LETTER NO. L-30-06 SIXTH FLOOR, 900 HOWE STREET, BOX 250 ROBERT J. PELLATT VANCOUVER, B.C. CANADA V6Z 2N3 COMMISSION SECRETARY TELEPHONE: (604) 660-4700 Commission.Secretary@bcuc.com BC TOLL FREE: 1-800-663-1385 web site: http://www.bcuc.com FACSIMILE: (604) 660-1102 VIA E-MAIL Log No. 14484 Regulatory.Affairs@terasengas.com June 26, 2006 Mr. Scott Thomson Vice President, Finance and Regulatory Affairs & Chief Financial Officer Terasen Gas Inc. 16705 Fraser Highway Surrey, BC V3S 2X7 Dear Mr. Thomson: Re: Terasen Gas Inc., Terasen Gas (Vancouver Island) Inc., Terasen Gas (Squamish) Inc. and Terasen Gas (Whistler) Inc. (collectively, the “Terasen Utilities”) Clarification of Commission Order No. G-116-05 and Kinder Morgan, Inc. Decision, Dated November 10, 2005 (“KMI Decision”) By letter dated April 20, 2006, Terasen Gas Inc. (“TGI”) wrote to the Commission seeking clarification on behalf of itself and its utility affiliates (Terasen Gas Inc., Terasen Gas (Vancouver Island) Inc., Terasen Gas (Whistler) Inc., Terasen Gas (Squamish) Inc., and Terasen Multi-Utility Services Inc., collectively the “Terasen Utilities”) on certain conditions issued by the Commission in Order No. G-116-05 and the accompanying Decision dated November 10, 2005 (the “Decision”) approving the application by Kinder Morgan Companies (“KMI”). In particular, the conditions for which clarification is sought are found in Section 7.2.3 of the Decision which provides as follows: “In order to address privacy concerns and other concerns, the Commission Panel determines that it would be appropriate to attach a condition to approval of the Transaction that requires KMI not to change the geographic location of any existing functions or data currently in Terasen Gas’ service area without prior approval of the Commission”. In order to ensure compliance with the Decision, the Terasen Utilities seek the Commission’s concurrence to a proposal which adopts a materiality threshold of 10 Full Time Equivalent (FTE) positions for the determination of whether or not a geographic relocation of a particular function outside the service area would occur. The proposal contemplates that Commission approval would only be required if more than 10 FTEs within a particular functional area are proposed to be transferred outside the service areas of the Terasen Utilities.
2 LETTER NO. L-30-06 In addition, the Terasen Utilities seek clarification of the Commission’s intent regarding the condition concerning changes in the geographic location of any existing data. Terasen Utilities seeks confirmation that having servers physically located outside of British Columbia would not constitute a breach of the condition of the Decision and would not require prior approval so long as the Terasen Utilities retain the ability to access from within the service area, at any time, the data and records stored on those servers; that only authorized persons could access such data and records; and that appropriate data security measures are maintained. In addition, confirmation is sought that the duplication of data for storage on back-up services located outside of the service area is not precluded by the Decision and does not require prior approval. Functions The Decision requires “KMI not to change the geographic location of any existing functions . . . currently in TGI's service area, without prior approval of the Commission”. By ‘functions’, the Commission intended to include not only those functions performed by TGI on behalf of the Terasen Utilities but also those functions performed by Terasen Inc. for the Terasen Utilities. By ‘currently’, the Commission meant as of November 10, 2005, the date of the Decision. The Commission identifies the following functions that are presently in TGI’s service area. i) Performed by TGI on behalf of the Terasen Utilities Human Resources Measurement • HR Advisory Services • Meter Shop • Labour Relations • ISC Data Acquisition • Compensation & Benefits • Measurement services • Environmental, Health & Safety • Engineering Governance Transmission • Training • Gas Control & SCADA • LNG Plant operations Distribution • Pipeline Operations • Operations Centre • Compression Management • Asset management • Capital installations Marketing • Regional operations • Mass Market Customer Care & Services • Commercial/Industrial Customer Management Business Services & IT • Forecasting/Market Planning • Infrastructure management • Community, Aboriginal and Government Relations • IT applications management • Business/Infrastructure Development • Fleet management • Facilities Finance/Regulatory • Engineering • Financial/Regulatory Reporting • Shops (manufacturing) • Financial Planning and Control • Materials management • Regulatory Affairs • Accounts Payable Gas Supply • Energy management Mid-stream services Source: BCUC IR-1, 7.2
3 LETTER NO. L-30-06 ii) Provided to Terasen Utilities by Terasen Inc. Corporate Services • Risk Management and Insurance Services • Government Relations and Public Affairs • Treasury and Cash Management • Legal Department • Internal Audit • Investor Relations • Taxation Services • External Reporting • Corporate Secretary’s Office • HR Compensation and Planning • Corporate Financial Analysis and Capital Management • Strategic Planning and Development Source: October 31, 2003 Report on Separation of Terasen Inc. and creation of the Corporate Centre, pp. 6-13 In the Commission’s view, the geographic relocation of any of the above listed functions will require Commission approval. The Commission is not prepared to agree to the proposed materiality guidelines. Data As for the location of data, the Commission finds its Decision to be unambiguous. The condition requires KMI “… not to change the geographic location of any existing . . . data currently in TGI's service area without prior approval of the Commission”. Should Terasen Utilities wish to change the geographic location of any data that was located in the service area on November 10, 2005, they must seek the Commission’s approval. The location of the data is determined, in the Commission’s view, by the location of the server. Whether Terasen Utilities staff can access the data on a continuous basis is irrelevant to the Commission. In Letter No. L-96-05, the Commission accepted that TGI employees have access to the TGI customer records and accordingly, no additional conditions were required at that time on the Accenture relocation of the Kelowna call centre to Fredericton, New Brunswick. The Commission considers that in accordance with the ring-fencing provisions of the KMI Decision that it is necessary to revise the conditions with respect to the location of data and servers, which provide service to the Terasen Utilities. Accordingly, the Commission has issued Order No. G-75-06 that requires the location of data and servers providing service to Terasen Utilities is to be restricted to Canada. Similarly, the nature of back-up data remains that of data. Any proposal to duplicate data and store it outside its present geographic location will require Commission approval. Governance Finally, the Commission draws Terasen Utilities attention to Section 7.2.2 of the Decision: “The Commission Panel finds that the Terasen Utilities should be required to maintain existing governance policies and that any changes in these policies should be approved by the Commission. In particular, the Commission concludes that the continued independence of Directors, as required in existing governance polices, will provide a further assurance that the Terasen Utilities will comply with the ring-fencing conditions.”
4 LETTER NO. L-30-06 By requiring Terasen Utilities to maintain “existing governance policies” the Commission intended that an independent Board of Directors would be maintained, to whom a President would report. In turn, the Vice Presidents would report to the President and manage their departments, which would continue to be arranged along functional lines and perform the functions referred to above. The Commission considers that any attempt to change such a structure would constitute a change in governance policies and that such a change would require Commission approval. The intent of the Decision is clear: existing functions and data must remain in their geographic location and existing governance policies must be maintained. Any change requires Commission approval. The Decision does not tell the Boards of Directors of the Terasen Utilities how to conduct their governance and it does not tell KMI how to exercise its rights of oversight that flow from its ownership of Terasen Utilities. Yours truly, Original signed by Robert J. Pellatt TP/cms TGI/Cor/Clarification Rsp – KMI Decision
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