Payment amounts for prescribed assets Presentation to Ontario Energy Board September 15, 2006

2 Summary Prescribed assets are heritage assets –Essentially risk-free to operator Support OEB staff proposal –Modified cost of service approach –Reg. 53/05 as starting point –Shareholder has established 5 percent return on equity Need to consider role and appropriateness of incentives –Current incentives embedded in Reg. 53/05 –Future incentives

3 Regulatory Framework Position Support the Modified Cost-of-Service (CoS) process recommended by Board Staff. Examine possible role of incentives focused on efficiency improvements; incentives should drive cost minimization. Rationale Provides continuity in pricing Provides more than adequate returns to OPG Based on procedures that are very familiar to the Board Provides an initial set of data that can act as a reference point Can be implemented relatively quickly and at reasonable cost Can be amended to include incentives as deemed appropriate

4 Return to Capital Position ROE established in Reg. 53/05 (5 percent) more than adequate Adopt model recommended by the ECSTF – namely the Heritage Asset model described as “Power provided from existing Government-owned assets which is sold to ratepayers at a price that reflects historical costs of the associated assets”. Rationale Based on approaches used in B.C. and Quebec In those provinces power at cost conveyed an advantage since cost of hydro less than replacement cost. In Ontario the historical cost of the assets is considerably higher than their market value.

5 Return to Capital Rationale (continued) OEFC has inherited the responsibility for meeting the cost of these assets. Consumers ultimately pay all of these costs in prices and charges that cover: –Interest paid to OEFC by OPG and the Province –PILs paid by OPG, Hydro One and the LDCs to the OEFC –The Debt Reduction Charge –Dedicated income paid by the Province to the OEFC Risks faced by the Province as owner of OPG are not comparable to commercial risk: –The government has indicated that all costs of providing electricity will be covered by ratepayers and not by taxpayers and it has the authority to ensure this is the case – e.g. the DRC, special charge for NUG assets –The creation of deferral and variance accounts under Section 5.(1) of Regulation 53/05 is another example of the government’s intention to shift risk to consumers.

6 Rate Determination Process Position Regulation 53/05 establishes shareholder expectations about the basis for rates (5 percent ROE) and serves to protect the interests of consumers Future rate adjustments should be based on appropriate benchmarking considering appropriate metrics, comparators and against non-prescribed and non-OPG assets Rationale Current prices were based on costs submitted by OPG and reviewed by the Ministries of Energy and Finance and by an outside advisor. This cost base can provide a starting point and should be made available to interested parties Costs should be presented by asset class defined in Regulation 53/05 with a separate allocation of common assets.

7 Incentives Position The use of incentive regulation should be a long term goal and should focus on improving operational efficiency; incentives should drive cost minimization. Rationale The Board staff discussion paper points out that CoS regulation provides the perverse incentive to exaggerate costs. Incentives should be designed to counteract this tendency by providing the applicant with a share in cost saving or by encouraging cost savings to avoid a reduction in ROE (or both). Incentives designed to encourage increased revenues are generally unnecessary and those in place should be reviewed for effectiveness. The Board should initially concentrate on the establishment of benchmarks and on the types of incentives that might be effective rather than on the correct formula to be used.

8 Questions Adam WhiteLarry Murphy