MANAGEMENT’S DISCUSSION AND ANALYSIS  Renewed Regulatory Framework Electricity Rates Transmission Rates HYDRO ONE ANNUAL REPORT 2013 20 In May 2010, we filed a cost-of-service application with the OEB for 2011 and 2012 transmission rates, seeking the approval of revenue  requirements of approximately $1,446 million for 2011 and $1,547 million for 2012. In December 2010, the OEB approved revenue  requirements of $1,346 million for 2011 and $1,658 million for 2012. The approved 2012 revenue requirement was higher than that  applied for, reflecting OEB direction for our company to adopt a cost capitalization policy based on modified IFRS. This adjustment was  Customers who are not eligible for the RPP and wholesale customers pay the market price for electricity, adjusted for the difference between  market prices and prices paid to generators by the Independent Electricity System Operator (IESO) under the  Electricity Act, 1998 . The IESO is  responsible for overseeing and operating the wholesale market, as well as ensuring the reliability of the integrated power system. The following  is a summary of the RPP for the reporting and comparative periods: Under the current market structure, low-volume and designated consumers pay electricity rates established through the Regulated Price Plan  (RPP) and wholesale electricity consumers pay a blend of regulated, contract and wholesale spot market prices. The OEB sets prices for RPP  customers based on both a two-tiered electricity pricing structure, with seasonal consumption thresholds, and a three-tiered electricity pricing  structure with Time of Use (TOU) thresholds. Substantially all of our RPP customers are now on TOU billing. We received an exemption from the  OEB, effective until December 31, 2014, from implementing mandatory TOU pricing for approximately 122,000 customers that are currently  out of reach of our smart meter telecommunications infrastructure. Unexpected shortfalls or overpayments associated with the RPP are temporarily  financed by the OPA. RPP prices are reviewed by the OEB every six months and may change based on an updated OEB forecast and any  accumulated differences between the amount that customers paid for electricity and the amount paid to generators in the previous period.  In late 2013, the OEB issued its  Report of the Board on Rate-Setting Parameters and Benchmarking under the Renewed Regulatory Framework  for Ontario’s Electricity Distributors.  This report sets out the OEB’s policies and approaches to the rate adjustment parameters for incentive rate  setting for electricity distributors and the benchmarking of electricity distributor total cost performance. It also includes the OEB’s determination on  rate adjustment parameter values for 2014 incentive rate setting, which were used to adjust Hydro One Networks’ 2014 distribution rates. In December 2010, the OEB initiated a coordinated consultation process for the development of a Renewed Regulatory Framework for Electricity. In October 2012, the OEB issued its report  A Renewed Regulatory Framework for Electricity Distributors: A Performance Based Approach.  The report identified three rate-setting models available to provide choices suitable for distributors having varying capital requirements: a fourth generation Incentive Regulation Mechanism (IRM); a custom rate setting; and an Annual Incentive Rate-  setting Index method. The report also provided information on performance measurement, continuous improvement and implementation of the new framework. RPP  Tier Threshold (kWh/month)  Tier Rates (cents/kWh) Effective Date  Residential  Non-Residential   Lower Tier  Upper Tier November 1, 2011  1,000  750  7.1  8.3 May 1, 2012  600  750  7.5  8.8 November 1, 2012  1,000  750  7.4  8.7 May 1, 2013  600  750  7.8  9.1 November 1, 2013  1,000  750  8.3  9.7 RPP TOU  Rates (cents/kWh) Effective Date  On Peak  Mid Peak Off Peak November 1, 2011  10.8  9.2  6.2 May 1, 2012  11.7  10.0  6.5 November 1, 2012  11.8  9.9  6.3 May 1, 2013  12.4  10.4  6.7 November 1, 2013  12.9  10.9  7.2