Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 1 Schedule 1 ORIGINAL Page 1 of 1 POLICY INTRODUCTION

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1 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 1 Schedule 1 ORIGINAL Page 1 of 1 1 POLICY 2 3 INTRODUCTION In prior applications, THESL presented evidence in this Exhibit on the following different policy areas: THESL s shared service arrangements; its business planning process including the process underlying the financial projections used in its Applications; associated assumptions; macro-economic variable forecasts used as inputs to the business planning process; THESL s internal cost-allocation model used to distribute vehicle, facilities, and IT costs to the THESL departments and affiliates receiving those services; THESL s Conditions of Service; and THESL s approach to asset management and setting priorities for long-term sustaining and reactive capital investments Some of this evidence has been relocated to other related Exhibits. Shared Services evidence is now presented in Exhibit F2 along with THESL s A&G evidence, and THESL s approach to asset management is now presented along with its rate base and associated capital evidence in Exhibit D1, Tab 7, Schedule Business planning related evidence, and four specific policies (Buildings and Facilities, Procurement and Inventory Management, Equipment and Fleet, and Capitalization), remain in this Exhibit THESL s Conditions of Service can be found at its website at efault.aspx.

2 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 ORIGINAL Page 1 of 1 1 BUSINESS PLANNING The business planning process is performed annually and involves key personnel from all levels of management. The process begins in the first quarter of each year with a review of prior year results and ends late in the year with approval of the business plan by the Board of Directors. The results of the activity include a detailed budget for the upcoming year and a plan for the four subsequent years. The typical business planning cycle is described in Appendix A to this schedule In order to complete an electricity distribution rate ( EDR ) application to be filed in August, it has become necessary to advance and compress the planning process. In February 2011, a process was initiated to determine the financial projections that would form the foundation of THESL s distribution rate application utilizing the best information available at that time. The financial planning process underlying this rate application is described in Appendix B to this schedule. Although separate from the annual business planning cycle, the EDR application development activity also includes operational and financial reviews and oversight and approvals from executive management The key assumptions and related discussion underlying the financial projections that form the basis of the revenue requirement are filed as Appendix C to this schedule.

3 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix A ORIGINAL Page 1 of 6 1 BUSINESS PLANNING PROCESS INTRODUCTION In the first quarter of each year, Toronto Hydro-Electric System Limited ( THESL ) begins a full business planning review process. The exercise is comprised of a detailed plan for the upcoming year and a more general plan for the four subsequent years. Upon approval, the THESL plan is consolidated at the corporate level and filed with the shareholder the City of Toronto (the City ), 30 days before the end of the year in accordance with Toronto Hydro Corporation s ( THC or the Corporation ) Shareholder Direction from the City In 2009, THESL established the Strategic Management function to facilitate and support the strategic planning process. In addition to this new function, a smaller Strategic Team consisting of Executives meet on a regular basis to develop strategies and set the course for THESL s operational activities This document describes the typical business planning process.

4 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix A ORIGINAL Page 2 of ANNUAL PLANNING PROCESS THESL s typical annual planning process follows the following general timeline: 1. Review of prior year results January February 2. Establishment of strategic goals and objectives for the next February March planning horizon by Executives 3. Approval of strategic goals and objectives by the Board of April Directors 4. Engagement and communication of approved strategic goals and May objectives to employees impacted by the strategic decisions 5. Preparation of key planning assumptions, investment plan and June July operating and maintenance requirements by business units 6. Preparation of a business plan including detailed budget for the August September upcoming year and long-term projections for the following four years 7. Executive review of proposed plan with business unit leaders October 8. Approval of the overall five-year business plan by the Board of Directors November Review of Prior Year Results The review of prior year results is the first step to derive the business plan and attendant strategic goals and objectives for the next year. During this process, senior management reviews the performance of each business unit and assesses the challenges and issues faced in the prior year. Following this review, senior management establishes a list of initiatives to be considered when determining the upcoming plan. The review of prior year results as well as the list of initiatives and the review process is guided by the Corporation s strategic vision and road map.

5 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix A ORIGINAL Page 3 of Establishment of Goals and Objectives From its review of prior year results, senior management assesses all significant current initiatives and the need for new initiatives to fulfill its mandate with regard to Customer Service, Investment in Infrastructure, Health and Safety, and Financial Performance. At the conclusion of this process, THESL s executive management agree on the overall strategy for the next planning horizon (five years) and on the underlying initiatives required to meet the related goals and objectives. THESL executives also ensure that the proposed strategy is aligned with the requirements of the City s Shareholder Direction Approval of Strategy The overall strategy and the underlying goals and objectives of THESL are presented to the Board of Directors (the Board ) by the President and Chief Executive Officer during a strategic session in April. The Board s approval of the overall strategy is required to proceed with the elaboration and execution of the business plan Engagement and Communication of Strategy The Board-approved strategic goals and objectives are communicated to employees prior to the detailed preparation of the business plan to ensure alignment by each of THESL s business units Preparation of Plan Assumptions The assumptions underlying the operational aspects of the business plan are derived by the business units following an in-depth analysis of their own initiatives and projects. Business unit assumptions are guided by the following centralized assumptions.

6 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix A ORIGINAL Page 4 of Economic Outlook Assumptions The economic outlook assumptions have a direct impact on expenditures, business growth, and required investments. The determination of the economic outlook and related assumptions is prepared by the Finance team and encompasses assumptions respecting load growth, labour and benefits escalation rates, income taxes, short-term and long-term interest rates and the Consumer Price Index. Key assumptions are communicated to each business unit to be used in the preparation of the operational plans Investment Plan During recent rate applications, THESL submitted evidence showing the need to execute a major infrastructure renewal plan (the Capital Plan ), which requires a significant increase in capital and operating investment. The Capital Plan is necessary to refurbish the overall distribution plant in order to maintain the appropriate level of service to customers and to operate the system to acceptable safety and reliability standards As with any long-term plan, the overall assumptions underlying the plan will be re-visited annually, by THESL s Asset Management Division to ensure alignment. The detailed investment plan for the upcoming year will then be derived in a rigorous manner using a work prioritization model. The amount of work to be performed during the period will consider available resources both human and capital, and incremental load requirements all within acceptable risk tolerances. Operating Maintenance and Support Programs The maintenance program is derived based on the condition assessment of the assets and recognizing their operating requirements. The Asset Management Division determines maintenance requirements for THESL assets for the upcoming year using models and assumptions that factor expected useful life, load, historical failure rates, condition

7 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix A ORIGINAL Page 5 of assessments, environment health and safety laws and regulations, manufacturers operating and maintenance instructions, insurance underwriters recommendations and acceptable risk tolerances Preparation of Budget Following the preparation of the investment plan and the operating and maintenance programs, Toronto Hydro enters into the more detailed budgeting phase of the business plan. Each business unit performs this exercise at a department level, and the process results in a detailed calculation of revenue and expenditures (operating and capital) for the upcoming year. The budgeting phase focuses on near-term objectives and uses assumptions derived from the previous phase. The major activities included in this phase are: Load forecasting Miscellaneous revenue budgeting Capital expenditure budgeting Workforce planning Operating expenditure calculation Interest and financing charges and interest income review Depreciation calculation Payment in lieu of income taxes ( PILs ) calculation The end result of the budget process is a detailed plan for the upcoming year. Following the preparation of this detailed plan, assumptions are used to derive a high level plan for the following four years. The assumptions used are mainly related to THESL s long-term investment plan, long-term operating and maintenance programs, cash requirements, staffing requirements, electricity regulation, changes in operating practices, changes to the securities regulations and accounting standards, economic growth indicators and weather history.

8 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix A ORIGINAL Page 6 of Executive Review of Business Plan After completion of the budgeting phase, the Chief Financial Officer and the President and CEO review the financial and operating plans including discussing the related details with the responsible executives. The Chief Financial Officer and the President and CEO also ensure that the business plan as presented is aligned with the strategic goals and objectives. Following this review, the business plan and related assumptions are approved. A final business plan is then derived for presentation to and approval by the Board Board Approval of Business Plan In November, the President and CEO present the business plan to the Board for discussion and approval. Following the presentation, members of the Board may request additional information and modifications to the plan. Once satisfied, the Board approves the Business Plan.

9 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 1 of 8 1 FINANCIAL PLANNING PROCESS INTRODUCTION This document summarizes the process and guidelines communicated to the Executives and business unit representatives of Toronto Hydro-Electric System Limited ( THESL ) during the financial planning cycle for the preparation of THESL s Electricity Distribution Rate ( EDR ) application filed with the Ontario Energy Board ( OEB ) BACKGROUND THESL will be filing a cost of service application including financial projections for a three year period 2012 to 2014 (the filing period ). Since the corporate business planning timelines do not align with the OEB s timing requirements with respect to the EDR application preparation, THESL s approach and timing will be modified to accommodate the regulatory timelines. The process will begin in February 2011 and will be completed by August During this period, adjustments to preliminary assumptions and the nature of projected costs will have to be made to reflect the OEB Decision related to the 2011 EDR application, operational requirements to meet the approved organizational Strategic Plan and changes in accounting standards. Leaders involved in the financial planning activities will exercise due diligence and review the financial data and assumptions underlying the financial projections included in the EDR application ( the projections ). PROCESS A cross-functional planning group led by Finance and Regulatory will meet regularly to manage the financial planning process and to communicate and gather information related to the projections. Key steps in the planning process are as follows:

10 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 2 of Operational and strategic requirements will be reflected in project estimates or loaded directly into the financial planning system. Finance representatives will support the preparation of the projections. Key financial and regulatory assumptions will be communicated throughout the process. This information should be used in determining the amounts included in the EDR application. Workforce requirements need to be determined by the operational units and communicated to the workforce planning team. All workforce requirements will be centrally managed by the workforce planning team which will coordinate with Finance to cost and categorize the resource requirements. Sub-processes will be in progress in parallel to the organization-wide planning process. These include processes to manage shared services, accounting matters, regulatory requirements, standard rates determination for labour and vehicle costing, cost allocation between departments, customer and load forecasting and tax planning. To facilitate accurate OEB reporting, revenue and expenditures will need to be inputted in the financial planning application at the full (13-digit) general ledger code level. Once the financial projections have been completed and assessed, Finance will distribute the key financial tables to be included in the EDR application based on the operational inputs and requirements. Operational representatives should ensure that the written evidence aligns with the financial tables included in the EDR application. THESL Executives will approve the projected amounts and underlying assumptions related to their operating units. 26

11 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 3 of 8 1 SPECIFIC ASPECTS Electricity Net Revenue The Rates department will be accountable for the calculation of distribution revenue and net power revenue. This activity will be completed after operational data has been collected as the operational data underlies the revenue requirement calculation. The distribution revenue variables include: Normal weather conditions Expected service area/customer growth Revenue requirements per the regulatory model (expenditures and return) Other Revenues/Income The projected other revenues/income will be based on the 2011 expected levels plus/minus any adjustments expected during the filing period. The Finance department will coordinate gathering of supporting documentation from business units including the explanation of variances from prior years. Note that each business unit responsible for other revenue/income transactions will need to provide the appropriate operational information to support the balances. Operating Expenses Operating expenses are divided by division into the following major categories: Compensation (Payroll) Costs Labour and Vehicle Costing Vehicle/Fleet Costs Direct Materials, Support, and Service Costs Usage Charges

12 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 4 of Compensation (Payroll) Costs The assumptions for all THESL compensation costs will be determined by the Organizational Effectiveness ( OE ) department in conjunction with information provided by the operational leaders. Projected headcount data will be aligned with the long-term capital plan. Following is a summary of the related process: Headcount (Staffing Requirements) Salaries Benefits Vacation Overtime Shift Premiums Sick Leave Other The existing long-term THESL operational staffing plan will be used as a basis for the determination of staffing requirements. All other areas not covered by staffing plan will be reviewed by OE with business unit executives. For non-union staff, the salary increase for the filing period will be based on market rates as projected by OE. For union employees, the compensation changes will be based the current or projected agreement with CUPE. Based on recent trends; To be validated by Morneau Sobeco for post-employment benefits. Based on entitlement. To be determined by business units and should reflect the planned work programs and investment plan. Based on historical trends. Based on historical trends. Other costs related to compensation expense will be based on recent trends and/or supported by business units or OE. 6 For reference, related costs are coded to the following expense element series: 3xxx Labour and Vehicle Costing Capitalization of labour will be determined by projects and programs that utilize internal labour. Finance and the operational units will work together to ensure that the investment plan and work program is appropriately reflected.

13 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 5 of For reference, related costs are coded to the following expense element series: 4001, through to 4011 and Vehicle/Fleet Costs Lease and fuel charges including maintenance and other charges related to the vehicles will be provided by the business units with input from the Fleet department. The fleetrelated projections will be aligned to established capital plan For reference, related costs are coded to the following expense element series: 4031 through to 4034 and 62xx Direct Materials, Support, and Service Costs Expenditure types in this category include materials, other goods, and external services to support projects and programs as well as administrative and operating/support activities. Consider specific and significant fees incurred including those related to the Independent Electricity System Operator (the IESO ), the OEB, and other regulatory agencies. A portion of goods and services purchased are consistent from year to year due to the repetitive nature of our business. As a result, an inflation index or consumer price index ( CPI ) will be applied to those standard costs that are expected to recur. The projected CPI rates are as follows: Year CPI Rate % % % For reference, related costs are coded to the following expense element series: 5xxx, 60xx, 61xx, 63xx, 64xx, and 65xx.

14 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 6 of Usage Charges Internal allocation of charges - occupancy costs, IT charges, and fleet and laboratory services - between THESL business units will be based on standard allocation methodologies. 5 6 For reference, related costs are coded to the following expense element series: 992x Shared Service Allocations and Recoveries Shared services costs will be allocated to and from THESL at appropriate costs. For the EDR projections, the charges from THC will be limited to governance activities given the changes in the operating structure for shared service activities. Shared service costs to be recovered by THESL for services rendered to other affiliated companies will be analyzed and appropriately reflected in the projections. All services provided to and from THESL should be supported by service level agreements For reference, related costs are coded to the following expense element series: 99xx Interest and Financing Charges Interest and financing charges will be derived by the Treasury department for the filing period. Interest income will be derived using expected cash balances. Interest expense and financing charges will be based on expected levels of debt including planned new debt issuances. Other aspects include costs related to parental guarantees, letters of credit, lines of credit, interest on regulatory assets and liabilities, and allowance for funds used during construction ( AFUDC ). AFUDC will be calculated by Finance based on the planned capital expenditures, energization assumptions and estimated recovery rate. 1 Source: Conference Board of Canada.

15 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 7 of Depreciation The depreciation balance for the filing period will be based on the projected book value of assets at the end of 2011 plus the impact of the expected capital investment during the planning period, as aligned with the capital plan. Finance will be responsible for determining the depreciation expense related to the distribution system assets PILs Payment in lieu of income taxes ( PILs ) will be determined by using the established THESL tax model which reflects the most recent tax rules and regulations. The PILs estimate will reflect prudent tax planning assumptions. The Tax department will be responsible for calculating the PILs projections. Smart Meter Operations The smart meter program has been operationalized in 2011, with assets energized and brought into revenue requirement for the filing period. The expenditures will be budgeted for clearance over a 36 month period starting in 2012 and the fixed assets to be transferred into opening balance for Street Lighting Operations The OEB Decision with respect to Street Lighting Operations will not be incorporated into the EDR application to be filed in August 2011 as there will not be sufficient time to complete the required analysis and quantify the resulting impacts. It is expected that an update will be filed soon after the EDR application is submitted in August Accounting Standards The application will be prepared under Generally Accepted Accounting Principles applicable in the United States ( US GAAP ). The application of US GAAP is not

16 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix B ORIGINAL Page 8 of expected to produce results significantly different from those resulting from similar Canadian accounting standards ( Canadian GAAP ) Capital Investment Plan The capital investment plan for the filing period will be based on the infrastructure investment plan managed by Asset Management. The investment plan will be updated to reflect the near-term objectives and new information obtained or studies conducted since that time. The costs assumptions should include productivity improvements and changes in compensation and cost for material. The Asset Management department will be responsible for preparing this portion of the capital investment plan Other capital expenditures related to IT, smart meters, facilities, and fleet will be prepared by the respective business units. Appropriate justification should be provided for major initiatives APPROVALS Once the projections and assumptions have been reviewed and finalized, meetings will be set to obtain divisional approvals.

17 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix C ORIGINAL Page 1 of 6 1 BUSINESS PLANNING ASSUMPTIONS INTRODUCTION Following is a summary of key assumptions related to THESL s financial projections included in this Application. 6 7 ECONOMIC 8 9 Table 1: Interest and Bond Rates 1 (%) Historical Historical Historical Bridge Test Test Test 90-Day Commercial Paper Prime Rate Year Government of Canada Bonds 10-Year Government of Canada Bonds Long-Term Government of Canada Bonds 1 Source: Conference Board of Canada. Forecast Date: March 11, 2011.

18 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix C ORIGINAL Page 2 of 6 1 Table 2: Other Historical Historical Historical Bridge Test Test Test CPI Cdn$/US Exchange Rate 2 TA RATES 3 4 Table 3: Tax Rates (%) Historical Historical Historical Bridge Test Test Test Federal Tax Rate Ontario Tax Rate Combined Statutory Tax Rate Ontario Capital Tax Rate Source: Income Tax Act (Canada). 3 Source: Corporations Tax Act (Ontario) and Taxation Act, 2007 (Ontario). 4 Source: Corporations Tax Act (Ontario) and Taxation Act, 2007 (Ontario). Ontario capital tax is eliminated effective July 1, As a result, when calculating capital tax in respect of the 2010 taxation year, the calculated amount must be pro-rated for the number of days in the year after December 31, 2009 and before July 1, 2010.

19 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix C ORIGINAL Page 3 of 6 1 COMPENSATION 2 3 Table 4: Full Time Equivalent ( FTE ) (Number of FTE) 2011 Bridge 2012 Test 2013 Test 2014 Test Total Table 5: Payroll Burden Rate (%) 2011 Bridge 2012 Test 2013 Test 2014 Test Benefit Burden Rate % 33.3% 34.7% 36.2% CAPITAL EPENDITURES 5 Table 6: Allowance for Funds Used During Construction ( AFUDC ) (%) Test 2013 Test 2014 Test Bridge AFUDC Rate (as per OEB prescribed rate for Q2 2011) 4.29 (as per OEB prescribed rate for Q3 2011) AFUDC is calculated on quarterly construction work in progress ( CWIP ) closing balance for distribution plant, net of capital construction. 5 Percentage of base pay related to payroll benefits (including medical, dental, post-employment benefits, longterm disability, life insurance, pension, workers compensation, AD&D, EAP and non-occupational health).

20 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix C ORIGINAL Page 4 of Depreciation and Amortization Rates Prior to January 1, 2011, THESL recorded depreciation and amortization on assets in accordance with the guidelines provided in the OEB s 2006 Electricity Distribution Rate Handbook ( EDRH ). The use of the guidelines was permitted under the Canadian Generally Accepted Accounting Principles ( CGAAP ) as the prescribed useful lives represented the estimated service lives of assets under the regulatory framework Effective January 1, 2011, THESL revised its estimates of useful lives of certain items of property, plant and equipment following a detailed review and analysis which were based on the study conducted by Kinectrics Inc. for THESL in 2009 and other third-party studies. These changes in the estimates of useful lives of assets were reflected in the corresponding depreciation and amortization balances in THESL s financial statements effective January 1, The EDRH is silent on the amortization rates related to capitalized software, capital contributions and land rights expenditures. THESL s current capitalization policy outlines the amortization period applicable to capitalized software costs to be over five years. Capital contributions and land rights are amortized over 25 and 50 years, respectively. Capitalized expenditures related to smart meters are being amortized over 15 years in accordance with the OEB s direction. REVENUE Distribution Revenue Normal weather conditions based on historic weather patterns are assumed.

21 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix C ORIGINAL Page 5 of 6 1 CUSTOMER AND SERVICE AREA 2 3 Table 7: By Class (mid-year) Historical Historical Historical Bridge Test Test Test Residential 604, , , , , , ,539 General Service 66,311 66,074 65,799 65,926 65,907 65,892 65,880 <50kW General Service 50kW - 999kW 12,066 12,231 12,873 13,251 13,776 14,350 14,973 (non interval) General Service 1000kW kW Large Users Unmetered Scattered 1,115 1,093 1,107 1,107 1,107 1,107 1,107 Load Total 648, , , , , , , Service Area THESL has assumed no significant changes to its service area.

22 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 1 Appendix C ORIGINAL Page 6 of 6 1 REGULATORY 2 3 Table 8: Carrying Charges (%) 2009 Historical 2010 Historical 2011 Bridge 2012 Test Q Q Q Q OPERATIONAL 5 6 Table 9: Operational (%) 2012 Test 2013 Test 2014 Test Inventory Surcharge Vehicle Surcharge Smart Meters Smart meter operational and capital costs are included in the revenue requirement for Operational costs are included in the on-going Metering Services group while capital requirements are included in the Capital Budget for

23 JS Couillard Telephone: Carlton St Facsimile: Toronto, Ontario M5B 1K5 August 19, 2011 CONFIDENTIAL via courier Ms. Kirsten Walli, Board Secretary Ontario Energy Board 2300 Yonge St, 27 th Floor P.O. Box 2319 Toronto, ON M4P 1E4 Dear Ms. Walli: RE: Confidential Filing Toronto Hydro-Electric System Limited Intention to Adopt US GAAP for 2012 Distribution Rates Further to Toronto Hydro-Electric System Limited s ( THESL ) letter dated March 25, 2011 advising the Ontario Energy Board (the Board ) of its intention to file a cost-of-service ( COS ) application for 2012 distribution rates, the purpose of this letter is to provide the Board with notice that THESL is planning to adopt United States Generally Accepted Accounting Principles ( US GAAP ) in lieu of International Financial Reporting Standards ( IFRS ). On August 16, 2011, Toronto Hydro Corporation s (the Corporation ) Audit Committee, with delegated authority from its Board of Directors, approved the adoption of US GAAP for rate making and financial reporting purposes for the years beginning January 1, Following the Corporation s Board of Directors meeting on August 25, 2011, THESL will file its next COS application on the basis that reflects the adoption of US GAAP for rate making and financial reporting purposes, beginning January 1, The context and details of this are outlined below. Page 1 of 7

24 Adoption of US GAAP for financial reporting is expected to provide the following: Recognition of regulatory assets and liabilities Ensure that the Corporation s financial results are more representative of the underlying economic substance of rate regulation due to the fact that regulatory assets and liabilities are recognized under US GAAP, whereas under IFRS they are not; Comparability Allow comparability of financial reporting between current and prior periods due to the fact that US GAAP and Canadian Generally Accepted Accounting Principles ( CGAAP ) are very similar; Benchmarking Reporting under US GAAP will facilitate benchmarking to other large North American utilities for capital market investors and rating agencies; Investors and Rating Agencies Maintain the confidence of the investment community and rating agencies that the underlying business fundamentals are not artificially altered by a change in accounting standards; and Deferral and Variance Accounts Allow for the continued use of deferral and variance accounts under the OEB s rate making methodology. In addition, attached is Appendix A US GAAP Background and Information which is a summary of the information that the Board indicated it would require from utilities adopting US GAAP as outlined in EB Addendum to the Report of the Board: Implementing International Financial Reporting Standards in an Incentive Rate Mechanism Environment. Attached for the OEB s consideration is the decision granted by the Ontario Securities Commission ( OSC ) (Appendix B Ontario Securities Commission Decision to Provide Toronto Hydro Corporation Exemptive Relief through US GAAP Adoption). Due to the fact that the Corporation s decision on the adoption of US GAAP will not become public until the Corporation files its consolidated financial statements with the OSC on August 26, 2011, THESL requests that the OEB treat this information as confidential. THESL intends to file both this letter and the attached OSC decision in its next COS application, which is currently expected to be filed on August 26, 2011, as public information at that time. Furthermore, THESL will include a discussion and an estimate of the impacts of the adoption of US GAAP in its COS application. Page 2 of 7

25 If you have any questions regarding this submission please either contact Pankaj Sardana, VP, Treasurer and Regulatory Affair at (416) or myself at (416) Yours truly, [Original signed by JS Couillard] JS Couillard Chief Financial Officer Copy: Mark Rodger, Counsel to THESL Page 3 of 7

26 Appendix A US GAAP Background and Information Toronto Hydro Corporation (the Corporation ) has now formally received its decision from the Ontario Securities Commission ( OSC ) allowing it to utilize United States Generally Accepted Accounting Principles ( US GAAP ) for external financial reporting and securities filing purposes instead of International Financial Reporting Standards ( IFRS ) effective January 1, The Board indicated that it will require utilities to explain the use of an accounting framework other than Modified International Financial Reporting Standards ( MIFRS ) for regulatory purposes in its EB Addendum to the Report of the Board: Implementing International Financial Reporting Standards in an Incentive Rate Mechanism Environment. In doing so, the Board noted that a utility would need to demonstrate its eligibility under the relevant securities legislation to report external financial information using that framework, would need to include a copy of the authorization to use the standard from the appropriate Canadian securities regulator and set out the benefits and potential disadvantages to the utility and its ratepayers. On July 8, 2011, the Corporation filed an application with the applicable Canadian securities regulatory authorities pursuant to section 5.1 of National Instrument Acceptable Accounting Principles and Auditing Standards, to seek permission for the Corporation to prepare its consolidated financial statements in accordance with US GAAP without qualifying as a SEC registrant. That application sets out the requirements under the formal securities legislation and outlines how the Corporation meets those requirements. On July 21, 2011, the OSC issued its decision which would permit the Corporation to prepare its consolidated financial statements in accordance with US GAAP for its financial years beginning on or after January 1, 2012 but before January 1, 2015 and to deem US GAAP as the issuer GAAP for purposes of applicable Canadian securities legislation. The decision rendered by the OSC to the Corporation is similar to that obtained by other rate-regulated utilities. The following paragraphs outline the benefits to both the ratepayers and the shareholder that the Corporation has identified in using US GAAP for regulatory purposes. The use of a consistent financial accounting framework for both internal and external financial reporting and regulatory accounting and reporting allows the Corporation to preserve the existing link between the audited consolidated financial statements and financial information, and the Page 4 of 7

27 documentation that it will utilize in its rate applications and regulatory reports. The impacts of the Board rate decisions can be clearly reflected as regulatory assets and liabilities, given that the accounting guidance under US GAAP allows for the recognition of rate regulation. It is a benefit to the Board, THESL, and interested stakeholders to be able to compare the financial information provided by THESL in its regulatory process to its audited consolidated financial statements. This provides all participants with assurance of the integrity of the information. Secondly, due to the fact that IFRS does not allow for rate regulated accounting, THESL would need to maintain dual reports and reconciliations, parallel transaction processing, and dual IT systems and accounting ledgers to track and maintain the differences between IFRS and MIFRS. US GAAP allows for the recognition of regulatory assets and liabilities and therefore only one ledger is required. This cost avoidance is a direct benefit to ratepayers. THESL also benefits from a consistent accounting methodology by having a better ability to present the consequences of rate regulation in its audited external consolidated financial statements. This provides a more meaningful and reliable information regarding the economic substance of THESL s business and operations to its external investors and analysts. In addition, US GAAP allows for the continued use of group depreciation methods. IFRS does not. THESL will be able to continue to use its existing accounting policies, including the use of group depreciation under THESL s regulatory accounting and reporting framework. The use of group depreciation will relieve THESL of the requirement to derecognize its assets. This will reduce the risk of over/under recovery of costs. Other differences that were previously identified under IFRS which no longer represent as a difference under US GAAP for the Corporation include, but were not limited to, the change in discount rate used to calculate decommissioning provisions, no prohibition with respect to the netting of capital contributions received against items of fixed assets, unvested accumulated sick leaves, and timing of capitalization of borrowing costs. THESL is aware that the Board favours consistency in accounting methodology across all utilities. THESL believes that such comparability could still be achieved with minimal efforts as the modified IFRS filling guidelines are very similar to USGAAP.. Furthermore, the adoption of US GAAP will improve THESL s ability to benchmark against other large North American utilities and other entities that are retaining or adopting US GAAP. Page 5 of 7

28 Finally, standard setters for the US and international accounting bodies continue to work closely together and are expected to do so in the future, in an effort to converge. The use of rate-regulated accounting remains as one of the few major differences to be resolved. As the Board noted in its Addendum Report, Hydro One pointed out that differences between US GAAP and IFRS are concentrated in specific well-defined areas where the potential impacts can easily be understood. Consistent with Hydro One Inc., THESL is of the view that its use of US GAAP will not lead to any confusion or unmanageable complexity that was previously expressed as a concern. For the foregoing reasons, THESL remains of the view that its adoption of US GAAP for both financial accounting and regulatory accounting and reporting purposes is in the best interest of the utility and its ratepayers. Page 6 of 7

29 Appendix B Ontario Securities Commission Decision to Provide Toronto Hydro Exemptive Relief through U.S. GAAP Adoption (three pages attached) Page 7 of 7

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33 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 2 ORIGINAL Page 1 of ECONOMIC FORECAST THESL subscribes to the Conference Board of Canada s Metropolitan Outlook service for forecasts of economic activity in the Company s franchise area. The Conference Board report, completed March 1, 2011, is attached as Appendix A to this schedule A summary of economic conditions over the forecast period is contained in the following table: 9 10 Table 1: Toronto Economic Indicators GDP Consumer Population Employment Unemployment Retail Housing Growth Price Growth Growth (%) Rate (%) Sales Starts (%) Index (%) Growth (000s) Growth (%) (%) Source: Conference Board of Canada, March 11, 2011

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56 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 3 ORIGINAL Page 1 of BUSINESS PLANNING THESL S INTERNAL COST ALLOCATION MODEL THESL uses a cost allocation model to transfer the cost responsibility for vehicle, facilities and information technology services to the business units that use those services. The allocation of costs also helps ensure that THESL is compensated by its unregulated affiliates for the true costs of these services provided by THESL ALLOCATION METHODOLOGY The responsibility for operating costs of the Fleet and Equipment Services ( FES ), Facilities and Asset Management ( FAM ) and Information Technology Services ( ITS ) departments are transferred to other business units or affiliates who use their services in accordance with an allocation methodology. The process for the allocation is as follows: FES, FAM and ITS prepare an overall budget for all their expected costs based on the service requirements provided by the business units; Following this budgeting exercise, standard rates are derived based on expected units for recoverable costs; The standard rates are then used to allocate the costs to each business unit based on expected usage; FES, FAM and ITS record the allocation to the business unit as a recovery (reduction of operating costs); and During the year, all actual costs are recorded in FES, FAM and ITS departments along with a recovery from the business units to reflect estimated usage of services The costs described in the following exhibits are presented on a gross basis for each area. These costs include the costs allocated to the FES, FAM and ITS departments. The costs

57 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 3 ORIGINAL Page 2 of presented for FES, FAM and ITS are also presented on a gross basis to provide an overall view of these costs for THESL A more detailed discussion on the rationale and methodology for the allocation of the costs of the Fleet and Equipment Services ( FES ), FAM and Asset Management ( FAM ) and Information Technology Services ( ITS ) departments are presented below FES DEPARTMENT The allocation of fleet costs to business units is done to optimize the number of vehicles and to allocate the vehicles to either maintenance or capital projects. The allocation is based on the number and type of vehicles. In the case of maintenance projects, the allocation provides for a transfer of operating costs from the FES department to the business units using the service. In the case of capital projects, the allocation provides for a transfer of operating costs to capital investment. The allocation to capital is based on the nature of the work performed and follows THESL s labor costing methodology. The costs included in the fleet allocation are mainly comprised of: Fleet compensation costs; Parts and material; Vehicle insurance, licensing and registration; and Fleet overhead. FES also allocates costs related to large tools and laboratory services using the same methodology. Costs allocated to unregulated affiliates include a component for depreciation and return on assets.

58 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 2 Schedule 3 ORIGINAL Page 3 of FAM DEPARTMENT The allocation of FAM costs to business units is done to optimize the use of space within THESL s facilities. The allocation is based on square-footage and type of space. The allocation provides for a transfer of operating costs from the FAM group to the business units The costs included in the Facilities allocation mainly consist of: Compensation costs; Property leases; Maintenance costs; Facilities overhead; Utilities costs; and Property taxes FAM costs allocated to unregulated affiliates include a component for depreciation and return on assets ITS DEPARTMENT The allocation of ITS costs to business units is done to optimize the use of technology assets. The allocation is based on ITS support to the end user, including directly attributable labour and support costs. The allocation provides for a transfer of operating costs in the ITS department to the business units The costs included in the ITS allocation are comprised mainly of: Compensation costs; and Directly attributable support costs.

59 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 3 Schedule 1 ORIGINAL Page 1 of 3 1 POLICY BUILDINGS AND FACILITIES FACILITIES ASSET MANAGEMENT POLICY The Facilities Asset Management Policy describes the principles for making prudent investment decisions to complete essential work on facilities assets. The objective of the policy is to make prudent investment decisions regarding facilities assets to support the business strategies, plans and requirements of THESL The policy is used in conjunction with Supply Chain, Procurement and Safety by Design processes. It provides direction for acquisitions, design, construction, maintenance refurbishment, decommissioning and asset disposal, and conforms to the following requirements: Provincial legislation and regulations; Building Code; City of Toronto by-laws; and Corporate Health & Safety and Environmental Policies Investment decisions are typically made at several points during the lifecycle of each facilities asset, and are guided by the following principles: Acquisition. THESL generally purchases required facilities. However, lease arrangements are occasionally made to meet short-term business requirements and address functional obsolescence of facilities. Design and Construction. THESL uses a competitive procurement process and internal construction resources to minimize costs and meet THESL business unit requirements. Maintenance and Refurbishment. THESL identifies ongoing building maintenance and refurbishment requirements through regular inspection and refurbishes surplus facilities to meet new requirements.

60 Toronto Hydro-Electric System Limited EB Exhibit C1 Tab 3 Schedule 1 ORIGINAL Page 2 of Decommissioning and Disposal. Where a surplus facility asset cannot be used for another purpose, THESL decommissions and disposes of the asset on the open market The guiding principle for all investment decisions regarding each facilities asset, over its total lifecycle, is to maximize the net benefits it delivers having due regard for its use. In accordance with this principle, the cost of acquiring real property and constructing and maintaining buildings must enable THESL to maximize the stream of net benefits flowing from the investment. Investment decisions regarding facilities assets consider whether an asset is Optimizing or Enabling. Optimizing. Facilities assets acquired and/or constructed for general distribution purposes (for example, a service centre) provide not only functional benefits, but also the opportunity to optimize the work of the organization, thereby reducing overall operating costs. A well-chosen site for a service centre can significantly reduce travel time, decrease response time to emergencies and contribute to increasing the productivity of field workers. A well-designed building can support the optimal flow of materials (such as in a warehouse) and work (such as in a repair and maintenance shop). Competitive procurement, in this case, would consider not only functional requirements, but also optimizing benefits. For example, one site may be ideally located, and another site may require an additional ten minutes of travel time, per field worker, per day. The optimizing benefits may more than compensate for a higher initial cost of the ideally located site. Enabling. Facilities assets acquired and/or constructed for administrative or operations purposes can provide not only functional and optimizing benefits, but also an environment that enables THESL staff to collaborate effectively on departmental and cross-functional projects. By investing in facility characteristics that inspire individuals and teams to operate efficiently and effectively, additional