2007 Performance Pay Guidelines THC & THESL

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1 The Introduction Toronto Hydro-Electric System Limited EB Exhibit C2, Tab 1, Schedule 5 Filed: 2007 Aug 2 The Pay Program reinforces Toronto Hydro s commitment to recognize and reward employee performance and contributions. The objectives of the program are to: Recognize employees for achievement of individual stretch goals, affiliate and corporate performance, beyond normal job functions Recognize productive employees contribute to cost containment and improving service to customers Ensure the performance pay award is fair and equitable relative to the contributions of others Motivate employees by rewarding both the results and the behaviours required to achieve our business goals 1 Eligibility The program is effective January 1 st, 2007 and all Service and Administration (A & B level) management employees and professional engineers (The Society of Professional Engineers) of Toronto Hydro Corporation () and Toronto Hydro Electric System Limited () are eligible. The program combines both individual performance and Corporate/Affiliate performance. Payouts differ by job level. The program is revisited on an annual basis, and may be modified, at the discretion of the Executive.

2 2 Annual Process November/ December Set performance pay award percentage for next fiscal year. Complete current year key performance indicators (KPIs) audit and review. January Set individual performance contracts for current year. Send estimates of performance contract results to Organizational Effectiveness (OE) for preparation of payouts. Set Corporate/Affiliate threshold, target, and maximum goals for current year. February Organizational Effectiveness (OE) calculates performance pay allocations. March CEO advises Compensation Committee and the Board of Directors of overall results. Payroll is advised of step increases and performance payouts. July Leaders complete mid-year discussions with employees to review individual performance, including opportunities for development and career goals Scorecards is measured against a scorecard of key performance indicators (KPIs) in each of four categories People, Finance, Operations, and Customer. The KPIs provide important organizational measures and targets that will focus performance discussions between leaders and employees. Refer to the appendix to this guide for 2007 scorecards for and. Weightings by Position Weightings for Corporate/Affiliate scorecards and individual performance contracts differ by position and may change from year to year. Page 3 illustrates the 2007 Weightings by position. Weightings refer to the percentage of the total direct pay award that will be paid based on performance against the goals.

3 Weightings Position Individual (%) Affiliate (%) Corporate (%) CEO President COO, Executives Executives CFO, VP Organizational Effectiveness, VP Environment Health & Safety / 40 THESI/ THTI Managers Managers Supervisors and Professionals Supervisors and Professionals Service and Administration Service and Administration Pay Award Your performance pay award is based on a combination of Corporate/Affiliate results and your individual performance contract. The final payout will depend on the achievement weight of the Corporate/Affiliate scorecard and your individual performance contract results.

4 4 In 2007, the Corporate/Affiliate scorecards include threshold, target and maximum awards. Threshold Target Maximum The minimally acceptable level of performance necessary to earn an incentive award. The expected level of performance. The demonstration of superior performance that exceeds expectations. Corporate/Affiliate Threshold = 25% of weighted target award Target = 100% of weighted target award Maximum = 150% of weighted target award Example We have provided an example below to illustrate how this works: Salary for Employee = $50,000 Percentage Eligibility = 6% of $50,000 = $3,000 90% Individual, 10% Corporate/Affiliate % Weighting = 90% = $2,700 10% = $300 If 80% of the performance contract is achieved and the Corporate/Affiliate Scorecard exceeds target and the overall scorecard result is 105%, than the payout would be calculated as follows: Contract ($2,700 x 80%) $2,160 Corporate Plan ($300 x 105%) $315 Total Payout $2,475

5 5 Appendix Scorecards 2007 Following are the and Scorecards.The KPIs provide important organizational measures and targets that will focus our performance discussions. The scorecards will be the framework used to report overall performance under the categories of People, Finance, Operations, and Customer Scorecard KPIs Weight Threshold Target Maximum People Safety - My Goal is Zero % of people achieved zero Finance Consolidated Operating Expense $ millions 15% 93.4% $ % $ % $205.5 Consolidated Net Income $ millions, exluding sale of Water Heaters Operations Distribution Plant Capital Program Completion $K per work unit completed 15% $51.6 $1.76 $56.6 $1.25 $61.6 $1.00 Customer Call Response and Quality Index; not including impact of TOU 10% 70% 80% 85% SAIDI average outage minutes per customer 10% SAIFI average # outages per customer 10% % 25% 100% 150% Payout Ratios

6 Scorecard KPIs Weight Threshold Target Maximum People Safety - My Goal is Zero % of people achieved zero Safety - EUSA Zero Quest % Attainment of Level 3 Finance Operating Expense $ millions; not incl CDM Net Income $ millions Operations Distribution Plant Capital Program Completion $K per work unit completed SAIDI avg outage minutes per customer. SAIFI avg # interruptions per customer Customer Call Response and Quality Index; not including impact of TOU Customer Satisfaction establish benchmark CDM Program Attainment 10% 5% 25% 5% 5% 10% 0% 0% 93% 70% $181.1 $52.0 $ % NA 80% 94% 80% $176.1 $57.0 $ % Q3 90% 95% 90% $171.1 $62.0 $ % NA 100% 100% 25% 100% 150% Payout Ratios

7 7 A note about performance pay and employment status: Employees must be on the payroll as of December 31 st, 2007 for eligibility. Payouts are based on your salary as of December 31 st, Consideration is given to employees who have retired during the year. For employees who are promoted or transfered during the year, the award is pro-rated. The pro-rated calculation includes the number of months in the new position. The actual payout is weighted accordingly and reflects the target payout for each position. Leaders are accountable for submitting performance contracts for all new hires, employees on probation, or employees joining their department. For employees who retire, become disabled, or die during the year, a pro-rated payout is calculated based on the number of months worked in the position. Payouts are made at the same time as all other management employee payouts. For employees who are on sick leave or maternity leave for the entire year, no payout occurs in respect of that year. For employees who are on extended sick leave or maternity leave for only part of the year, a pro-rated payout is calculated. If an absence is less than three months, some discretion may apply. No payouts will occur for voluntary resignations or terminations with cause during the year. A note about base pay increase: The hire date for employees to be eligible for a base pay increase is before September 30 th, Worth Mentioning: Your leader may use discretionary ranking to assess the attainment of your individual objectives. Payouts will occur in March. Checklist contract completed and submitted by January 31 st, contract includes S.M.A.R.T (Specific, Measurable, Achievable, Relevant, Time-bound) objectives, stretch goals and a development plan. Mid-year discussion with your leader/employee to discuss objectives and performance expectations completed and submitted by July 31 st, Year-end appraisal completed by January 31 st, 2008.