International Swaps & Derivatives Association Transforming the Derivatives Business The Emerging Ontario Electricity Market July 11, Meg Timberg Solicitor

zHistorically, Ontario Hydro was an integrated utility, generating and transmitting electricity. Electricity was sold at regulated rates: yno electricity derivatives market existed in Ontario. Emerging Electricity Market

zIn 1998, the Province created the Market Design Committee (oversees design, creates rules etc. for the New Ontario Market) and the market restructuring legislation, the Energy Competition Act, 1998 was enacted: yOntario embarked on the course of deregulating the electricity sector and creating a New Market for electricity. Emerging Electricity Market

zApril 1, 1999, business of Ontario Hydro transferred to separate entities: yOntario Power Generation Inc. (generation business) yHydro One Inc. (transmission, rural distribution and retail energy services businesses) yIndependent Electricity Market Operator (“IMO”) (centralized independent electricity system coordinator and independent market operator) Emerging Electricity Market

yElectrical Safety Authority (electrical equipment and electrical wiring installation inspection functions) yOntario Electricity Financial Corporation (“OEFC”) (manages retirement of Ontario Hydro’s outstanding debt and other obligations for non-utility generator contracts) Emerging Electricity Market

zMarket Rules are being developed. zMarket testing is in process. zOPG continues to sell electricity at regulated rates. zMarket Participants are developing strategies, products etc. for New Market. Current Status

zProvince has indicated Open Access should be achieved by May 1, 2002 subject to four conditions being met: yprotecting consumers and offering more choice; ycreating a strong business climate with a reliable supply of electricity; yprotecting our environment; and yencouraging new ways of doing business and supporting the search for alternative sources of power. Date of Market Opening

zOPG’s generating license has two market power mitigation provisions, intended to help create framework for a competitive marketplace. z1. Rebate Mechanism (hedges against price increases): ymajority of OPG’s expected Ontario energy sales will be subject to an average annual price threshold of 3.8 cents per kWh; yOPG rebates any excess earned to Ontario energy consumers via the IMO (creates automatic hedge for Ontario consumers). Market Power Mitigation

z2. OPG relinquishing effective control of generating capacity (thereby creating competition in generation of electricity): yFirst target: decontrol at least 4,000 MW of fossil generating capacity (1,000 MW of which can be substituted with hydroelectric generating capacity) within 42 months after Open Access. ySecond target: reduce effective control over electricity supply options to 35% or less of total electricity supply options in Ontario within 10 years of Open Access. Market Power Mitigation

zGenerators may submit to the IMO offers to sell electricity and consumers (i.e. ‘load’) may bid to purchase electricity from the IMO. zGenerators and load who do not submit an offer or bid will be “non-dispatchable” (i.e. will automatically sell or purchase at floating price). zPrice will be established and electricity will be dispatched based on offers and bids received by IMO to sell (and purchase) energy and operating reserve. New Market - Establishes a Floating Price for Electricity

zGenerally speaking, generators will receive the IMO 5- minute price and load will pay the IMO hourly market clearing price: yprice paid/received will be a floating price, not the amount offered/bid; ycreates incentive for generators and load to enter into OTC derivative contracts to fix the price of electricity. zAn energy forward market will not be established as of Open Access, but may be introduced at a later date. New Market Lends Itself to Price Management

zCan either fix price of electricity by contracting with a competitive retailer, or purchase energy from current distributor (“standard supply service” or “SSS”). zGenerally, distributors of SSS will charge customers with demand greater than 50 kW the hourly spot price directly, while consumers with less demand will be charged a fixed annual rate based on a forecast spot price, subject to adjustment at the end of each year against the actual spot price. Retail Consumers

Status of Emerging OTC Derivatives Market zVarious market participants are developing products to meet customers price management needs following Open Access. zProducts and opportunities will develop over time as market develops.