Stakeholder Consultation Distribution Custom IR Rate Application 2015-2019

1. Stakeholder ConsultationDistribution Custom IR Rate Application 2015-2019 Stakeholder Session #2 June 26, 2013

2. Agenda 2

3. Facilitator’s Remarks • Introductions Facilitator, Bob Betts & OPTIMUS | SBR support team • Meeting Facilities • Safety Review • Note taking process • Participant Introductions 3

4. Meeting Process • Mobile phones “Off” or “Silenced” • Avoid side discussions while others speaking • All questions are good ones • All comments are appreciated • Materials and notes will be posted on Hydro One’s Regulatory Website: www.HydroOne.com/RegulatoryAffairs 4

5. Progress Update on Stakeholder Session #1 5

6. CDM Forecasting Initiative Update on Line Loss Study Stan But Manager, Economics & Load Forecasting June 26, 2013

7. OEB Directive • In its Decision with Reasons for EB-2009-0096 released on April 9, 2010, the OEB directs Hydro One to track the dollar value of variances between the Board approved losses recovered in rates, and actual line losses, commencing January 1, 2010. • The OEB also directs Hydro One to bring this analysis to its next cost of service proceeding so that this issue may be further examined. 2

8. Status of the Line Loss Study • To develop a well-defined and defendable methodology for the line loss study, Hydro One has recently engaged Navigant to assist in this analysis. • Hydro One plans to file the line loss analysis in the upcoming cost of service application. 3

10. Break

20. Lunch

21. CDM Forecasting Initiative Update on Seasonal Customer Initiative Henry Andre Manager, Pricing June 26, 2013

22. Topics • Existing Seasonal customer feedback • Planned Seasonal customer consultation • Possible Options for Modifying Seasonal Rates 2

23. Corporate Customer Satisfaction – Seasonal • Satisfaction with how Hydro One “calculates their bill” and “fairness of charges” lower for Seasonal as compared to all respondents • Overall satisfaction with rates and charges on the bill shows a decrease with increase in consumption (other rate classes show similar trends) • The % of seasonal respondents indicating “Distribution Charge / Delivery charges” as driver for low satisfaction were higher than other classes • Two main themes in comments from customers: • high bills for times they are not using property • Estimated bills and meter reads not done monthly “For seasonal service, it is every three months. It is turned off, but I get delivery charges of $70” “The cottage is not in use during the winter time. Last month I got a bill for $23 when I did not use power at all” “I was trying to get my meter read rather than estimated for my seasonal residence” 3

24. Customer Call Centre – Escalated complaints High consumption customers generate majority of Seasonal customer complaints: • Differences in type of rates/billing complaints based on level of energy consumption: • Monthly Service Charge issues account for ~25% of complaints for low energy users but only ~2% for high energy users • Rate classification issues account for ~26% of complaints for high energy usage but only ~10% for low energy users Customer advised that he was very concerned with his high bills the last few months as they are much higher than in the past … Customer is very upset that he pays higher delivery charges as a seasonal resident in comparison to his neighbor who is a full time resident… Mr Y questioning delivery charges when seasonal property isn't in use and hardly any consumption is being used 4

25. Planned Seasonal Consultation • Have engaged CitizenOptimum to conduct focus groups with seasonal customers • Two focus groups in each of four regions in Ontario (North, South, East and West) • Will engage local cottagers’ associations to send one or two representatives to local focus groups of 6 to 8 participants • Provide some information on cost allocation and rate design • Get input on customer concerns • Solicit feedback on possible options for rate class changes • To be completed by mid August 5

26. Possible Options for Seasonal Rates 1. Status Quo • Outcome of harmonization process that combined Seasonal rate classes (R3 and R4) into one class • The harmonization process adopted the lower R3 fixed charge as the “target” for the harmonized class • shifted revenue to be collected from fixed to variable charge • revenue requirement increases since 2008 largely absorbed by higher variable charges 2013 Typical Monthly Bill 6

27. Possible Options for Seasonal Rates 2. Revise revenue collected via fixed and variable rates • Increase fixed charges from current $19.50 • R2 Fixed charge ($57), R1 ($20), OEB Minimum System ($24) • Current Seasonal rates recover 38% of revenue via fixed & 62% via variable charges • Prior to harmonization revenue split was ~ 70% fixed & ~ 30% variable • Changes to Fixed charge will have significantly different impacts depending on consumption level - e.g. increasing Fixed charge to $30/month will increase Total Bill by 8% for 200 kWh customer and decrease Total Bill by 8% for 1,000 kWh customer 7

28. Possible Options for Seasonal Rates • Revise Seasonal rate class criteria • Exclude Seasonal customers with greater than 1,000 kWh avg monthly consumption over the prior year • High consuming seasonal customers move to respective residential classes • Seasonal customers moving to R2 rate class not eligible for RRRP • Expect small impact to residential classes • Seasonal customers moving to R1 rate class would see a significant decrease, but smaller decrease for those moving to R2 • Customers remaining in Seasonal class will see an increase in rates 2013 Typical Monthly Bill 8

29. Possible Options for Seasonal Rates • Split Seasonal rate class into High and Low volume classes • Where to draw the dividing line? • No impact on other residential rate classes • Expect rates to drop for High consuming customers given higher revenues currently collected • Expect rates to climb for Low consuming customers given lower revenues currently collected 9

30. Criteria for Evaluating Options • Delivery Charge Impacts • Total Bill Impacts • # of customers with positive and negative impacts • Consistency with rate making principles 10

31. CDM Forecasting Initiative • Overview of Custom IR • Annual Adjustments • Off-Ramps/Re-Openers • Annual Reporting & Performance Metrics Susan Frank Vice-President & Chief Regulatory Officer June 26, 2013 Jim Malenfant Senior Regulatory Advisor

32. Timeline for Custom IRStakeholdering • Process: • Economic Outlook (Sept) • Business Planning (Sept) • Studies (April, June, Sept) • Strategy (Sept) • Knowledge of Assets -Asset Analytics (Sept) • Customer Information (April, Nov) • The Cost of Service Plan: • Annual Revenue Requirement (Nov) • Smoothed Annual Requirement (Nov) • Rate Schedules (Nov) • Adjusting/Monitoring of the Plan (over 5 year period): • Annual adjustments, off-ramps/re-openers (June) • Annual reporting and performance metrics (June) 2

33. Custom IR Framework 3

34. Hydro One Research for Custom IR DesignWhat Performance-Based or Incentive Regulation is Elsewhere? • UK • Introduced new RIIO (Revenue using Incentives to deliver Innovation and Outputs) model in Mar 2013. • Outcome focused model, distributors required to develop plans and define performance measures and outputs for a 8 year period. • The model includes an Annual Iteration Process, Uncertainty Mechanisms (i.e. Off-Ramps/Re-Openers), and Incentives (i.e. rewards/penalties) based on performance. • The new model is intended to mitigate concerns with the prior incentive framework; including: • Lack of ownership of the distributor plans due to regulator driven templates • Higher long-term costs based on uneven incentives between operating and capital costs • Lack of customer engagement 4

35. Hydro One Research for Custom IR DesignWhat Performance-Based or Incentive Regulation is Elsewhere? • Australia • Currently in the midst of major review of its regulatory policy (“Better Regulation program”). • The Better Regulation program is to deliver an improved regulatory framework focused on promoting the long term interests of electricity consumers. • The improved framework is intended to address concerns with the prior incentive framework; related to high capital spending. 5

36. Hydro One Research for Custom IR DesignWhat Performance-Based or Incentive Regulation is Elsewhere? • Alberta • ENMAX initiated a Formula Based Ratemaking model in Alberta which was approved in 2009. • The regulator expanded this concept to all Alberta utilities (gas & electric) in 2012 with the issuance of its Performance Based Regulation framework. • The model is based on a productivity-inflation rate setting mechanism for a 5 year term (including Annual Adjustment, Re-Openers, and Capital Trackers). 6

37. Annual Adjustments Criteria Annual Adjustment Options Questions?

38. Hydro One’s Options for Annual Adjustments • Criteria: • Externally driven beyond utility’s control • Ongoing / recurring changes either upward/downward • Formula based 7

39. Hydro One’s Options for Annual Adjustments • Annual Adjustments Options: • Cost of Capital • Based on OEB issued Return On Equity and deemed Short Term debt rate in Nov each year • Based on Hydro One’s actual long term debt issued • Working Capital • Based on change in Commodity Prices (including global adjustment) • 3rd party flow-through costs • Based on change in RTSRs, WMSC, SME charge, RRRP, OEB Charges • Tax Rate Changes • CDM based on change in cost or change in load • Clearing of Variance Accounts based on prior year-end audit financials (e.g. RSVAs, pension) 8

40. Hydro One’s Options for Annual Adjustments Facilitated Discussion • Questions: • Should there be materiality thresholds? • Should the annual adjustments be based on forecasts or actuals? • How to address prudency review during the annual adjustment process? 9

41. Off-Ramps and Re-Openers Criteria Off-Ramp Options Re-Opener Options Questions?

42. Hydro One’s Options for Off-Ramps and Re-Openers • Criteria: • Externally driven beyond utility’s control • Unexpected • Very material impact • Off-ramps result in whole Custom IR plan to be examined and possibly terminated; whereas with Re-Openers only a particular component of the plan is adjusted. 10

43. Hydro One’s Options for Off-Ramps and Re-Openers • Off-Ramp Options: • Return on Equity (+/- 300 basis point thresholds) as per OEB’s RRFE • Performance erodes to unacceptable levels as per OEB’s RRFE • Restructuring of the industry 11

44. Hydro One’s Options for Off-Ramps and Re-Openers • Re-Opener Options: • New Government Mandates • Market Rules/Code changes • Environmental law changes • Technical standard changes • New investments resulting from the newly developed Regional Plans • Material unforeseen weather events • Accounting Framework changes 12

45. Hydro One’s Options for Off-Ramps and Re-Openers Facilitated Discussion • Questions: • What is the level of materiality to trigger a re-opener? Different levels for Capital and OM&A? • How to incorporate re-openers into the plan: track in variance accounts and seek recovery in next cost of service filing period or require immediate funding thru use of rate riders? • Should re-openers be combined to trigger materiality? 13

46. Reporting & Performance Metrics Criteria Metrics for Delivery of Plan Questions?

47. Hydro One’s Options for Reporting and Performance Metrics • Criteria: • Outputs to allow Board and Intervenors to monitor key outcomes committed to in the plan • Metrics need to be measurable, controllable, and transparent • Manageable number of metrics 14

48. Hydro One’s Options for Reporting and Performance Metrics • Metrics for Delivery of Plan: • Level of Spend (Capital In-Service and OM&A) • Productivity/Cost Effectiveness • Forestry Brush Control & Line Clearing ($/km) • Planned End of Life Wood Pole Replacements ($/pole) • Cable Locates ($/locate) • New Connections (S/connection) • Customer Satisfaction • Metrics associated with significant change in performance/reliability (e.g. Innovation–Smart Grid) 15

49. Hydro One’s Options for Reporting and Performance Metrics Facilitated Discussion • Questions: • Should there be incentives (i.e. rewards/penalties) related to metrics? • How to develop the targets for each metric? Should the targets be annual or cumulative? • How to validate the accuracy of the metric’s reporting? • How far off target can a utility go before the OEB intervenes? 16

50. Thank you for attending!Check our website for further information:www.HydroOne.com/RegulatoryAffairs Any questions or comments can be directed to:Regulatory@HydroOne.com