1. Enterprise Risk Management: Getting your organization started, and improving corporate results John R.S. Fraser Senior Vice President, Internal Audit & Chief Risk Officer Hydro One Networks Inc. For Directors Global & Grant Thornton LLP – Toronto December 2, 2010

2. Summary of Presentation 1. Background on Hydro One (2 - 4) 2. ERM Concepts and Clarifications (5 – 8) 3. Policy and Framework (9) 4. Risk Criteria (Tolerances) (10 – 13) 5. Corporate Risk Profile (14 – 18) 6. Risk Workshops (19 – 24) 7. Business Planning (25 – 27) 8. Conclusion (28 – 32) 1

3. Background on Hydro One 2 Ontario’s primary electricity transmission & distribution company One of the largest Tx companies in N.A. $15.8 B of assets $4.7 B of annual revenue $1.5 B annual capital and maintenance spend 5,400 employees

4. The Changing Electricity Marketplace in 2000 Unprecedented change within the industry (Re- regulation, Commercialization, Reorganizations) Ontario Hydro broken up in April 1999 Commercial Board of Directors appointed Asset Management Model introduced Retirement of 20% of workforce in 2000 Purchased 88 municipal electric utilities in 2000 For 2002, an IPO and Market Opening (unbundled bills) 3 Background on Hydro One

5. History of ERM at Hydro One Previous attempts that did not engage Organizational realignment with CFO led to rethink Can the Head of Audit be the CRO? January 2000 - New Beginnings 2000 – 2003: Full Steam Ahead 2004 – Present: Sustainment 2011 - Regeneration 4 Background on Hydro One

6. Is there a need in your organization ? Amount of change in the organization and/or industry Amount of change in senior management Appetite for: –governance (actual and optics) – clarity of decision making 5 ERM Concepts and Clarifications

7. ERM – Scope of Mathematical Intensity Detailed math is the answer Broad ranges are the way to go AU/NZS 4360 COSO ISO 31000 SOA CAS PRMIA S&P Moody’s RIMS 6 ERM Concepts and Clarifications

8. Notice - What our ERM is not about Sarbanes Oxley Compliance Audits Regulations Performance Measurement Credit, market or operational risk in isolation Note - The world does not need more bureaucracy 7 ERM Concepts and Clarifications

9. Notice - What our ERM is about Good Governance Good Management –Agreed objectives and risk strategies –Future outlook –Prioritization of objectives and risks and mitigants –Resource allocation based on risks to objectives 8 ERM Concepts and Clarifications

10. ERM Processes “Conversations” & “Prioritizations” via: Policy and Framework Risk Criteria (appetite /tolerances) Corporate Risk Profile Risk workshops Business Planning Hydro One’s Approach

11. ERM Policy and Framework

12. ERM Policy: –“ERM provides uniform processes to identify, measure, treat and report on key risks.” –This is the umbrella policy under which all other risk policies fall. –Key principles include: portfolios of ALL types of risks, integrated with strategic and business planning, annual risk assessments, everyone’s responsibility. –Key accountabilities: Audit & Finance Committee, the President, CFO, Management and CRO. ERM Framework: –Establishes the basic process for all risk assessments 9 ERM Policy and Framework

13. BOARD COMMITTEE EXECUTIVE MANAGEMENT LINE MANAGEMENT CORPORATE RISK PROFILE POLICY & FRAMEWORK RISK PROFILES RISK TOLERANCES MANAGE RISKS, $$ ERM - Corporate View ERM Process

14. Risk Criteria (Tolerances) Risk Tolerances

15. Use of Risk Criteria (Tolerances) In order to run effective risk workshops In order to create a common understanding of risks by both the leadership team and the board Criteria for Business Planning/Resource Allocation prioritization 10 Risk Tolerances

16. A more complex view Risk Capacity Risk Appetite Risk Tolerance Risk Target/Range Source: Web presentation by: J. Chris Karow E&Y ERM Symposium New York March 28, 2007 Risk Limits This is the box we play in 11 Risk Tolerances

17. Turning Strategy into Risk Tolerances Strategic Planning How are we going to achieve our overall Corporate aims?? Business Objectives Key Performance Indicators Risk Tolerances What is our attitude toward failure for each KPI?? How will we measure success for each Business Objective? What 6-10 objectives do we want to factor in to decision-making? 12 Risk Tolerances

18. Example of HOI “risk tolerances” Worst Case: - threatens the survival of Hydro One Inc. in its current form Minor: - noticeable deterioration in results Major: - significant deterioration in results 13 Risk Tolerances

19. Corporate Risk Profile Hydro One’s Approach

20. Corporate Risk Profile Purpose and Benefits Semi-annual based on: –Interviews & Databases –Trends & Emerging risks Reviewed by: Executive (Risk) Committee Audit Committee Input to Business Planning The Corporate Risk Profile 14 Hydro One’s Approach

21. Risk Interviews Strategic Objectives List of major events since last Risk Profile Prior list of top risks: to capture trend and rating Listings of all possible existing and evolving risks 15 Risk Interviews

22. Structured Risk Interviews/Workshops Human Resources (R=2.6 / C=2.9) Retaining Expertise R=2.6 / R=2.1) Training (R=2.5 / C=2.8) Labour Agreements R=2.4 / C=2.0) Commercial Culture (R=3.4 / C=2.1) Volatile Work Schedule (R=2.4 / C=2.1) Budget (R=2.8 / C=2.6) Skills (R=2.5 / C=2.6) Demographics (R=3.5 / C=2.3) Competition (R=2.7 / C=2.5) R = Residual Risk C = Control 16 Risk Workshops

23. Corporate Risk Profile SOURCES OF RISK IMPACTED OBJECTIVES MITIGANTS RISK # 1 RISK # 2 # 3 # 4 # 5 CHART OF RISKS SCOPE, METHODS & CHANGES SPECIFIC RISKS 17 Risk Profiles

24. Corporate Risk Profile Note: Each risk category is explained with a half page analysis outlining the sources of the risk and the mitigants in place or planned. 18 Risk Profiles

25. Risk Workshops

26. Risk Workshops are Facilitated for: Major Projects, e.g. construction, I.T., M&A Major Types of Risks, e.g. environmental Lines of Business, e.g. for business planning Leadership Team and Full Board of Directors Note: A Full Report is Provided within 24 hours “Risk Management is a contact sport.” Diana Del Bel Belluz 19 Risk Workshops

27. ERM Workshops –Objectives articulated –Risk Criteria (tolerances) developed –Magnitude (“largest credible risk”) –Probability (always to specific time-frames) –Risk Trends for the future –Risk Maps show quality of controls Unique Workshop Design 20 Hydro One’s Approach

28. Risk Workshops - Process Champion: identified & used Attendees: number, qualities Pre-voting: methods & benefits/disadvantages Timing: length & agenda Software: voting and data capture Facilitation techniques: how to A Full Report is Provided within 24 hours 21 Risk Workshops

29. Environmental Hazards 0 20 100%806040 Worst Case Severe Major Moderate Minor 8 2 1 7 Risk Workshops 5 4 3 2 1 Number of participants who voted for each category 22 Risk Workshops

30. 0 20 100% 80 6040 Environmental Hazards Worst Case Severe Major Moderate Minor 5 4 3 2 1 3 10 5 Risk Workshops 23

31. Briefing Sessions: voted results & meaning “Molecules” themes, patterns in discussion common causes Risk Workshops 24

32. Business Planning

33. Spending Prioritization: Making choices based on value Vehicles?? House?? Medical?? Travel?? Intolerable Risks Highest “Risk Mitigation” Value for money + 25 Business Planning

34. “True” tolerances: “Red Zone” 5 Worst Case 4 Severe 3 Major 2 Moderate 1 Minor 5 Very Likely 4 Likely 3 Middle Odds 2 Unlikely 1 Remote 26 Business Planning

35. Ranking across Work Programs (1) value for $’s Intolerable Risk “BANG for BUCK” Resources = $14 27 Business Planning

36. Hydro One ERM Status - April 2002 28 Hydro One’s Approach

37. Hydro One ERM Status - April 2002 29 Hydro One’s Approach

38. Hydro One ERM Status - April 2002 30 Hydro One’s Approach

39. Staying in Business “We have been in business since 1906, and we have been pleasing and displeasing the public ever since. We have been cussed and discussed, boycotted and investigated, talked about, lied about, hung up, held up and robbed. The only reason we are staying in business is to see what happens next.” Sir Adam Beck, 1922 As quoted in “Adam Beck and The Ontario Hydro” by W. R. Plewman, published March 1947 31 Conclusion

40. Questions? 32