Submission: Submission

Hydro One Submission

February 27, 2009

The Honourable Dwight Duncan
Minister of Finance
Attention: Comments on Report of the Expert Commissions on Pensions
5th Floor, Frost Building South
7 Queen's Park Crescent
Toronto, ON M7A 1Y7

Dear Minister Duncan:

Hydro One Inc. would like to express its appreciation to the Members and staff of the Expert Commission on Pensions on the completion and release of the Commission's Report. We are grateful for the opportunity to make this submission in response to the Report's recommendations. In preparing this response we have carefully considered the Terms of Reference of the Commission as well as the unique roles played by Hydro One as an employer and pension plan sponsor and as the owner and operator of a vital public enterprise — the provincial high voltage transmission grid and its related power distribution network.

As the sponsor of a defined benefit pension plan which has approximately 12,000 members, Hydro One shares the Commission's interest in promoting the security, viability and sustainability of the pension system in Ontario. Our work force is among the most highly skilled and specialized in the Province. We remain wholly committed to the prudent financial management and safeguarding of their pension assets.

We are also the stewards of a key economic resource and are responsible to manage the-business affairs of the company in a manner which achieves an appropriate balance of economic and efficient corporate management and the broader interests of the stakeholders as represented by the ownership interest of the provincial government. We have kept that balance in mind in the preparation of this submission.

We have identified three key areas of the Report which have the most significant potential impact on Hydro One:

1. Solvency Valuation Measures and Funding Issues

We do not agree with or support a number of the recommendations in the Report in regard to solvency funding, namely:

  1. The requirement that the impact of indexed benefits be included in the calculation of the solvency liability. We are in favour of the continuation of the current practice which is to exclude indexing from the solvency calculation.
  2. The proposal to eliminate asset or liability smoothing in the determination of solvency valuations.

    When forecast over a long time frame, we expect the plan will fluctuate between periods of solvency deficit and solvency surplus. The elimination of smoothing will unnecessarily contribute to an elevated level of volatility in contribution requirements. The smoothing of solvency deficits and surpluses is more consistent with the long term nature of the pension plan.

  3. The introduction of a solvency funding target of 105% of solvency liabilities.

    In our view this will contribute to greater volatility in the funding of solvency deficiencies. In that regard we believe that measures should be introduced which would permit solvency deficiencies to be funded over a longer time frame than the current five year period.

  4. The suggestion that expenses can only be paid from plan assets when the plan is in a surplus position.

    Expenses which are properly incurred in the operation and management of the Plan should be payable from assets regardless of whether the Plan is in surplus or deficit.

  5. The Report outlines a scenario in which Single Employer Pension Plans, such as Hydro One's, could convert to a Jointly Sponsored Pension Plan (OSPP) or a Jointly Governed Target Benefit Pension Plan (JGTBPP) and thereby avoid solvency funding. However, we believe that this assumption may be unrealistic:

    1. It would depend upon extensive negotiations with two large unions, the outcome of which would be less than certain.

    2. Questions arise over whether JSPP or JGTBPP rules could apply retroactively to all accrued benefits. Retroactive application would be required for a large, mature pension plan to see any material financial impact within the next ten to twenty years.

We cite the following in support of our position on these points:

  1. Hydro One Inc. is a regulated business enterprise with a predictable revenue stream. It is operated with the expectation of being a long term, going concern business with no foreseeable discontinuance of operations.

  2. Given the size and demographic profile of our Plan (approximately two-thirds of our members are retired and the fact that benefit payments are fully indexed) the solvency recommendations set out in the Report will dramatically increase the volatility of contributions that will be needed to fund potentially large solvency deficiencies.

    As an example, if Hydro One were required to file a funding valuation as at December 31, 2008 using the funding requirements described in the Report (with no grandfathering), Hydro One's contribution requirements for 2009 would increase by more than 100% of company payroll.

  3. Any contribution increase that would be required in order to fund potentially large solvency deficiencies would have to come from one of two sources:

    1. General revenues, which would decrease the level of annual dividend payment to the Province, or

    2. Rates charged to electricity consumers in the Province (subject to the regulatory approval process). Solvency funding, as proposed in the Report, could result in rates that need to reflect pension plan contributions that swing several hundred million dollars from one year to the next.

In the same way that solvency deficits can arise quickly in adverse market conditions, solvency surpluses can also arise quickly when market conditions change. The requirement to fund large solvency deficits over a short period of time could result in large solvency surpluses if economic conditions change. As surplus ownership is not tied to the party bearing the funding risk (see below), ratepayers could end up paying high electricity rates to over-fund the plan.

2. Grow-In Benefits

The Report proposes that grow-in benefits should be extended to employees that are involuntarily terminated, provided that a minimum combination of age and years of service (55 points) has been achieved. Hydro One is opposed to this measure. It would in effect grant enhanced grow-in rights to individual employees, even those who might be terminated for cause. It is our view that grow-in benefits were intended to protect older or longer service employees who are involuntarily terminated as a result of a material restructuring or reorganization. We also note that grow-in benefits exist in only two provinces.

3. Surplus Ownership

We find that the Report fails to add needed clarity to the issue of ownership of surplus for single employer pension plans. In our view, lack of certainty on this issue acts as a continuing dis-incentive to the creation of new defined benefit plans in Ontario, and thus serves as an obstacle to the goal of broadening the scope of pension coverage. Employers are clearly responsible for funding deficits in single employer plans. We believe that it would act as a greater catalyst to the formation of new defined benefits plans, increased funding and security under current defined benefit plans and promote fairness among the various stakeholders if the regulations were amended to provide that, absent express clear language to the contrary as set out in the plan documents, that surplus in the Plan is also owned by the employer.

We wish to thank you once again for allowing us this opportunity to submit our comments.

Yours truly,

Original signed by

Laura Formusa
President & CEO
Hydro One Inc.