PENSION. Filed: August 17, 2005 RP /EB Exhibit C1 Tab 4 Schedule 3 Page 1 of OVERVIEW

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1 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of PENSION.0 OVERVIEW 0 Hydro One Networks is a participant in the Hydro One Pension Plan ( the Plan ). The Plan is a contributory, defined-benefit pension plan whose members comprise represented employees of the Power Workers Union ( PWU ), the Society of Energy Professionals ( Society ), MCP employees, pensioners who were employees, and pensioners who are beneficiaries of employees or pensioners. The Plan was in a deficit position as at January, 00. Commencing on that date Hydro One Inc. (Hydro One). was legally required to make cash contributions for the current and past funding costs for the portion of the annual Plan contributions related to staff who worked for, or retired from, Hydro One Networks. 0 On September, 00, Hydro One filed its actuarial valuation with the Financial Services Commission of Ontario (FSCO). The actuarial valuation determined the funded status of the Plan as at December, 00, and established the funding requirements from 00 to 00 at approximately $ million per year. Contributions after 00 will be based on an actuarial valuation as at December, 00, and will depend on future investment returns, changes in benefits or actuarial assumptions. Since Hydro One Networks commenced operations on April,, employer pension contributions have been notionally paid by drawing down the Plan surplus. These contributions have not been recorded as a cost of the Distribution business, nor has any of the employer s portion of the pension costs been recovered in rates.

2 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of The Plan is properly governed and administered and is prudently operated and managed. The Plan s performance has been better than most other pension plans against which it is judged..0 PENSION COSTS 0 Hydro One Networks is incurring pension costs for which recovery is being sought. First, commencing in 00, and until the next Plan valuation date, annual cash pension contributions totaling approximately $ million for the employer-paid portion of current service cost and required special payments have been made by Hydro One Inc. In addition, Hydro One Networks has paid to Inergi LP ("Inergi") an annual charge of $ million related to pension costs. The pension costs are paid in accordance with the terms of its outsourcing arrangement with Inergi, which was entered in March, 00 (Exhibit C, Tab, Schedule ). 0 Finally, under the outsourcing agreement with Inergi, a further top-up payment of about $ million became payable beginning in January, 00. The top-up is being paid in equal monthly payments, or $ million per year, and is based on an actuarial calculation prepared as at December, 00. The Board has allowed cash payments related to pension obligations to be recorded in rates (RP--000). For the Distribution business, the annual charge to be recovered through rates is estimated to be $ million, which amount represents the annual operating cost portion of the annual pension cost applicable to Hydro One Networks Distribution business, as described below.

3 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of The costs of annual pension payments are allocated to the Transmission and Distribution businesses and to Capital and Operating expenses ("OM&A"). The pension costs for which recovery is being sought are estimated as follows: 0 (I) Annual Estimated Pension Contribution (Hydro One) Hydro One Networks (i) Portion of (I) allocated to Hydro One Networks (ii) Plus: Inergi annual pension charge (iii) Plus: Inergi "top-up" payment Total estimated annual Hydro One Networks pension costs $ million $ million $ million $ million $ million The Hydro One pension cost allocated to Hydro One Networks is based on the ratio of base pensionable earnings for Hydro One Networks staff, as compared to the total base pensionable earnings for all of Hydro One employees. 0 The total estimated annual Hydro One Networks pension cost [item (i) above] is then allocated to the OM&A and Capital projects. Most field labour costs are allocated to Transmission or Distribution projects or OM&A on the basis of time sheets. Where not allocated by time sheets, labour costs are allocated based on cost drivers. The method of allocation is consistent among all shared services costs, for operating and capital costs, as discussed in, Tab, Schedule. The Inergi annual pension charge [item (ii) above] and the Inergi top-up payment [item (iii) above] is allocated 00% to OM&A costs and is allocated between Transmission and

4 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of Distribution, consistent with the method of allocation among all shared services operating costs, as discussed in, Tab, Schedule. The allocation of annual Hydro One Networks pension cost between Distribution OM&A and Capital is: Annual Distribution cash pension cost (between capital and OM&A) 0 Capital OM&A Total $ million $ million $ million As noted above, the Inergi annual pension charge and the Inergi top-up payment is allocated 00% to OM&A costs. The portion attributable to the Distribution business is: 0 Inergi annual pension charge Inergi annual "top-up" () Total () top-up payments are paid evenly over months $ million $ million $0 million Together, the annual operating pension costs related to the Distribution business amount to $ million. The amount of the pension costs allocated to capital of $ million per year will be included in capital projects. Annual pension costs will be determined on the basis of actual base pensionable earnings during the year. Pension costs reflected above are in keeping with the Board s expectation in respect of its July, 00 decision for Hydro One Networks deferral account (RP-00-00).

5 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of Hydro One Networks believes that pension costs have been reasonably incurred and well managed, and should be recoverable. The Corporation seeks the approval of the Board for recovery of the fair and reasonable annual pension costs relating to its Distribution business, as relating to its operations and maintenance expense..0 ACTUARIAL CALCULATION 0 Under the Ontario Pension Benefits Act (OPBA), actuarial funding valuations are required for pension plans at least every three years, although a plan sponsor may elect to file an actuarial valuation earlier than the triennial anniversary of the last filing date. The purpose of an actuarial funding valuation is to assess the funded status of the plan and ensure that the plan is properly funded for benefits to be ultimately paid to employees, retirees and their beneficiaries. The initial actuarial valuation for the Hydro One Plan was December,. At that time, the actuarial valuation indicated that the assets less liabilities to be transferred to the Plan from the Ontario Hydro Pension and Insurance Plan provided a surplus of $ million on a going-concern funding basis. 0 Hydro One filed a second actuarial valuation as at December, 000, indicating that the Plan still had assets in excess of liabilities, for a surplus of $ million on a going- concern funding basis. On September, 00, Hydro One submitted its December, 00, actuarial valuation to FSCO. On a going-concern basis, the Plan had a deficit of $ million, assuming assets are measured on an average market value basis.

6 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of The deterioration in the Plan s funding position from reflects investment returns that were lower than those assumed in the last actuarial valuation of about $0 million. In addition, about $ million of surplus was used to fund employer contribution holidays in 000, 00, 00 and 00, as allowed by legislation. A voluntary retirement program ( VRP ) implemented in 000 further reduced the opening surplus by $0 million. $0 million of the surplus was used to fund benefit improvements. The remaining difference of about $0 million relates to changes in assumptions and interest. 0 Mercer Human Resource Consulting LLC ( Mercer ), the Plan s actuary, identified a number of techniques which can be adopted to reduce the Plan s annual contribution requirements on a going-concern basis. These techniques, including the deferred recognition of some stock market losses and a reduction in the margin for adverse deviations in the valuation interest rate, resulted in a going-concern deficit of $ million as at December, 00. With the adoption of these techniques, Hydro One is fully compliant with the funding requirements of the OPBA and with accepted actuarial practice. 0 On a windup basis, the Plan had a $ million deficit by December, 00. The regulations under the OPBA permit Hydro One to exclude the cost of indexing from the plan s solvency liabilities. By excluding the cost of indexing from the solvency liabilities and smoothing the solvency assets and liabilities, Hydro One is not required to make solvency contributions during the next few years. By electing to exclude indexing from the Plan s solvency liabilities, smoothing equity losses and reducing (but not eliminating) the margin for adverse deviations in the valuation interest rate, the required contribution for the Hydro One companies has been reduced to about $ million per annum. Of this amount, about $0 million represents

7 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of annual current service costs, and the remaining portion represents special payments over years required toward the going-concern deficiency. Contributions have commenced by Hydro One to the Plan following the filing of the valuation with the appropriate regulatory authorities. If the Plan s future experience differs from the actuarial assumptions, the contribution rate will be adjusted in future actuarial valuations. 0 To reduce the annual Plan contributions to $ million, smoothing techniques were used. As a result, the Plan entered 00 with large unrecognized investment losses. Investment losses represent the difference between the projected market value of assets at December, 00, and the projected market value of assets at that date had the Plan earned the annual rate of return that was assumed in the previous actuarial valuation. Unless future investment results are better than expected, most of these losses will be recognized by December, 00 (the next required triennial filing), and, unless real interest rates have increased significantly from recent levels, this will increase the required annual cash contributions above $ million after that time. 0.0 INERGI OUTSOURCING ARRANGEMENT The following is an overview of the Inergi outsourcing arrangement and the pension matters addressed in the agreement transferring Hydro One Networks employees to Inergi (the Agreement Affecting Employees ) (, Tab, Schedule ). Through the outsourcing, employees were transferred from Hydro One Networks to Inergi, and Inergi will assume the obligations for the employees earned pensions when the assets transfer, have assumed their ongoing current pensions, and the performance risk for its own pension plan. Had the transferred employees remained as employees of

8 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of Hydro One Networks rather than become Inergi employees, Hydro One Networks would have continued to be responsible for the employees pension costs and for the performance risk associated with the Plan. 0 In March, 00, Hydro One Networks completed a transaction with Inergi, an affiliate of Cap Gemini Canada Inc., for the outsourcing of certain functions previously carried out by Hydro One Networks. To allow Inergi to perform the contracted services, Hydro One Networks employees (0 regular pensionable employees) were transferred to Inergi. Hydro One does not have, nor has it ever had, an ownership interest in Inergi, Cap Gemini Canada Inc, or any affiliates of these entities. Pursuant to the transaction documents, Inergi is required to provide the transferred employees with a mirror pension plan and benefits consistent with those they received while they were with Hydro One Networks. 0 The outsourcing was undertaken through a competitive bid process, and bids were made on the basis that Hydro One Networks would pay supplier costs related to future benefits earned for the transferred employees. This approach allowed Hydro One Networks to seek bids for the outsourcing service from multiple bidders, without the bidders having to complete a detailed due diligence on the Plan. As with the balance of its remaining employees, and because the transferred employees were employees of Hydro One Networks during the period, Hydro One Networks was not paying pension costs in respect of the transferred Inergi employees during through 00. Commencing in 00, as a new entity, Inergi was required to start paying pension costs. In 00 and 00, the cash pension costs paid to Inergi in respect of the transferred employees were charged to Hydro One Networks operations.

9 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of No retired Hydro One Networks employees were transferred to Inergi, nor were any pension assets or liabilities for retirees. 0 The amount to be paid from the Plan to Inergi LP Pension Plan for the transferred employees existing earned pension obligations is based on a solvency calculation as at March, 00. At December, 00, there was a one-time re-balancing of the amount that will be transferred to the Inergi pension plan for the earned pension obligation. Because the plan was underfunded, the underfunding must be paid by Hydro One Networks as part of the annual fee. Payment of this top-up amount of $ million is being paid over a period of months commencing in 00. Pursuant to the outsourcing transaction documents, Hydro One Networks is required to pay Inergi s annual current service pension cost in each year in each of the ten years of the outsourcing. The current service pension cost for 00 of $. million was based on an actuarial valuation prepared by Mercer. There is no past service obligation that must be paid under the agreement. The 00 current pension service cost decreases from 00 to 0 (to an average of $M) to reflect the assumed reduction in Inergi employees working on Hydro One Networks account. 0 The annual pension costs payable by Hydro One Networks have not changed as a result of the Inergi arrangement, other than to reflect staff reductions that were assumed in the outsourcing service agreement. Had the 0 regular pensionable employees remained with Hydro One Networks, the Corporation would have been responsible for their current service costs. Hydro One Networks has benefited by being able to transfer, to Inergi, the future pension plan performance risk for the transferred employees. Hydro One Networks also benefits because the current pension service costs are expected to decline as a result of fewer Inergi employees working on Hydro One Networks account; and the costs of any future improvements in pension plan benefits are being borne by Inergi.

10 Filed: August, 00 RP /EB-00-0 Tab Schedule Page 0 of Bidders for the outsourcing agreement competitively bid on the basis that they would receive an outsourcing service fee equal to their bid price plus pension costs. The outsourcing service fee paid to Inergi in respect of pension costs represents a prudent, ongoing cost to Hydro One Networks. These pension costs were not previously included in Hydro One Networks revenue requirement, so the pension costs now being incurred should be included as part of the annual recovery of the pension amounts..0 PENSION PLAN BENEFITS 0 By Regulation passed by the Lieutenant Governor in Council, pension plans for each of the successor companies to Ontario Hydro were established effective with the pension plans Commencement Date of December,, and the successors assumed responsibility for their proportionate share of accrued pension benefits on January, 000 (the Changeover Date ). The Electricity Act,, permitted changes to Plan benefits to be made subsequent to the Commencement Date. 0 Since the Commencement Date, a limited number of pension plan changes have been made to member benefits for both current and retired employees of the Plan. Plan benefit improvements have been awarded to the Society by an arbitrator through a binding arbitration process and to the PWU through two-party collective bargaining. Up to and including the last round of bargaining, the collective agreement between Hydro One Networks and the Society required the use of binding arbitration if the parties were unable to reach agreement. This binding arbitration provision was a legacy from the collective agreement with Ontario Hydro. Since the division of Ontario Hydro into five successor corporations (the demerger ), the binding arbitration process has been employed in each round of bargaining with the

11 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of Society. The arbitrator s awards have brought the pension benefits enjoyed by Society- represented employees in line with the benefits Ontario Hydro had provided to PWU- represented employees prior to the demerger. These benefits were awarded by an arbitrator as part of a total award package; and by receiving such benefits, the Society was denied other cost related items on its agenda. Improvements in member benefits, which reduced the Plan surplus, have offset potential increased employment costs for represented staff. 0 A review of defined benefit plans of comparator utility companies indicated that benefits available to Plan members are in aggregate more generous than other comparable defined benefit pension plans. The existing benefits provided to Plan members are reflective of the Plan s roots as a branch of the Ontario Public Service. 0 Plan members benefits and the costs associated with them are largely a legacy in that the obligations were transferred intact from the Ontario Hydro Pension and Insurance Plan. Approximately two-thirds of members covered under the plan are inactive; and of the remaining third, approximately 0% of employees are represented staff. Due to a variety of factors, including pension benefits legislation, employment law, and collective agreements, it is extremely difficult to alter negotiated pension benefits. Hydro One Networks has, on a going-forward basis, implemented changes to the Plan for new management employees hired on or after January, 00. Benefits payable for new management staff were reduced by approximately %, and new management employees are offered the option of receiving a cash payment of.% of their base salary in lieu of joining the defined benefit plan, or joining the reduced defined benefit plan. These changes are a first step in reducing pension costs for future employees.

12 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of In 000, Hydro One Networks, with the agreement of the PWU and the Society, introduced a voluntary retirement program ( VRP ). The VRP was available to both management and represented staff. Staff who met certain criteria were provided the opportunity to apply for and to take early retirement. The VRP was accepted by,0 staff. The $0 million cost of the VRP program was funded out of the existing Plan surplus. Plan surplus can be used only to improve plan benefits for Plan members or to fund employer contributions. By using the surplus to fund the VRP, various benefits, both quantitative and qualitative, were accrued to Hydro One Networks customers. Those benefits addressed a variety of issues arising from the demerger of Ontario Hydro. 0 There were two objectives when the VRP was undertaken. The first was to right-size Hydro One Networks staff to meet the goals and needs of the Company by addressing required skill sets and improving work efficiency. The second objective was to adjust demographics to address the issue of the company s aging workforce. The immediate benefits of the program were realized through the ability to employ a variable workforce that addressed seasonal workload. Additional benefits included the introduction of new work processes, the development and introduction of apprenticeship programs, and the ability to hire a younger workforce. 0 Since January, 000, and for the year ended December, 00, Hydro One Networks used the accumulated Plan surplus to fund its employer contributions and to fund the negotiated improvements to the Plan. During this period, while Hydro One Networks was allowed to take advantage of an employer contribution holiday, the employees continued to make annual contributions to the Plan.

13 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of.0 PENSION PLAN GOVERNANCE AND PERFORMANCE Hydro One is the Plan sponsor and administers the pension assets and obligations of the Plan. 0 As of December, 00, the Plan had a reported net asset value of $, million (after an allocated $ million for the Inergi transfer) and about,00 members. One-third of the Plan s members are active. The remaining Plan members are inactive, either retired or beneficiaries of retirees. Annual current service costs, which have historically been paid from the Plan surplus, have approximated $0 million, based on the December, 00 actuarial valuation prepared by Mercer. 0 The Hydro One Board has approved a separate governance structure for the pension fund. Within this structure, the Board retains approval of actuaries and financial statements and requires reports on the activities of the Fund. The operating aspects of the Fund are delegated to a Board-appointed management committee and dedicated staff. To ensure compliance with all policies, the Board has mandated that an independent third party annually review all operations and activities of all parties involved in the management of the Fund and that the third party report annually to the Board. The Fund engages Cortex Applied Research, a recognized leader in the field of pension fund governance to advise on governance policy development, to perform the required third party review, and to provide the annual mandated report. Investment Performance versus Actuarial Assumptions The actuary determines a set of assumptions, within a range acceptable to the Canadian Institute of Actuaries and subsequently approved by the FSCO, for calculating the projected liabilities of the Plan, and the projected growth in the assets of the Fund. The

14 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of long-term investment performance assumption set by the actuary for the period was.%. The actuary has determined that the average return on the adjusted market value since the last valuation was.%. The performance below assumption averaged.0% over the period and created an experience loss of $ million within the report, or $0 million when combined with the 000 experience gain of about $ million. Investment Performance versus Market Indices 0 In developing an appropriate benchmark to measure itself, the Fund attributes the index returns available in various security markets in the same proportions as its policy requires an exposure to a particular security market, and the resulting aggregate becomes its target return. The investment policies of the fund are set to outperform this target in a prudent manner. The policies take into account the risk involved in achieving this target both over the short and long terms. In the. years since the inception of the Fund at Hydro One in June, 00, to the end of 00, the target has been.%. The Fund has been successful in outperforming its target return by 0.%. In the. years since inception of the Fund at Hydro One until the end of 00, the Fund target return was.%, and the Fund successfully outperformed this target by 0.%. 0 Investment Performance versus Other Pension Funds The Fund engages Russell Mellon Analytics to measure its performance versus other pension funds. In this service, a rank of is the highest and 00 the lowest. The Fund s strategy is to incur average volatility over shorter terms and outperform over longer terms. The policies have been successful such that since inception, the Fund has moved from the th centile during its first full calendar year, to a th centile rank during its second year and to a th centile rank during 00.

15 Filed: August, 00 RP /EB-00-0 Tab Schedule Page of Over the two-year period ending December, 00, the Fund achieved a th centile rank. For the two-year period ending December, 00, the Fund achieved a th centile rank. For the three-year period ending December, 00, the Fund achieved an th centile rank. In summary, the Fund has outperformed its peers and its targets but did not meet its actuarial return assumption.