Energy Probe (EP) INTERROGATORY #50 List 1

Transcription

1 Exhibit I Tab 8 Schedule 3.01 EP 50 Page 1 of Energy Probe (EP) INTERROGATORY #50 List 1 Issue 8 Are the methodologies used to allocate Shared Services and Other O&M costs to the transmission business and to determine the transmission overhead capitalization rate for 2013/14 appropriate? Interrogatory Ref: Exhibit C1, Tab 4, Schedule 2, Page 2, Table 1 & Exhibit C1, Tab 7, Schedule 1, Page 3, Table 1 and Table 2 & Exhibit C1, Tab 7, Schedule 1. Attachment 1 One of the difficulties in examining CCF&S costs is the inclusion/exclusion of Inergi costs. a) Please provide a version of Exhibit C1/Tab 4/Schedule 2/Page 2 Table 1 that shows the total year over year % increase and the % increase in allocation to Tx. b) Please provide a version of C1/Tab 2/Schedule 7/Page 3 Table 1 that shows the Total CCFS costs as reviewed by B&V and as allocated to the Business Units per Table 3 of the B&V Report. c) Reconcile to C1/Tab 7/Schedule 1/Page 3 Table 1 and Table 2. d) Please provide a copy of BP (source data for B&V). e) Reconcile the CCF&S costs for 2012 with the Schedules A&B in the Service Level Agreements (see IR above). f) How are Inergi costs allocated to the Business Units? (direct cost driver etc). g) Please provide a Schedule that shows by service the total 2013 costs allocated to the business units with separate costs shown for in-house and Inergi costs. Reconcile to the total shown in the B&V report Table 3. Response a) Provided below is the requested table that shows the total year over year % increase and the % increase in allocation to Transmission

2 Exhibit I Tab 8 Schedule 3.01 EP 50 Page 2 of Historic Bridge Test Transmission Allocation Test 2010 over 2011 over 2012 over 2013 over 2014 over Description over 2013 Corporate Management -17% 2% 2% 2% 2% 1% Finance 2% 2% 8% -1% 0% 0% Human Resources 5% -33% -1% 0% 3% -1% Corporate Communications 8% -9% 5% 25% 11% -1% General Counsel & Secretariat 14% -1% 18% 2% 2% 0% Regulatory Affairs 9% -6% 11% 5% -3% -7% Corporate Security 14% 25% 23% 3% 3% -1% Internal Audit 4% 11% 35% 2% 2% 1% Real Estate & Facilities -1% 3% 17% 4% 3% 0% Total CCF&S Costs 3% -3% 12% 4% 2% -1% b) The table below shows how Exhibit C1, Tab 4, Schedule 2, Table 1 reconciles with the updated total CCFS costs used in the Shared Services Cost Allocation model. Description TX 2014 TX Corporate Management Finance Human Resources Corporate Communications General Counsel & Secretariat Regulatory Affairs Corporate Security Internal Audit Real Estate & Facilities CF&S Costs (Note 1) Customer Care Facilities (Note 2) (52.40) (54.03) (23.58) (24.31) Information Technology Systems New: Strategy New: Operations Other Total CCF&S Costs Less: Blue page adjustments (1.5) - (1.5) - CCF&S per Table 3 of the B&V Report Note 1: CF&S costs are consistent with C1-2-7 Table 2 Note 2: Facilities costs are not included in the cost allocation model reviewed by Black & Veatch Corporation. c) The table in response b) reconciles to Exhibit C1, Tab 7, Schedule 1, Page 3 Table 1 and Table 2.

3 Exhibit I Tab 8 Schedule 3.01 EP 50 Page 3 of d) Please refer to documents filed in confidence in response to Exhibit I, Tab 2, Schedule 3.01 EP 1. e) Please refer to the response to Exhibit I, Tab 6, Schedule 3.04 EP 25. f) Inergi costs are allocated to the Business Units using direct allocation and cost drivers. g) The table on the next page shows by service the total 2013 costs allocated to the business units with separate costs shown for in-house and Inergi costs Shareholder Description 2013 Total Tx Dx Telecom Brampton Remotes Only Corporate Management Finance Inergi - Finance Inergi - HR Human Resources Corporate Communications General Counsel & Secretariat Regulatory Affairs Corporate Security Internal Audit Real Estate & Facilities CF&S Costs (Note 1) Customer Care Inergi - CSO Inergi - Settlements Total Information Technology Systems Inergi - ETS Telecom Services Information Technology Systems Total Operations Inergi - AP Operations Total Strategy Facilities (Note 2) Direct HOI Costs Total CCF&S Costs Less: Blue page adjustments (1.5) (1.5) CCF&S per Table 3 of the B&V Report Note 1: CF&S costs are consistent with C1-2-7 Table 2 Note 2: Facilities costs are not included in the cost allocation model reviewed by Black & Veatch Corporation.

4 Exhibit I Tab 8 Schedule 3.02 EP 51 Page 1 of Energy Probe (EP) INTERROGATORY #51 List 1 Issue 8 Are the methodologies used to allocate Shared Services and Other O&M costs to the transmission business and to determine the transmission overhead capitalization rate for 2013/14 appropriate? Interrogatory Ref. Exhibit C1, Tab 7, Schedule 2, Attachment 1, Appendix a) The formula on page 7 uses the total CAPEX as the denominator. Confirm that the CAPEX includes Capital contributions. b) Explain why it is appropriate for the Overhead Capitalization Rate result to be affected by Capital contributions and if Rate base was the denominator whether less variability would occur. c) Please provide versions of Appendix A that i) removes capital contributions and ii) uses ratebase as the denominator. Response a) Yes, the CAPEX amount in the denominator includes Capital Contributions by customers. b) Capital Contributions by Customers are added because the Overhead effort required for projects is related to the gross capital cost, not net capital cost. The fact that a project is funded in part by customers is a financial transaction and does not relate to the Overhead effort required. It is not possible to tell if using the Rate Base for the denominator, instead of Capital Spending, would cause the ratio to be more or less variable than the Company s method. While the Rate Base may be less variable than Capital Spending, the Overhead Cap Rate that is calculated could be either more or less variable. That is because Overhead costs for capital projects are more directly related to Capital Spending (as computed by the Company for use in the Overhead Cap Rate) than to Rate Base, which is not as affected by annual Capital Spending. c) i). Attachment 1 of this exhibit shows the Overhead Cap Rate computed by removing Capital Contributions (line 84). While these rates are higher than the rates computed by Hydro One (line 83), the costs capitalized under this approach

5 Exhibit I Tab 8 Schedule 3.02 EP 51 Page 2 of (line 79) is lower than computed by Hydro One (line 80) because the higher rate gets applied to a lower amount (that is, Capital Spending without including Capital Contributions). ii). Attachment 2 of this exhibit shows the Overhead Cap Rate computed by using the Rate Base (line 82) as the denominator instead of Capital Spending (line 83). These rates are not comparable to the rates computed by Hydro One because they are applied to a much higher number (i.e., Rate Base instead of annual Capital Spending).

6 Exhibit I EP 51 Attachment 1 Page 1 of 2 REMOVE CAPITAL CONTRIBUTIONS FROM CAPITAL SPENDING TRANSMISSION OVERHEAD CAPITALIZATION RATES ($ millions) Capital Expenditures 2 Total capexp , , , Less: Minor fixed assets (31.4) (26.0) (27.3) (25.4) (25.9) 4 Less: Capitalized overhead (115.2) (116.5) (117.0) (109.9) (111.2) 5 Less: Capitalized interest (48.9) (43.7) (56.4) (59.9) (57.6) 6 Add: Capital contributions 7 Add: Removal costs OM&A 11 Total OM&A Less: CCF&S costs (113.5) (113.2) (112.6) (113.2) (113.2) 13 Less: Facility costs (22.2) (22.7) (23.5) (24.0) (24.5) 14 Less: Asset Management \1 (71.7) (71.6) (73.0) (74.3) (75.2) 15 Add: Capitalized overheads Capitalized CCF&S Costs 19 Total Costs per Model Less: AM (35.3) (35.8) (37.0) (37.4) (37.2) 21 Less: Operations (0.6) (0.6) (0.7) (0.7) (0.7) 22 Less: Network Operations (31.4) (32.2) (33.2) (33.9) (34.9) 23 Less: CBR (3.6) (3.6) (3.7) (3.8) (3.9) 24 Net CCF&S Costs Add: Facility costs Less operating-type CCF&S costs: 28 Inergi - CSO Inergi - ETS CSO Apps Inergi - ETS Market Ready (1.1) (1.1) (1.1) (1.0) (1.0) 31 Inergi - Settlements (0.2) (0.2) (0.2) (0.3) (0.3) 32 (1.3) (1.3) (1.3) (1.3) (1.2) Applicable CCF&S costs Portion capitalized based on labour content: 37 Labour in OM&A Labour in capexp % capexp 60.6% 60.3% 60.5% 55.5% 56.7% Portion capitalized based on total spending: 43 OM&A Capexp , , , , , % capexp 70.3% 71.8% 71.5% 68.5% 69.5% Weighting: 49 Labour content 50.0% 50.0% 50.0% 50.0% 50.0% 50 Total spending 50.0% 50.0% 50.0% 50.0% 50.0% Portion capitalized based on weighting of two methods 65.5% 66.1% 66.0% 62.0% 63.1% Applicable CCF&S costs Capitalized CCF&S costs

7 Exhibit I EP 51 Attachment 1 Page 2 of 2 REMOVE CAPITAL CONTRIBUTIONS FROM CAPITAL SPENDING TRANSMISSION OVERHEAD CAPITALIZATION RATES ($ millions) Capitalized AM, NO, OP Costs 59 Network AM, NO, OP (Tx + Dx): 60 Asset Management group Network Operating department Operations group (certain departments, see Report) Portion capitalized (per time study): 66 Asset Management group 24.3% 24.3% 24.3% 24.3% 24.3% 67 Network Operating department 11.6% 11.6% 11.6% 11.6% 11.6% 68 Operations group (certain departments, see Report) 4.3% 4.3% 4.3% 4.3% 4.3% Capitalized AM, NO, OP costs: 71 Asset Management group Network Operating department Operations group (certain departments, see Report) Overhead Capitalization Rate 77 Capitalized CCF&S costs Capitalized AM, NO, OP costs TOTAL SHARED COSTS CAPITALIZED As filed by Hydro One Capexp Overhead capitalization rate 14.0% 12.0% 12.0% 13.0% 12.0% 84 As filed by Hydro One 11.0% 9.0% 9.0% 12.0% 12.0% 85 \1 Asset Management excludes facility costs

8 Exhibit I EP 51 Attachment 2 Page 1 of 2 USE RATE BASE FOR DENOMINATOR TRANSMISSION OVERHEAD CAPITALIZATION RATES ($ millions) Capital Expenditures 2 Total capexp , , , Less: Minor fixed assets (31.4) (26.0) (27.3) (25.4) (25.9) 4 Less: Capitalized overhead (115.2) (116.5) (117.0) (109.9) (111.2) 5 Less: Capitalized interest (48.9) (43.7) (56.4) (59.9) (57.6) 6 Add: Capital contributions Add: Removal costs , , , OM&A 11 Total OM&A Less: CCF&S costs (113.5) (113.2) (112.6) (113.2) (113.2) 13 Less: Facility costs (22.2) (22.7) (23.5) (24.0) (24.5) 14 Less: Asset Management \1 (71.7) (71.6) (73.0) (74.3) (75.2) 15 Add: Capitalized overheads Capitalized CCF&S Costs 19 Total Costs per Model Less: AM (35.3) (35.8) (37.0) (37.4) (37.2) 21 Less: Operations (0.6) (0.6) (0.7) (0.7) (0.7) 22 Less: Network Operations (31.4) (32.2) (33.2) (33.9) (34.9) 23 Less: CBR (3.6) (3.6) (3.7) (3.8) (3.9) 24 Net CCF&S Costs Add: Facility costs Less operating-type CCF&S costs: 28 Inergi - CSO Inergi - ETS CSO Apps Inergi - ETS Market Ready (1.1) (1.1) (1.1) (1.0) (1.0) 31 Inergi - Settlements (0.2) (0.2) (0.2) (0.3) (0.3) 32 (1.3) (1.3) (1.3) (1.3) (1.2) Applicable CCF&S costs Portion capitalized based on labour content: 37 Labour in OM&A Labour in capexp % capexp 60.6% 60.3% 60.5% 55.5% 56.7% Portion capitalized based on total spending: 43 OM&A Capexp 1, , , , , , , , % capexp 74.7% 77.0% 77.0% 70.1% 69.9% Weighting: 49 Labour content 50.0% 50.0% 50.0% 50.0% 50.0% 50 Total spending 50.0% 50.0% 50.0% 50.0% 50.0% Portion capitalized based on weighting of two methods 67.7% 68.7% 68.8% 62.8% 63.3% Applicable CCF&S costs Capitalized CCF&S costs

9 Exhibit I EP 51 Attachment 2 Page 2 of 2 USE RATE BASE FOR DENOMINATOR TRANSMISSION OVERHEAD CAPITALIZATION RATES ($ millions) Capitalized AM, NO, OP Costs 59 Network AM, NO, OP (Tx + Dx): 60 Asset Management group Network Operating department Operations group (certain departments, see Report) Portion capitalized (per time study): 66 Asset Management group 24.3% 24.3% 24.3% 24.3% 24.3% 67 Network Operating department 11.6% 11.6% 11.6% 11.6% 11.6% 68 Operations group (certain departments, see Report) 4.3% 4.3% 4.3% 4.3% 4.3% Capitalized AM, NO, OP costs: 71 Asset Management group Network Operating department Operations group (certain departments, see Report) Overhead Capitalization Rate 77 Capitalized CCF&S costs Capitalized AM, NO, OP costs TOTAL SHARED COSTS CAPITALIZED As filed by Hydro One Capexp 1, , , Rate Base 9, , Overhead capitalization rate 1.0% 1.0% \1 Asset Management excludes facility costs

10 Exhibit I Tab 8 Schedule 9.01 SEC 23 Page 1 of School Energy Coalition (SEC) INTERROGATORY #23 List 1 Issue 8 Are the methodologies used to allocate Shared Services and Other O&M costs to the transmission business and to determine the transmission overhead capitalization rate for 2013/14 appropriate? Interrogatory [C ] Please provide the terms of reference and the instructions provided by the Applicant to Black & Veatch regarding the review of its overhead capitalization rate. Response Please see Appendix A to this exhibit.

11 Exhibit I SEC 23 Appendix A Page 1 of 10 Hydro One Networks Inc. Request for Proposal Reference: RFP # SCO Re: Cost Allocation Study Part 1: Instructions to Proponents Part 2: Commercial Terms and Conditions Part 3: Terms of Reference Part 4: Format for Submission of Proposals Part 5: Attachments

12 Exhibit I SEC 23 Appendix A Page 2 of 10 PART 3: TERMS OF REFERENCE 1.0 Introduction Hydro One Inc. ( Hydro One or the Company ) is conducting a competitive selection process for the provision of services that will provide a methodology to allocate common costs and assets as well as an overhead capitalization methodology. The successful proponent should be prepared to commence their service on April 4 th, 2011 and complete their proposed methodology/report by June 30 th, It is anticipated that the successful proponent will be appointed for an initial term of three years to provide services relating to the proposed methodology including yearly reviews of the methodology as well as provided services during a rate application through briefing preparation, responding to interrogatories and potentially testifying before the Ontario Energy Board ( OEB ) on the proposed methodology. Hydro One Inc. retains the right to extend the contract for one additional year after the initial three year period. We invite your firm to participate and to submit a response to this Request for Proposal ( RFP ) for the provision of such services. 1.1 Background on Hydro One Inc. Following the enactment of the Electricity Act, 1998 and the anticipated restructuring of the former Ontario Hydro, Hydro One Inc. was incorporated under Ontario s Business Corporations Act on December 1, 1998 as Ontario Hydro Services Company Inc. and commenced carrying on business on May 1, On May 1, 2000, the company s name was changed to Hydro One Inc. In accordance with Section 48.1 of the Electricity Act, 1998, as amended, Hydro One Inc. is a holding company operating through its subsidiaries. Its principal subsidiary, Hydro One Networks is the largest electricity transmitter and distributor to customers within Ontario. Hydro One s subsidiaries include: Hydro One Networks Inc.. (The primary transmitter of electricity and rural distribution utility in Ontario. These businesses are separately regulated by the OEB); Hydro One Brampton Networks Inc. (The electrical distribution utility for the City of Brampton, which is separately regulated by the OEB)

13 Exhibit I SEC 23 Appendix A Page 3 of 10 Hydro One Remotes Inc. (The electrical generation and distribution utility to several communities in Northern Ontario, which is separately regulated by the OEB) Hydro One Telecom Inc. (A provider of lit and dark fiber telecommunication services, which is regulated by the Canadian Radiotelevision Telecommunications Commission) Hydro One Networks has two major business segments. The Transmission Business operates a high-voltage electrical transmission network that represents almost all of the licensed transmission capacity in Ontario. The Distribution Business operates a low-voltage electrical distribution network that distributes electricity from the transmission system, or directly from generators, to customers within Ontario. Distribution customers include small local distribution companies and large industrial customers with loads of less than 5 MW. Both businesses do not have legal status, but are required to be filed with the industry s regulatory body. These statements, along with those of Hydro One and Hydro One Networks Inc, incorporate the concept of regulatory accounting. As such, knowledge and experience in accounting within a regulatory setting is a requirement of this RFP. More detailed information on Hydro One s corporate structure, internal operations, regulatory environment and lines of business is available in Hydro One s corporate filings at Proposing firms are also encouraged to visit our website at: to review Hydro One s: History and vision Corporate structure Innovation, capabilities, corporate objectives and goals Leadership and board member profiles Financial results Recent press releases Other pertinent information Hydro One has been in existence since 1999 and is the successor company to Ontario Hydro s electricity transmission and distribution businesses. We are a public utility operating with a private company corporate structure. Hydro One s sole shareholder is the Province of Ontario. Hydro One has an independent Board of Directors and Audit and Finance Committee. Hydro One debt is publicly traded and its debt is assessed by credit rating agencies.

14 Exhibit I SEC 23 Appendix A Page 4 of 10 Hydro One Inc.. ( Networks ) is the largest subsidiary of Hydro One. It is regulated by the OEB and is licensed to transmit and distribute electrical power in Ontario. Networks is Ontario s largest transmission and distribution utility and one of the 10 largest in North America. It operates as an integrated transmission and distribution business with centralized backroom and finance operations. The OEB sets rates following oral or written public hearings. Our transmission revenues primarily include our transmission tariff, which is based on the uniform province-wide transmission rates approved by the OEB for all transmitters across Ontario. Our distribution revenues primarily include our distribution tariff, which is also based on OEB-approved rates, and the recovery of the cost of purchased power used by our customers. Consequently, our Distribution Business does not have commodity price risk. Transmission and distribution tariff rates are set based on an approved revenue requirement that provides for cost recovery and includes a return on deemed common equity. In addition, the OEB approves rate riders to allow for the recovery or disposition of specific regulatory assets and liabilities over a specified timeframe. Our distribution business, which represented approximately $6.53 billion of our total assets of $15.81 billion as at December 31, 2009, distributes electricity through our approximately 123,500 circuit-kilometre low-voltage distribution system, to municipalities and to rural areas. Customers of our distribution business include 25 local distribution companies that are not directly connected to our transmission system, 36 customers with loads exceeding 5MW and approximately 1.3 million rural and urban customers. Hydro One Brampton Networks Inc. is our urban distribution company, serving approximately 130,000 customers in the GTA with approximately 2,700 circuit-kilometres of lines. We also operate through our subsidiary, Hydro One Remote Communities Inc., 19 small, regulated generation and distribution systems in 21 remote communities across Northern Ontario that are not connected to Ontario s electricity grid. Our transmission business, which represented approximately $9.12 billion of our total assets of $15.81 billion as at December 31, 2009, transmits electricity through an approximately 28,900 circuit-kilometre high-voltage network. We transmit electricity from generators to our own distribution networks, to 51 local distribution companies and to 89 transmission connected companies. We also own and operate 26 facilities that interconnect our transmission system with systems in neighbouring provinces and states. Hydro One Brampton was incorporated on April 25, 2000 under the Business Corporations Act (Ontario). Up to October 31, 2006, the Company was a wholly

15 Exhibit I SEC 23 Appendix A Page 5 of 10 owned subsidiary of Hydro One Brampton Inc. Hydro One Brampton Inc. was legally dissolved on January 30, As a consequence, the Company is now a wholly owned subsidiary of Hydro One Inc. (Hydro One). The principal business of the Company is the ownership, operation and management of electricity distribution systems and facilities within the City of Brampton, Ontario. The Ontario Energy Board (OEB) regulates the Company. At December 31, 2009, Hydro One had total assets of $15,810 million and shareholders equity of $5,418 million. Revenues for the 12 months ended December 31, 2009 were $4,744 million and net income was $470 million. At the end of 2009, our Hydro One Networks Inc. subsidiary had 5,086 regular (i.e., permanent) employees comprised of 609 non-represented executive and managerial staff, 3,307 employees represented by the Power Workers Union and 1,170 employees represented by the Society of Energy Professionals. Hydro One s finance functions, including most of its accounting, all of its financial statement preparation, its financial statement analysis and reporting, taxation, treasury and financial transaction processing functions are centrally located at its head office at 483 Bay Street in Toronto. In March 2002, Networks entered into a 10-year Business Process agreement with Inergi LP ( Inergi ), a wholly owned subsidiary of CapGemini Canada. Under the outsourcing agreement Inergi operates the processing functions for the financial, payroll, accounts payable, accounts receivable and settlements functions for the Hydro One Group. Inergi also provides business process functions for the customer call centre, supply chain and procurement processes and maintains and operates the IT environment for the Hydro One Group. To undertake these functions approximately 900 employees of the Hydro One Group, including management, who performed those duties at the Hydro One Group, were transferred to Inergi. These individuals work in close proximity to, and directly with, Hydro One Group staff to carry out their duties. On May 1, 2010, the Company extended the Master Services Agreement (MSA) with Inergi for a further three-year period. The term of the agreement, which would have expired on February 29, 2012, has been extended to February 28, Under the extended agreement, Inergi will provide business processing and information technology outsourcing services, as well as core system support related primarily to SAP implementation and optimization. The Hydro One Group uses SAP and CSS as its primary accounting systems. The Company has been converting to SAP s enterprise wide financial system over the period of 2007 to The first phase of this conversion impacted supply chain functions and was completed in The second phase of this conversion includes the finance and accounting functions which was completed in 2009.

16 Exhibit I SEC 23 Appendix A Page 6 of Corporate Structure The following is the legal corporate structure for Hydro One: Hydro One Inc. Hydro One Hydro Ne tworks Inc. One Brampton Inc. Hydro One Remote Communities Inc. Hydro One Telecom Inc. Transmission Business Distribution Business Hydro One Telecom Link 1.3 Common Corporate Cost Allocation and Common Asset Allocation Methodology Hydro One utilizes a centralized shared services model to deliver its common services. This serves as the most economic approach. Accordingly, common services are provided to the Transmission and Distribution businesses of Hydro One Networks and to other Hydro One subsidiaries on a centralized basis. The costs of these services and assets are assigned to business units and subsidiaries on the basis of cost causation. These costs and assets are directly assigned where it is possible to do so. All other costs are allocated based on cost drivers, direct benefits or other methods as appropriate. The Common Corporate Costs OM&A programs include the provision of Corporate Common Functions and Services ( CCF&S ), Asset Management, Information Management Services, and Operating programs to support the Hydro One Networks Distribution and Transmission business. Similar to the common corporate costs, Hydro One has been able to maximize efficiencies through the centralization of the maintenance, management and purchase of shared assets at the corporate level. These assets include shared land and buildings, telecommunication equipment, computer equipment, applications software, tools and transportation and work equipment ( T&WE ).

17 Exhibit I SEC 23 Appendix A Page 7 of 10 Hydro One Networks previously commissioned studies to recommend appropriate allocation methods for the assignment of these costs. The study was presented for examination during the Company s 2006 Distribution Rates proceeding, RP /EB and was accepted by the OEB as an appropriate methodology for allocating costs amongst the subsidiaries and Networks businesses. Updates by B&V to the cost allocation report, specific to the Distribution and Transmission businesses, were accepted by the OEB during the EB Distribution Rate Proceeding as well as the EB and EB Transmission Rate Proceedings. In 2009, B&V reviewed and confirmed that Hydro One applied the OEB-accepted methodology to its Business Plan data for its 2010/2011 Distribution Rate Filing EB and its 2011/2012 Transmission Rate Filing EB , and the results reflect a consistent allocation of these common corporate costs and shared assets; this was accepted by the OEB in its Decisions in those proceedings. 2.0 Scope of Work 2.1 Vision Hydro One is conducting a selection process for an external consulting firm to conduct a common cost allocation study and a common asset allocation study. In addition, Hydro One will require the successful proponent to conduct and prepare an overhead capitalization methodology. The Company is seeking a firm of competent and committed professionals, to provide such studies, as well as the ability to testify to the proposed methodology in an OEB proceeding. Interested parties should include in their submission a proposed timeline that includes milestones and proposed schedule of time spent with Hydro One personnel. 2.2 Project Objective, Mandate and Scope The ultimate objective of the project is to successfully select an external consultant that will review corporate shared resource levels (both common costs and common assets) and to recommend appropriate cost allocation methodology and rates to meet the requirements of the Company and its subsidiaries, as well as other stakeholders such as the OEB. The proposed methodology must comply with OEB precedent and also comply with relevant provisions of the Affiliate Relationship Code for Electricity Distributors and Transmitters. Therefore, the external consultant should not only be familiar with the regulatory environment but also have experience before regulatory bodies in Ontario or North America. Hydro One will be preparing a new Business Plan for the period that is expected to be approved by the Hydro One Board of Directors in September This Business Plan will be the basis of the 2012/2013 Distribution rate application which is expected to be submitted to the OEB in the fall of 2011 and

18 Exhibit I SEC 23 Appendix A Page 8 of 10 the 2013/2014 Transmission rate application which is expected to be submitted to the OEB in Q The results of the required study will be used in the preparation of this Business Plan. The successful proponent should have a reasonable understanding of various financial accounting frameworks and standards including: Pre-Changeover Canadian Generally Accepted Accounting Principles (i.e. CICA Handbook part V), U.S. GAAP, and International Financial Reporting Standards (IFRS). The successful proponent will also have an appreciation for the IFRS modifications that the Ontario Energy Board (OEB) proposes to apply in using this accounting framework in the regulation of Ontario rate regulated enterprises. The OEB EB report on the transition to IFRS is available on the OEB web site Proponents are advised to review previous Hydro One rate applications and applicable studies which can be found at Scope Recommend a best practice methodology to distribute Hydro One Inc. s Common Corporate costs and assets among the business units that use the functions and services. This recommendation could include the continuation of the existing methodology, the continuation of the existing methodology with modifications or the proposal of a new methodology. Recommend a best practice methodology to distribute an appropriate amount of Hydro One Inc. s Common Corporate costs to Capital Expenditures through the overhead capitalization rate. This recommendation could include the continuation of the existing methodology, the continuation of the existing methodology with modifications or the proposal of a new methodology or elimination entirely of an overhead capitalization methodology. Prepare a Report of the recommended Common Corporate Costs and Assets Methodology to be used in future rate applications. This report will include a conclusion, definitions, a summary of every factor used in the methodology and the proposed methodology. Prepare a Report of the recommended Overhead Capitalization Methodology to be used in future rate applications. This report will include a conclusion, definitions, a summary of every factor used in the methodology and the proposed methodology. Identify the functions and services included in the Common Corporate costs Identify activities that are performed in order to provide the functions and services included in the Common Corporate costs

19 Exhibit I SEC 23 Appendix A Page 9 of 10 Determine which Common Corporate functions can distribute cost directly, which units can have cost distributed using time studies and which units require allocations using drivers and why. Propose and analyze all drivers used for allocation. Propose, analyze and perform all time studies required. Distribute the 2012, 2013 and 2014 budgeted cost to perform each function and service among the activities required to perform it, based on time and/or cost studies Distribute the cost of each activity among the business units based on direct assignment when possible, and based on cost drivers when not Prepare a report documenting the overhead capitalization methodology that has been developed which will attribute Common Corporate costs to capital expenditures for both the Distribution and Transmission businesses for each of 2012, 2013 and Prepare responses to Interrogatories from Intervenors during a rate application relating to the proposed Cost Allocation methodology. Be available to testify to the proposed methodology during a future rate application. The deadline for the completion of the methodologies is June 30 th, The immediate deliverable for the end of June is a review of the current methodologies with an update reflecting currently available data. Final reports for Common Corporate costs allocation, Common Corporate assets allocation and Overhead Capitalization Methodology reflecting the current Business Plan and including both the Distribution and Transmission businesses in the same report, to be completed by the beginning of October 2011, in order to be submitted in Cost of Service applications. In support of the successful Proponent s work, Hydro One s management will respond to all requests for basic information and/or supporting documentation. Expectations: Hydro One management expects a high quality engagement team with substantial knowledge and experience in the regulated electricity industry. We also expect that the engagement partner selected to serve Hydro One is a senior member of the firm, capable of committing the firm. Consequently, resumes of the proposed engagement team should be included with the proposal and the key members of the engagement team should attend the presentation. It is also expected that additional resources will be available beyond the engagement team, as needed. Hydro One management expects to be served by a firm that has professional credibility in Hydro One s industry and knowledge of the issues affecting Hydro

20 Exhibit I SEC 23 Appendix A Page 10 of 10 One. A representative list of clients in Hydro One s industry, including the types of services rendered, should be provided. Firm wide expertise and local expertise should be differentiated. Hydro One management expects to pay competitive fees for external consultation services. The annual fee quote should include estimates for routine, out-of-pocket expenses. Consulting hours by area, professional level, and average billing rates should be included in the proposal. Please also outline the circumstances and processes for adjustment to the base fee. Competitive flat fee structures are required. Hydro One expects that the successful Proponent will have relevant experience in performing and/or testifying to cost allocation studies that have been used by regulated entities either in Ontario or North America. The proponent will also have relevant experience and knowledge of regulatory accounting.

21 Exhibit I Tab 8 Schedule CCC 27 Page 1 of Consumers Council of Canada (CCC) INTERROGATORY #27 List 1 Issue 8 Are the methodologies used to allocate Shared Services and Other O&M costs to the transmission business and to determine the transmission related overhead capitalization rate for 2013/2014 appropriate? Interrogatory (Ex. C1/T1/S1/p. 6) The evidence indicates that in 2102 HONI retained Black and Veatch to review the methodology to allocate common costs among the business entities. Has HONI considered retaining an independent consultant other than B&V to review the methodology. If not, why not? Was the B&V work tendered? Response Hydro One released a Request For Proposal (RFP) as part of the process of selecting an independent consultant to review the common cost allocation methodology. All responses to the RFP were considered.