COMPENSATION, WAGES, BENEFITS

Transcription

1 Filed: September, 00 EB Exhibit C Tab Schedule Page of COMPENSATION, WAGES, BENEFITS.0 OVERVIEW Hydro One has experienced rapidly increasing transmission and distribution work programs since 00. Resourcing of these work programs must occur on the most cost- effective basis possible within a highly competitive labour market..0 COMPENSATION STRATEGY 0 Operating within a competitive labour market, Hydro One has faced, and continues to face, a number of challenges with respect to the establishment and maintenance of a more favourable cost structure. Most notably, more than 0% of the workforce is unionized, and came to Hydro One with pre-existing collective agreements. Because 0% of the workforce is represented by a single union, the Power Workers Union ( PWU ), the Corporation would be unable to continue operations in the event of a work stoppage by that union. Consequently, the focus in collective bargaining with the PWU has been on increasing productivity and on reducing staff levels relative to the work program, rather than on seeking compensation concessions. 0 With respect to collective bargaining with the Society of Energy Professionals of Ontario ( Society ), Hydro One s view is that our goal of reducing overall wages, pension and benefits for future new hires reflects a reasonable balance between the need to attract and retain new staff while pursuing a more favourable cost structure. With respect to Management staff, the Corporation utilizes Hay Consulting to evaluate our positions relative to the market. Compensation adjustments are made as deemed necessary to attract, motivate and retain competent staff.

2 Filed: September, 00 EB Exhibit C Tab Schedule Page of The following sets out a brief description of the labour agreements to which Hydro One is signatory, as well as the compensation strategy with respect to the three categories of regular employees: PWU represented, Society represented and Management..0 LABOUR AGREEMENTS Hydro One has collective agreements with the PWU, Society, the Canadian Union of Skilled Workers (CUSW), and each of the BTU s (via EPSCA). The key agreements are with the PWU and the Society. 0 PWU This is a typical industrial collective agreement that covers wages, pensions, benefits and working conditions. The contract has been reduced in size and complexity since it was inherited from Ontario Hydro in in order to provide Management with the flexibility to direct and effectively utilize the workforce. However, wage rates, pension entitlements, and benefit coverage are prescribed and can be changed only through negotiations. 0 Society This is a collective agreement that covers wages, pensions, benefits and working conditions for professional staff. The Society had mandatory mediation/arbitration since the formation of Hydro One until 00. Through arbitrated awards Management attained some increases in flexibility and cost reduction in return for market rate wage increases. In 00, mediation/arbitration did not apply and traditional bargaining took place. The resultant settlement is more responsive to Management s needs.. PWU Compensation of PWU-represented employees is negotiated through the collective bargaining process. An aging workforce in technical and trades positions in the utility

3 Filed: September, 00 EB Exhibit C Tab Schedule Page of industry is likely to limit the supply of skilled staff in the future, putting upward pressure on wages. The key focus with respect to the PWU has been to achieve increased management flexibility to run the operations, as opposed to widescale reductions in wages, benefits and pensions. The following gains have been made to date with respect to PWU negotiations: Established favorable shift scheduling process and costs for Central Maintenance Shop. Eliminated the PWU annual incentive plan that would have paid up to % of base pay per year. Established a new three-day weekend shift in Lines. Established a new lower-paid Switching agent classification and midnight shift. Established full afternoon shift for Fleet Mechanics. 0 The common view is that an attempt by Hydro One to achieve significant cost reductions in wages, benefits and pension would likely result in a strike. The last PWU strike was in and lasted days. It was handled by placing management and Society-represented staff in key functions to maintain operations/service to the extent possible. However, as a result of numerous downsizing programs, and reorganization of work, there are far fewer management staff available today with the requisite skills and experience to occupy key PWU positions during a strike. As a result, the Company would be unable to continue operations during a PWU strike.

4 Filed: September, 00 EB Exhibit C Tab Schedule Page of. SOCIETY Compensation of Society-represented employees is negotiated through the collective bargaining process. The most recent Society negotiations (which were ultimately concluded in arbitration and followed a fifteen week strike) resulted in salary increases of % on April, 00, % on April, 00, and % on April, 00, with the expiration of that agreement occurring on March, Hydro One s goal is to compensate Society-represented staff at levels competitive in the market place in order to maintain the ability to attract, motivate and retain competent staff. For the utility industry, an aging workforce within operations management and specialist engineering positions is likely to limit the supply of skilled employees in the coming years, putting upward pressure on compensation. 0 In establishing rates for Society-represented staff, Hydro One considers the average industrial wage settlements, Consumer Price Index, and survey results from the Ontario Society of Professional Engineers. This survey is used as a major data source since engineers are the single biggest classification within the Society. As an employer, Hydro One focuses on the marketplace more than on inflation. Hydro One s goal is to occupy a certain position in that marketplace in order to attract, motivate and retain the kind of talent required in the organization. Society-represented employees continue to be eligible for performance pay, which allows them to progress up the wage schedule as they increase their competency in the position. Approximately % of the Society base payroll is generally available for distribution to employees whose performance on the job merits performance pay. With respect to the Society, the strategy prior to 00 had been to achieve increased management flexibility to run the operations. Until 00, the Society had mandatory

5 Filed: September, 00 EB Exhibit C Tab Schedule Page of mediation/arbitration as the method of dispute resolution, so there had been no strikes with them. This has now been eliminated, and in 00 the Society initiated a -week strike. Hydro One s operations continued to perform uninterrupted throughout the labour disruption. Some Society functions (e.g, Information Technology, Payroll, Call Center, and Finance) were previously sold to Inergi, and subsequently to Vertex, and these remained fully operational during the Society strike at Hydro One. The following gains have been made to date with respect to Society negotiations: Cancelled annual incentive plan that had a maximum payment of % of base salary. Eliminated mandatory mediation/arbitration. The arbitrated settlement provided for market rate wage increases of % in each of the three years, no employment security and a two-tier pension plan, whereby future Society employees pension plan is approximately % less costly than the existing pension plan for current employees..0 MANAGEMENT COMPENSATION PLAN ( MCP ) 0 Following the Ontario Hydro demerger, Hydro One introduced a new Management Compensation Plan (MCP), which included base salary, benefits and variable pay. The MCP is designed around a structure comprised of 0 broad band levels. The advantage of such a system is that it reduces the number of pay layers, simplifies administration, and provides increased opportunity for employees to progress as they gain skills and experience, without the frequent need to change positions.

6 Filed: September, 00 EB Exhibit C Tab Schedule Page of The following compensation goals and principles apply to Management staff: 0 Attract and retain competent executives Achieve ongoing performance improvement Align the interests of management and shareholders Compensation will be linked to the achievement of corporate objectives and individual performance Salary ranges will allow sufficient flexibility for executives to move up the ranges based on annual performance Incentive pay will be on an annual basis and based on a rigorous performance management system. Each management position is assigned to a salary band according to the accountabilities, size and complexity of the job. Base salary within the pay band depends upon individual expertise relative to the requirements of the job. Base salary is reviewed annually. Hydro One establishes reference positions using Hay Methodology. All Hydro One MCP jobs are rated against these reference positions for scope and complexity. 0 Base salary adjustments for MCP staff are tightly managed and have never been applied as across-the-board economic increases, but rather to reflect improved competency in a job. In 00, the Human Resources and Public Policy Committee of the Board made available % of base salary for increases. In 00, 00 and 00,.%, % and % respectively were made available as base salary increases. The variable pay concept is another key component of the management compensation strategy. Each of the 0 broad base salary bands has a maximum variable pay range associated with it. These maximums are percentages of the individual s base salary, and have been determined through an assessment of compensation practices in the target

7 Filed: September, 00 EB Exhibit C Tab Schedule Page of market. As noted earlier, two of the Hydro One management compensation principles are: Linking compensation to the achievement of corporate objectives and individual performance. Providing incentive pay on an annual basis and based on a rigorous performance management system. 0 The short-term incentive program meets both of these principles in a cost effective manner. The program provides an incentive payment, based on an employee s performance against a specific set of annual performance criteria and factors in corporate performance. The incentive is re-earnable every year, so it is not built into the employee s ongoing compensation. In a year where performance is very strong, the incentive will be at the high end of the range. In years where performance is not as strong, a reduced incentive, or no incentive pay, will be provided. The re-earnable aspect of the program reflects a best practice approach since it minimizes the long-term compensation costs and allocates pay based solely on performance. 0 It is important from an employee attraction, motivation and retention perspective that the management bands be competitive with the external market and that internal relativities be maintained. The compensation strategy for MCP is that Hydro One would target total cash compensation at the th percentile of the target market comparator group, which is the Hay All Industrial Component. The organizations in this study represent corporations which are in the electricity sector or related fields and with which we compete for talent. Hydro One s best performers are highly marketable, and several key management staff have left the company in recent years. The Hydro One succession plan has facilitated

8 Filed: September, 00 EB Exhibit C Tab Schedule Page of internal promotion and a smooth transition in most cases, but our internal replacement capacity is now significantly diminished in key areas. External recruitment has proved challenging as our compensation levels and structures have fallen below the market for top people. The Human Resources and Public Policy Committee mandate requires a review of the Management Compensation Structure every year. Hay Management is utilized to assist in the review. Recommendations are ultimately presented to the Board of Directors for approval. (Following a 00 review, Hay recommended that the minimum and maximums of the majority of bands be increased in order to maintain market relativity.) 0.0 PENSION AND BENEFITS Networks is a participant in the Hydro One Pension Plan ( Plan ). The Plan is a contributory, defined benefit pension plan whose members comprise represented employees of the Power Workers Union ( PWU ), Society of Professional Engineers ( Society ), non represented management employees, employee pensioners and beneficiary pensioners. 0 In an effort to contain escalating benefit and pension costs, in January 00 the Corporation introduced revised pension and benefits plans for MCP hired after January, 00. These new plans are approximately % less costly than the previous plans. As noted previously, the revised pension plan is also applicable to Society staff hired after November, 00. Additional detail on pension costs is contained in Appendix A of this Schedule.

9 Filed: September, 00 EB Exhibit C Tab Schedule Page of.0 SUMMARY 0 As noted previously, in a heavily unionized environment, there are significant constraints on an employer s ability to reduce compensation costs per employee. However, despite these constraints, the Corporation has made significant gains in the reduction of pension and benefits costs for MCP staff and pension costs for Society-represented staff. In addition, Hydro One remains committed to obtaining further compensation reductions from the Society in the next round of collective bargaining. The elimination of the incentive plans for PWU and Society has reduced potential cash payouts to the PWU and Society by % and % respectively. Hydro One will also continue its focus on increasing productivity and management flexibility to run the business.

10 Filed: September, 00 EB Exhibit C-- Appendix A PENSION COSTS.0 PENSION COSTS 0 From April, to December, 00, employer pension contributions were notionally paid by drawing down Pension Fund surplus. These contributions were not recorded as a cost of the Transmission business, nor was any of the employer s portion of the pension costs recovered in rates. The Board has allowed cash payments related to pension obligations to be recorded in rates (RP--000). As well, in April 00, the OEB in its Decision with Reasons, approved full recovery of Hydro One Networks Distribution pension costs included in OM&A (RP /EB-00-0). Pursuant to the Inergi outsourcing transaction (see Exhibit C, Tab, Schedule ), Hydro One Networks is also required to pay, directly to Inergi, a predetermined estimate of Inergi s annual current service pension cost in each year for each of the ten years of the outsourcing. 0 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. The method of allocation of the pension cost and the Inergi annual pension charge is consistent among all shared services costs, for operating and capital costs, and is consistent with the methodology reviewed during RP /EB-00-0.

11 Filed: September, 00 EB Exhibit C-- Appendix A For the Transmission business, the annual charge to be recovered through rates is estimated as follows: Annual cash pension cost (millions) (may not add due to rounding) 00 Corporate Pension Costs Transmission Distribution Other Total OM&A $ $ $ $ Capital $ $ $ - $ $ $ $ $ 00 Inergi Annual Pension Charge OM&A $ $ $ - $ 00 Corporate Pension Costs OM&A $ $ $ $ Capital $ $ $ - $ $ $ $ $ 0 Inergi Annual Pension Charge OM&A $ $ $ - $.0 ACTUARIAL CALCULATION 0 The most recent actuarial valuation for the Hydro One Plan was as at December, 00. In September 00, Hydro One filed this actuarial valuation with the Financial Services Commission of Ontario (FSCO), which was reviewed during RP /EB The valuation showed that the Plan had a deficit of $ million, on a goingconcern basis. The required contribution for the Hydro One companies was set at $ million starting in 00, variable based on the level of base pensionable earnings. Of this amount, about $0 million represented annual current service costs, and the remaining portion represented special payments over years required toward the going-concern deficiency, and commuted value top-ups. 0 In accordance with applicable regulations, Hydro One has made all required contributions since January, 00.

12 Filed: September, 00 EB Exhibit C-- Appendix A Hydro One s next actuarial valuation will be prepared as at December, 00 and will be filed with FSCO in September 00. The valuation will depend on investment returns, changes in benefits, and actuarial assumptions. Pension costs for 00 and 00 are estimated at $00 million and $0 million respectively. These pension costs were derived in December 00 from estimates prepared by Mercer Human Resource Consulting LLC ( Mercer ), the Plan s actuary. The December, 00 membership data and September 0, 00 assets were extrapolated to December, The estimated $00 million contribution in 00 is comprised of $0 million in current service cost and $0 million in unfunded liability payment. The change from the $ million contribution estimate in the 00 actuarial valuation, or $ million, is due to: Impact of liability and service cost increase due to assumption changes $0 million Increase in current service cost reflecting higher earnings $ million 0 Impact of asset gains ($) million $ million Going concerns assumption in the 00 actuarial valuation and in Mercer s estimate for 00 are the same except inflation was raised from.% to.0%, consistent with market conditions. The inflation estimate is based on the spread between the yield on long-term Government of Canada Bonds and Government of Canada Real Return Bonds. This spread increased by 0.% between December, 00 and October, 00 (the

13 Filed: September, 00 EB Exhibit C-- Appendix A latest available yields at the time the estimate was prepared). The yield spread at July, 00 is consistent with the yield spread at October, 00. The higher earnings are consistent with the staff growth to support the requirements of the work program. 0 The short-term investment experience in 00 and 00 exceeded the long-term discount rate used to calculate pension plan liabilities at December, 00. This investment experience in 00 and 00 results in a reduction in projected contribution requirements starting in 00, assuming no offsetting investment losses occur in 00. Actual contribution requirements starting in 00 may differ significantly as they will depend on final membership data, plan assets and economic assumptions used in the actuarial report filed as at December, 00. The difference between the estimated and actual pension costs for 00 and 00 will be tracked in a variance account (see Exhibit F, Tab, Schedule )..0 PENSION PLAN GOVERNANCE AND PERFORMANCE 0 Hydro One is the Plan sponsor and administers the pension assets and obligations of the Plan. As of December, 00, the Plan had a reported net asset value of $, million 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. The Plan governance was reviewed during RP /EB The Fund continues to outperform market indices. In the period from June, 00 (the Fund s inception) to December, 00, the Fund return was.% and the Fund outperformed its target return number by 0.%.

14 Filed: September, 00 EB Exhibit C-- Appendix A In addition, Fund performance has been favourable relative to that of other pension funds. Specifically, the Fund has moved from the th centile during its first full calendar year, to a th centile rank during its second year, to a th centile rank during 00 and to a 0 th centile rank during 00.