MANAGEMENT’S DISCUSSION AND ANALYSIS 41 HYDRO ONE ANNUAL REPORT 2013 Regulatory Assets and Liabilities Environmental Liabilities Employee Future Benefits  Our regulatory assets represent certain amounts receivable from future customers and costs that have been deferred for accounting purposes  because it is probable that they will be recovered in future rates. Our regulatory assets mainly include costs related to the pension benefit  liability, deferred income tax liabilities, post-retirement and post-employment benefit liability, and environmental liabilities. Our regulatory  liabilities represent certain amounts that are refundable to future electricity customers, and pertain primarily to OEB deferral and variance  accounts. The regulatory assets and liabilities can be recognized for rate-setting and financial reporting purposes only if the amounts have been  approved for inclusion in the rates by the OEB, or if such approval is judged to be probable by management. If management judges that it is  no longer probable that the OEB will allow the inclusion of a regulatory asset or liability in future rates, the applicable carrying amount of the  regulatory asset or liability will be reflected in results of operations in the period that the judgement is made by management.  We record a liability for the estimated future expenditures for the contaminated LAR and for the phase-out and destruction of PCB-contaminated  mineral oil removed from electrical equipment. There are uncertainties in estimating future environmental costs due to potential external  events such as changes in legislation or regulations and advances in remediation technologies. In determining the amounts to be recorded  as environmental liabilities, the Company estimates the current cost of completing required work and makes assumptions as to when the  future expenditures will actually be incurred, in order to generate future cash flow information. All factors used in estimating the Company’s  environmental liabilities represent management’s best estimates of the present value of costs required to meet existing legislation or regulations.  However, it is reasonably possible that numbers or volumes of contaminated assets, cost estimates to perform work, inflation assumptions and  the assumed pattern of annual cash flows may differ significantly from the Company’s current assumptions. Environmental liabilities are reviewed  annually or more frequently if significant changes in regulations or other relevant factors occur. Estimate changes are accounted for prospectively. In June 2013, Environment Canada issued Canada Gazette I, which included a proposed amendment to the existing PCB regulations. The  proposed amendment would extend the end-of-use deadline for our company’s PCBs in concentrations of 500 parts per million or more  from December 31, 2014 to December 31, 2025. The proposed amendment is subject to final approvals before the enacted regulation is  published in Canada Gazette II. Canada Gazette II is anticipated to be issued in the first half of 2014. An environmental liability is recorded  based on regulations as currently enacted, and as such, our environmental liability as at December 31, 2013 is based on the current  compliance date of December 31, 2014.  We provide future benefits to our current and retired employees, including pension, group life insurance, health care and long-term disability. The discount rate used to calculate the accrued benefit obligation is determined each year end by referring to the most recently available market  interest rates based on “AA”-rated corporate bond yields reflecting the duration of the applicable employee future benefit plan. The discount  rates at December 31, 2013 increased to 4.75% from 4.25% used at December 31, 2012, in conjunction with increases in bond yields  over this period. The increase in discount rates has resulted in a corresponding decrease in liabilities for accounting purposes. The accrual  costs are determined by independent actuaries using the projected benefit method prorated on service and based on assumptions that reflect  management’s best estimates.  The assumed return on pension plan assets is based on expectations of long-term rates of return at the beginning of the fiscal year and reflects  a pension asset mix consistent with the pension plan’s investment policy. Returns on the respective portfolios are determined with reference to  published Canadian and US stock indices and long-term bond and treasury bill indices. The assumed rate of return on pension plan assets  reflects our long-term expectations. We believe that this assumption is reasonable because, with the Fund’s balanced investment approach, the higher volatility of equity investment returns is intended to be offset by the greater stability of fixed-income and short-term investment returns.  The net result, on a long-term basis, is a somewhat lower return than might be expected by investing in equities alone. In the short term, the plan  can experience aberrations in actual return.