maintain the service levels as defined in Schedules A through D of the Client Services Agreement. Given that CustomerWorks would be at risk of penalties should service levels not be achieved, TGI has accepted their assurances that they have enough hardware capacity to support the incremental growth.

18.3 What is the possibility of declining customer service levels as a result of this

enlarged database?

Response: A decline in customer service levels is not anticipated as a result of the enlarged database. Systems and business processes are stable and have been for the past year. There are no system enhancements identified related to the data conversion activity, and the business processes currently in place for TGI have been validated by TGVI as being acceptable for their customer needs. Operationally CustomerWorks will have to expand or restructure to absorb an increase of approximately 10% in the number of customers supported. TGVI does not believe this is a significant risk.

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19. Reference: Gannett Fleming – June 20, 2002 Review of Depreciation Rate

The study done by Gannett Fleming indicated that computer systems – MIS are to be depreciated over a five year service life. 19.1 Please provide a scenario analysis of the Conversion Option based on this term.

Response:

TGVI notes that the relationship between depreciation term and actual useful life is never

exact. The current analysis is based on depreciating the conversion costs over 5 years and measuring the financial impacts over 10 years. TGVI believes the conversion from Banner to Energy and extension of the current outsourcing arrangement with CustomerWorks to include the TGVI customers will provide significant longer-term cost and service benefits to TGVI and its customers using the approved depreciation period.

The Gannet Fleming study of Management Information Systems (“MIS”) for TGVI

suggested that these types of capital assets should be depreciated over a five-year service life. This was approved in the TGVI Settlement by Commission Order No. G-02-3 on January 14, 2003. Gannet Fleming later performed a similar study for TGI specifically and the recommendation was an approved depreciation rate for MIS systems of 8 years. In this specific case related to the conversion of the TGVI customers to the Energy CIS platform the capital costs for the Conversion option are more of a conversion nature than a pure CIS implementation and therefore a longer approved service life may be more appropriate.

When comparing heavily weighted operating cost scenarios with a capital outlay

scenario, over the short term, the result will be preferential to the operating option. Using a short-term outlook will result in many capital projects with positive customer and company impacts being unfortunately overlooked.

Comparing the Convert to Energy option with the Retain Banner option when reducing the analysis term to five years creates a levelized cost per customer of $6.92 as described below. 5 Year Evaluation with TGVI Depreciation of Class 12 Computer Systems @ 20% and without Capitalized Overheads2005.05.08

2006 2007 2008 2009 2010

Revenue RequirementsRetain Banner 5,115$ 5,356$ 5,648$ 5,865$ 5,981$ Conversion to Energy 3,981$ 6,733$ 6,787$ 6,842$ 6,920$ Savings (Cost) to Convert 1,134$ (1,378)$ (1,140)$ (977)$ (939)$

Average Customers 87,677 90,643 93,504 96,186 98,973

Revenue Requirement Per CustomerRetain Banner 58.33$ 59.09$ 60.40$ 60.98$ 60.43$ Conversion to Energy 45.40$ 74.29$ 72.59$ 71.14$ 69.92$

Savings/(Cost) per Customer 12.93$ (15.20)$ (12.19)$ (10.16)$ (9.49)$

Levelized Savings/(Cost) per Customer (6.92)$ (6.92)$ (6.92)$ (6.92)$ (6.92)$

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19.2 Identify the 5 year NPV for this analysis?

Response:

PV of Cash

PV of Cash Flows Flows (000's)

Banner to Energy (16,750)$ Retain Banner (14,976) Difference - Switch / (Retain) (1,773)$

19.3 If the NPV is negative at the end of 5 years, identify the alternatives TGVI would

have to achieve a positive NPV. What would TGVI’s recommendation be?

Response: As indicated above, the NPV is negative if the analysis timeline is reduced to five years.

As described in part 1 of the response to this information request, TGVI does not believe this is an appropriate forecast horizon to use in this case.

One alternative that might be considered, although this would not necessarily guarantee

a positive payback over five years, would be to try to negotiate an outsourcing arrangement similar to the TGI arrangement where the capital cost is transferred to the service provider and the recovery is built into the fixed service fees. Under this arrangement TGVI would have to commit to a long-term arrangement in order to ensure the provider had adequate time to fully recover the capital costs. Based on our review of recent outsourcing contracts negotiated in the industry, the transfer of capital risk is not a common occurrence. Service providers are hesitant to take on this additional risk.

The benefits as described in the Application for converting to the Energy system and the

CustomerWorks outsourcing arrangement are not purely financial. As explained in the Application, there are numerous non-financial benefits, such as more consistent and enhanced service levels to customers. Additionally by participating jointly with TGI in a relationship with CustomerWorks, TGVI and TGVI’s customers will benefit in the opportunities related to scope and scale by being part of a larger organization specializing in customer care services and having increased bargaining power in negotiating changes and pursuing alternate opportunities in the future.

050527 BCUC IR Response F · 1. Reference: Application p.ii Preamble: “The customer care...

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