COMMON ASSET ALLOCATION

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Filed: September 12, 2006 EB-2005-0501 Exhibit C1 Tab 5 Schedule 3 Page 1 of 4

COMMON ASSET ALLOCATION

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This evidence will discuss the nature of Common Fixed Assets ("Shared Assets") and the

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method by which the costs of these assets are assigned to the Distribution and

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Transmission business units.

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Similar to the common services discussed in Exhibit C1, Tab 5, Schedule 1, Hydro One

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has been able to maximize efficiencies through the centralization of maintenance,

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management and purchase of shared assets at the corporate level. These assets include

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shared land and buildings, telecommunications equipment, computer equipment and

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applications software, transportation and work equipment (“T&WE”), and tools.

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Shared Assets and Facilities Costs

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Most fixed assets are directly assigned to the appropriate business unit. The remaining

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assets (4% of total assets) are considered shared assets, and are allocated to Transmission

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and Distribution based on the results of a Shared Assets Methodology Review. Table 1,

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below, summarizes the total gross fixed assets and identifies the proportion of allocated

18 shared assets. 19 20 Table 1 21

Summary of Gross Fixed Assets

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as at December 31, 2005 ($ Million)

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Transmission Distribution Total

Total Fixed Assets 9,510.2 5,492.9 15,003.1

Shared Assets (in Total) 230.9 366.7 597.6

Shared Asset % 38.6% 61.4% 100%

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Shared assets are sub-divided into two categories. Major Fixed Assets consist of land,

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buildings, applications software, and telecommunications equipment. Minor Fixed Assets

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Updated: February 23, 2007 EB-2005-0501 Exhibit C1 Tab 5 Schedule 3 Page 2 of 4

include office furniture, computer equipment, tools and T&WE. Table 2, below, shows

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the proportion of major and minor shared fixed assets, accumulated depreciation and net

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book value as of December 31, 2005.

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Table 2

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Details of Shared Net Fixed Assets

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as at December 31, 2005 ($ Million)

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Asset Gross Asset Value Accumulated

Depreciation

Net Book Value

Shared Major Assets 168.9 100.5 68.4

Shared Minor Assets 428.7 282.8 145.9

Total Shared Assets 597.6 383.3 214.3

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Allocation of Shared Assets in Service

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Due to the nature of Hydro One's business, Shared Assets are not directly attributable to

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either the Transmission or Distribution business units. In addition, from year to year, the

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use of these shared assets changes, based upon changes in the underlying transmission

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and distribution work programs. Consequently, the methodology by which shared assets

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are allocated to the Transmission and Distribution business units is subject to periodic

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review. The intent of such a review is to ensure that the assignment of assets is reflective

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of their true use and that the costs are apportioned appropriately among the business

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units.

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During 2004, the Company conducted a detailed study of all assets to determine their use

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by either the Transmission or Distribution business units. This internal study resulted in

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the identification of specific assets that could be directly assigned to particular business

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units, based on the use of the assets. For administrative ease, it was decided that assets

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with uses of greater than or equal to 95 per cent by one business unit were attributed

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wholly to that business unit.

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Updated: February 23, 2007 EB-2005-0501 Exhibit C1 Tab 5 Schedule 3 Page 3 of 4 1

In 2005, the Company commissioned a study by R. J. Rudden Associates ("Rudden") to

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determine a methodology to allocate the remaining shared assets. The methodology

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developed represents industry best practices, identifying appropriate cost drivers to

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reflect cost causality and benefits received.

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The Rudden study resulted in the allocation of shared assets based on the relative usage

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by Transmission and Distribution or by cost drivers, similar to those used for the

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common corporate functions and services.

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A summary of the allocation results appears in Table 3, below.

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Table 3

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Allocation of Shared Fixed Assets

14 as at December 31, 2005 ($ Million) 15 16 Asset Description Net Book Value Transmission % Distribution % Transmission NBV Allocation Distribution NBV Allocation Total Shared Assets 214.3 35.2% 64.8% 75.4 138.9 17

The higher percentage of shared assets allocated to Distribution is primarily due to the

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level of Transportation and Work Equipment (e.g. trucks, cars, off-road equipment)

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utilized in the Distribution business.

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The Rudden study is attached to this evidence as Attachment “A”. The Company

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proposes to accept the approach of the Rudden study as a reasonable representation of the

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use of shared assets among the business units. Hydro One's test year submissions in this

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Application reflect the methodology developed in the study.

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Filed: September 12, 2006 EB-2005-0501 Exhibit C1 Tab 5 Schedule 3 Page 4 of 4 Table 4 1

Hydro One Common Asset Allocation

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Total Gross Value

All Hydro One Transmission & Distribution Assets $15,003 million

Transmission (Total) $9,510 m Distribution (Total) $5,493 m

Transmission (Direct) $9,279 m Distribution (Direct) $5,126 m

Transmission (Common) $231 m Distribution (Common) $367 m

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Report to

Hydro One Networks Inc.

Regarding

Report on Common Assets Methodology 2006

May 31, 2006

Filed: September 12, 2006 EB-2005-0501 Exhibit C1-5-3 Attachment "A"

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Hydro One Common Corporate Functions and Service Review Report on Common Assets Methodology 2006

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A Unit of Enterprise Management Solutions - Black & Veatch Corporation

T

ABLE OF

C

ONTENTS

I. Summary... 1

A. Background and Purpose ... 1

Common Assets ... 1

Table 1. Types of Common Assets ... 2

C. Summary of Approach ... 2

II. Description of Each Asset Group... 3

A. Major Assets ... 3

B. Minor Fixed Assets ... 4

C. Transportation Work Equipment... 5

III. Summary of Results... 6

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I. S

UMMARY

A. Background and Purpose

R. J. Rudden Associates (“Rudden” or “we”) is pleased to submit this Report on our Common Assets Methodology 2006 to Hydro One Networks Inc. The purpose of this Report is to implement, using updated values, the methodology previously recommended by Rudden, adopted by Hydro One and approved by the Ontario Energy Board (“OEB”) to allocate the cost of Hydro One’s Common Assets between its Transmission business and Distribution business.

The methodology used in this Report is the same as approved by the OEB for Hydro One. The data used in the previous study has been updated with more recent information; as a result the portion of Common Assets allocated to Tx allocation is now 35% as compared to 38% in the previous report. The primary cause for this shift is the lower portion of Tx Common Costs compared to the prior study, reflecting the removal from Common Costs of certain F&RE costs which had a large Tx component.

In addition, Rudden recommended, Hydro One adopted, and the OEB approved a methodology for Hydro One to allocate the cost of Common Assets between its

Transmission business and Distribution business, and issued our Report on Shared Assets Methodology Review (June 15, 2005). In this Report, Rudden has applied the OEB-approved methodology, updated for asset values as of December 31, 2005 and information from our Report on Common Costs Methodology 2006 (May 31, 2006). Rudden’s objective in allocating the costs of the Common Assets was to ensure that the allocation was reasonable and was consistent with the allocation of the costs of the common corporate functions and services. In this Report, “cost” means Net Book Value as of December 31, 2005.

The reader is referred to the Report on Common Costs Methodology 2006 (May 31, 2006) for information on certain items discussed in this Report.

B. Common Assets

Hydro One provided Rudden with a list of the Common Assets, grouped by Asset Group and Component as at 12/31/2005. The Asset Groups and Components are shown in Table 1.

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TABLE 1 TYPES OF COMMON ASSETS

Asset Group Components

Major Assets

• Buildings

• Buildings- Telecommunications equipment • Telecommunications equipment

• Software

Minor Fixed Assets (“MFA”)

• Aircraft

• Computer Hardware • Office equipment

• Service equipment- Miscellaneous

• Service equipment- Measurement and Testing • Service equipment- Storage

• Tools Transportation Work

Equipment (“TWE”)

• Transportation Work Equipment

• Transportation Work Equipment- Power equipment

C. Summary of Approach

Our approach for allocating the costs of Common Assets was:

• For each asset, Rudden discussed with Hydro One personnel if it was possible to estimate its relative usage by Transmission and Distribution.

• If it was possible to estimate the relative usage, the cost of the asset was allocated based on the estimated usage. Rudden reviewed the usage estimates to ensure that similar assets were classified consistently. Assets estimated to be used at least 95% in either Transmission or Distribution, were 100% assigned to that business and removed from Common Assets.

• If it was not possible to estimate the relative usage of an asset, a cost driver was assigned based on discussions with Hydro One personnel, to ascertain what cost driver was most closely related to usage. The cost drivers used to allocate the Common Assets were selected from among, or derived from, the cost drivers used to allocate the costs of the common corporate functions and services.

The specific steps used for each Asset Group are discussed below. The results are summarized in Table 2.

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II. D

ESCRIPTION OF

E

ACH

A

SSET

G

ROUP

A. Major Assets Software

Approximately 18% of Software Common Assets was determined to be at least 95% Transmission or Distribution and removed from Common Assets. The balance of the costs were allocated based using cost drivers. The appropriate drivers were ascertained based on discussions with Hydro One personnel. For example:

• Software used to manage both Transmission and Distribution projects was allocated using the ProgramProjectCosts cost driver from the Report on Common Costs Methodology 2006 (May 31, 2006).

• Software used to manage real properties was allocated using the costs of Facilities & Real Estate (“F&RE”) developed in the Common Corporate Costs study using 2006 values; the 2007 values were not available because F&RE is not included in CCFS in 2007.

• PeopleSoft software was allocated by applying cost drivers (such as ProgramProjectCosts and Non-energy Rev_Assets Blend) to the estimated weight for each component of the software (such as the Project Costing and Financial Reporting components).

Buildings and Buildings- Telecommunications equipment

Approximately 51% of the Buildings and Buildings- Telecommunications Common Assets were determined to be at least 95% Transmission or Distribution and removed from Common Assets.

The balance of the costs were allocated using one of the following methods:

• Specific estimation for a building. For example, Sudbury Service Centre has estimated usage of Transmission-20% / Distribution-80%.

• Estimation based on type of usage. For example, Fleet was determined to be Transmission-25% / Distribution-75%, therefore the cost for buildings used for Fleet were allocated using this percentage.

• Cost drivers based on usage. The appropriate drivers were ascertained based on discussions with Hydro One personnel. For example:

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o Buildings used to manage both Transmission and Distribution projects were allocated using the ProgramProjectCosts cost driver developed in the Common Corporate Costs study.

o Buildings used for training were allocated using the FTEs (full-time equivalent employees) cost driver.

Application

The analysis described above was performed using Net Book Values (NBV) as of December 31, 2005. Mixed Use Software, with NBV of $33 million, was 54% Transmission. Mixed Use Buildings / Telecom, with NBV of $35 million, was 51% Transmission. Overall, 52% of Mixed Use Major Assets were Transmission and 48% were Distribution. The results are summarized in Table 2.

B. Minor Fixed Assets

Each component of Minor Fixed Assets Common Assets includes many individual items. Rudden reviewed the lists of individual items and determined the following allocations to be appropriate:

Aircraft – Helicopter components. Estimated usage was determined to be Transmission-25% / Distribution-75%.

Computer Hardware – Includes Laptops, Desktops, Network equipment, Printers, etc. Allocated using cost driver based on number of Workstations (50% weight) and number of FTEs (50% weight).

Office equipment – Includes office furniture and other office equipment. Allocated using cost FTEs.

Service equipment - Miscellaneous – Includes miscellaneous equipment. Allocated in proportion to Total CCFS costs.

Service equipment- Measurement and Testing – Includes Meters, Splicers etc. used for Distribution. Directly assigned to Distribution.

Service equipment- Storage – Includes Waste Storage and Other Storage

equipment. Allocated Transmission-25% / Distribution-75% based on estimated usage.

Tools – Includes Rental tools. Allocated Transmission-80% / Distribution-20% based on estimated usage.

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The results are summarized in Table 2. C. Transportation Work Equipment

Approximately 88% of Transportation Work Equipment Common Assets were allocated using the cost driver Fleet, which was determined to be Transmission-25% / Distribution-75%. The balance were directly assigned to Transmission or Distribution based on usage. The results are summarized in Table 2.

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III. S

UMMARY OF

R

ESULTS

The results of the Common Assets allocation are summarized in Table 2. TABLE 2 SUMMARY OF COMMON ASSETS ALLOCATION

(DECEMBER 31, 2005 NET BOOK VALUE)

(C$000) Total Trans-mission Distrib-ution Trans-mission Distrib-ution Major Assets Software $33,486 $17,958 $15,528 54% 46% Building / Telecom 34,907 17,712 17,195 51% 49% Total 68,393 35,670 32,723 52% 48%

Minor Fixed Assets

Aircraft $ 4,100 $ 1,025 $ 3,075 25% 75% Computer Hardware 19,900 9,654 10,246 49% 51% Office Equipment 2,286 1,107 1,179 48% 52% Service- Misc. 2,168 811 1,357 37% 63% Service- Measure/Test 1,871 1,871 100% Service- Storage 4,590 1,148 3,442 25% 75% Tools 1,163 930 233 80% 20% Total 36,078 14,675 21,403 41% 59%

Transportation Work Equipment

Total $109,796 $ 25,070 $ 84,726 23% 77%