1. 2008 Annual Meeting ● Assemblée annuelle 2008 Québec 2008 Annual Meeting ● Assemblée annuelle 2008 Québec Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires JF

2. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Enterprise Risk Management “Not just for Insurance Companies” John R.S. Fraser Vice President, Internal Audit & Chief Risk Officer, Hydro One Inc., June 20, 2008 2008 Annual Meeting Conference Canadian Institute of Actuaries, Quebec City

3. Summary 1.Background on Hydro One 2.What we consider ERM to be 3.The Components of ERM 4.The ERM Processes 5.Risk Tolerances and Workshops 6.Risk Profiles 7.Resource Allocation 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008

4. Background on Hydro One Ontario’s primary electricity transmission & distribution company One of the largest Tx companies in N.A. $12 B of assets $4.6 B of annual revenue $1 B annual capital and maintenance spend 5000 employees plus 1,000 outsourced 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 1

5. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 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 2

6. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 ERM is no big deal…. “Enterprise risk management is just basic actuarial science, which is now being applied in all industries.” Sim Segal, FSA, CERA, MAA, Managing Director Aon’s Global Risk Consulting Group (quoted by Rough Notes Magazine - October 2007) 3

7. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 ERM requires a major re-think… “…actuaries of the fourth kind…” (a reference to actuaries working in ERM) by Professor Paul Embrechts of the Swiss Federal Institute of Technology as quoted by Stephen D’Arcy in his 2005 Presidential address to the Casualty Actuarial Society 4

8. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Risks Identification “There is no point getting into a panic about the risks of life until you have compared the risks which worry you with those that don’t but perhaps should.” Rothchild Quoted by Felix Kloman in Risk Management Reports - Vol. 31 No. 10 - October 2004 5

9. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Why have ERM? “...overly complex methods are likely never to be fully implemented, or, if they are, to generate a lot of resentment, non-compliance and workarounds.” “…the minutia will be well-managed at great cost while ignoring the big picture, especially the future types of risks.” David McNamee October 2004 Internal Auditor Magazine 6

10. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 What our ERM is not about Sarbanes Oxley Compliance Audits Regulations Performance Measurement Credit, market or operational risk in isolation Detailed calculations without the big picture 7

11. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Good Governance Good Management (“a proxy for good management”) –Agreed objectives and risk strategies –Future business outlook –Prioritization of objectives, risks and resources –Resource allocation (i.e improving the business/operations while knowing your risks and using your resources wisely.) What ERM is about: 10a

12. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 What ERM is about: 10b Market Operational Strategic Other Credit

13. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Policy and Organization (Hydro One ERM Status - April 2002) 11

14. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Risk Tolerances and Workshops (Hydro One ERM Status - April 2002) 12

15. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Reporting Processes (Hydro One ERM Status - April 2002) 13

16. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 CORPORATE RISK PROFILE BOARD COMMITTEE EXECUTIVE MANAGEMENT POLICY & FRAMEWORK RISK PROFILES & BUSINESS PLANS LINE MANAGEMENT RISK TOLERANCES MANAGE RISKS, $$ MANAGE RISKS, $$ The ERM Process at Hydro One 14

17. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Turning Strategy into Risk Tolerances Business Strategy 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? 15

18. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Key Components of ERM Process ERM Policy & Framework Asset Planning Corporate Risk ProfileScan of EventsBusiness Plans Audit & Finance Committee Board Risk Workshops Corporate Risk Tolerances Strategic Planning Business Objectives 16

19. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Example of HOI risk tolerances Worst Case: - threatens the survival of the organization in its current form Minor: - noticeable deterioration in results Major: - significant deterioration in results 17

20. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Environmental Hazards 0 20 100%806040 Worst Case Severe Major Moderate Minor 8 2 1 7 5 4 3 2 1 Number of participants who voted for each category 18

21. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 0 20 100% 80 6040 Environmental Hazards Worst Case Severe Major Moderate Minor 5 4 3 2 1 3 10 5 19

22. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Briefing Sessions: voted results & meaning “Meanings:” themes, patterns in discussion common causes 20

23. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 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. 21

24. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Spending Prioritization: Making choices based on value Vehicles?? House?? Medical?? Travel?? Highest “Risk Mitigation” Value for money + Intolerable Risks 22

25. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 “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 23

26. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Ranking across work programs (1) i.e. value for $’s Intolerable Risk “BANG for BUCK” Resources = $14 24

27. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Standard & Poor’s Questions on ERM: –Is there a statement of risk appetite or risk tolerance? –How does the company identify and control each major risk? –What information about each major risk is shared with senior management and/or the board of directors? –What environmental scanning techniques does the company use to anticipate the emergence of extreme disasters? –What contingency plans has the company developed? (Excerpts from Standard & Poor’s January 14, 2008 Bulletin) 25

28. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 Questions?