1. Page 1 Recording of this session via any media type is strictly prohibited. Page 1 Risk Appetite – Hydro One’s Approach Rob Quail Director, Enterprise Risk Management Hydro One Networks Inc

2. Page 2 Recording of this session via any media type is strictly prohibited. Rob Quail Director, ERM – Hydro One ERM since 1999, 220+ risk workshops Co-deliver Masters Certificate Program in ERM at Schulich Background: EH&S Internal Audit Outsourcing, commercial contracting/negotiations 2

3. Page 3 Recording of this session via any media type is strictly prohibited. Learning Objectives Understand the right questions to ask to gauge risk appetite. Adopt a proven method to begin and sustain the risk appetite conversation. Strengthen your position to overcome skepticism about your goals.

4. Page 4 Recording of this session via any media type is strictly prohibited. Overview Context –ERM and Hydro One Our Approach to Risk Appetite Lessons Learned and Benefits

5. Page 5 Recording of this session via any media type is strictly prohibited. Background on Hydro One Ontario, Canada electricity transmission & distribution company $20.8B assets; 5400 full time and 2000 non-regular employees 19,000 circuit-miles of transmission lines, 287 transmission stations; 412 transmission-connected customers (industrial customers and municipal distribution companies) 180,000 circuit-miles of distribution lines, 1007 distribution and regulating stations; 1.4 million distribution customers (mostly rural and in small towns)

6. Page 6 Recording of this session via any media type is strictly prohibited. ERM at Hydro One Since 1999 All the usual reasons for ERM (uniformity, governance, reduce surprises) PLUS… Stimulate conversations ---- workshops Take more risks ---- overcome conservative culture Embed risk-aware decision-making ---- risk based investment planning o Requires specific, detailed criteria Build an open culture – truth to power

7. Page 7 Recording of this session via any media type is strictly prohibited. Why so skeptical? “Limits”??? Confusion: -Attitude -Appetite -Tolerance -Capacity -Limits -??? Unclear (or overlapping) definition, No public examples of any clear value Overabundance of new “made-up” words in ERM circles A solution in search of a problem?

8. Page 8 Recording of this session via any media type is strictly prohibited. Initial thinking Strategic Goals KPIs Detailed Risk Tolerances High-level Strategy ????

9. Page 9 Recording of this session via any media type is strictly prohibited. Pitfalls

10. Page 10 Recording of this session via any media type is strictly prohibited. Our concept: three levels Risk Tolerances Tactical/ Operational Risk Attitude Conceptual Risk Appetite Strategic

11. Page 11 Recording of this session via any media type is strictly prohibited. Our approach Risk appetite is defined in the context of individual strategic objectives Risk appetite is not expressed as a hard limit or ratio Risk appetite expressed in relative terms using criteria

12. Page 12 Recording of this session via any media type is strictly prohibited. Risk Appetite is on a Continuum 1 Averse 2 Minimalist 3 Cautious 4 Flexible 5 Open “Sacred” – avoidance of risk is a core objective Extremely low tolerance for uncertainty When faced with multiple options, will choose the one with the lowest risk, always Will never trade off this objective against others Will take justified risks Fully anticipate uncertainty or volatility in results When faced with multiple options, will choose the one with the highest return and accept the possibility of failure Willing to trade off this objective against others

13. Page 13 Recording of this session via any media type is strictly prohibited. Risk Appetite Scale Name PhilosophyTolerance for Uncert/Var ChoiceTrade-off 5 Open Will take justified risks Fully anticipatedWill choose option with highest return; accept possibility of failure Willing 4 Flexible Will take strongly- justified risks Expect someWill choose to put at risk, but will manage impact Willing under right conditions 3 Cautious Preference for safe delivery LimitedWill accept if limited, and heavily outweighed by benefits Prefer to avoid 2 Minimalist Extremely conservative LowWill accept only if essential, and limited possibility/extent of failure With extreme reluctance 1 Averse “ Sacred ” - Avoidance of risk is a core objective Extremely lowLowest risk option, alwaysNever

14. Page 14 Recording of this session via any media type is strictly prohibited. Risk appetite workshop

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17. Page 17 Recording of this session via any media type is strictly prohibited. “Exhibited” Risk Appetite Executive Group A Group B

18. Page 18 Recording of this session via any media type is strictly prohibited. Benefits of this approach Provokes strategic discussion Deep understanding of the strategy Differentiated business objectives Relationship between risk-taking and value-building

19. Page 19 Recording of this session via any media type is strictly prohibited. Benefits of this approach Diagnostic value Gaps between target and exhibited; intent and action Differences across lines of business Signal need for changes in internal communication, controls, incentives, etc.

20. Page 20 Recording of this session via any media type is strictly prohibited. Future plans Continued data collection, reporting Annual refresh Use results to adjust tolerances

21. Page 21 Recording of this session via any media type is strictly prohibited. Lessons Learned and Advice Risk Appetite must have a specific business purpose and benefit There is no one “right way”. But should: Link to the strategy Drive other aspects of ERM and risk-based decision-making Be communicated Evolve Stick to your ERM “brand”

22. Page 22 Recording of this session via any media type is strictly prohibited. Questions? rob.quail(at)HydroOne.com