MATERIALS AND SUPPLIES INVENTORY

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1 Filed: September, 00 EB Schedule Page of.0 STRATEGY MATERIALS AND SUPPLIES INVENTORY Hydro One Transmission maintains and optimizes materials and supplies inventory in support of our reliability, system growth and customer satisfaction objectives. Having the right material at the right work location at the right time is important in meeting these objectives. Strides have been made to manage the growth in inventory levels over the 00 to 00 period consistent with the overall growth of the corresponding transmission asset base over this same period. Various initiatives have been undertaken by Hydro One to reduce its dependence on inventories including: Project planning and procurement processes have been adjusted to secure materials for transmission capital projects directly from vendors; Eight Provincial warehouses were consolidated into one warehouse in Barrie in December 00; Strategic sourcing practices have reduced material costs. 0 A description of Hydro One s Supply Chain and initiatives undertaken are described in Exhibit C, Tab, Schedule..0 INVENTORY Hydro One Transmission carries two types of inventory strategic spare parts inventory and routine materials and supplies inventory. Strategic spare parts are stocked to enable timely restoration of equipment having long procurement lead time components. They

2 Updated: February, 00 EB Schedule Page of consist primarily of breakers, transformers, and steel towers. The strategic spare parts are carried at cost and are located at warehouses in Pickering and Orangeville. Routine materials and supplies consist of construction materials, with low materiality, that typically have a high turnover rate and are required on a regular basis. Typical parts are O-rings, gaskets, and contacts. Routine materials and supplies are carried at cost and are primarily located at the Barrie warehouse. As of December, 00, Hydro One Transmission carried a total year end inventory valued at $. million. Table provides the inventory levels for Included are both the year-end levels and annual average levels for each year.

3 Updated: February, 00 EB Schedule Page of Table Inventory Levels ($ Million) $M Year End Routine Materials and Supplies Year End Strategic Inventory Year End Total Annual Average Routine Materials and Supplies Annual Average Strategic Inventory Annual Average Total Note. Average annual inventory level is calculated based on (previous year-end level + current year-end level) / Over the period, the average annual inventory levels rise by ~ %. This increase is due to a number of reasons. First, a large percentage of the asset base is entering its mid-life to end-of-life age demographic where requirements for more spare parts are required due to increased failure rates. Second, the increased growth in transmission assets over the same period requires additional inventory to back up new equipment purchases requiring additional inventory. Third, the purchase of metering instrument transformer spares to comply with the market rules has increased inventory requirements. As well there is a need to replenish the spare pool of selective components where numbers are low or are not in good condition. Examples include protection and control equipment related to the replacement of the analog electro-mechanical protection system components with digital protection system components, and new station equipment component parts.

4 Updated: February, 00 EB Schedule Page of Increases to strategic inventory have been offset somewhat in the routine materials and supplies inventory as a result of the warehouse consolidation program in 00 which consolidated all eight provincial warehouses to one warehouse at Barrie.. Planned Levels of Strategic Spare Parts The planned levels of strategic spare parts are determined through the use of a probabilistic model which accounts for the size of the asset population which requires spare part coverage, failure rate, lead time to replace or repair, the cost to purchase, store, and maintain the spares, and the cost reliability consequences of not having the spare part available.. Monthly Inventory Levels In response to the Board s directive from the Rate Hearing, to track the Materials and Supplies accounts with a view to providing monthly balances as part of its next application for rates, Hydro One Transmission conducted a review of its inventory accounts. The actual monthly net inventory numbers for the years 00 through 00 are shown in Table below.

5 Table Historical Monthly Inventory Levels Updated: February, 00 EB Schedule Page of $M Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 00 $. $. $. $. $. $.0 $. $. $.0 $. $. $. 00 $. $. $. $. $.0 $. $. $. $. $. $. $. 00 $. $. $.0 $. $. $. $. $. $. $.0 $. $. 00 $. $. $. $. $. $. $. $. $. $. $. $. The monthly variation in inventory levels is relatively flat as expected with slow moving inventory items with the difference from month to month < $M.. Service Level The Service level metric has been established to monitor the percentage of the time the warehouse was able to fulfill an order by the required date for routine materials and supplies. Table below provides the monthly trend of the service level over the 00 to 00 period. Table Monthly trend of Service Level Service Levels YTD Percentage 0% % 0% % 0% % % Jan Feb March April May June July August Sept Oct Nov Dec Months

6 Updated: February, 00 EB Schedule Page of The Service Level has remained relatively constant over the period with the exception of the decline at the end of 00 and partway through 00. This was due to the transition period when warehouses across the province were closed together with the subsequent opening of the central warehouse in Barrie. The 00 service levels have regained previous levels.