IESO 2009 Annual Report - Independent Electricity System Operator

2009 Annual Report

Table of Contents 

Letter to the Minister of Energy and Infrastructure....................................1 

IESO Accomplishments.........................................................................2 

Management Report..............................................................................5 

Auditors’ Report....................................................................................6 

Statement of Operations, Comprehensive Loss and Accumulated 

Deficit..................................................................................................7 

Statement of Financial Position..............................................................8 

Statement of Cash Flows........................................................................9 

Notes to Financial Statements..............................................................10 

Appendix A - IESO Organizational Charts...............................................24 

Appendix B - Executive Compensation...................................................25

ieso 2009 ANNUAL REPORT 

Letter to the Minister of Energy and Infrastructure 

I am pleased to submit the 2009 Annual Report of the Independent Electricity System Operator (IESO). 

Throughout the year, the IESO reliably operated Ontario’s power system and efficiently managed the 

wholesale electricity market in the midst of sector-wide change and evolution. The IESO aggressively 

managed its finances in 2009, reducing costs by 6.8 per cent while simultaneously maintaining the high 

level of service that customers and stakeholders expect. We plan no increase in our fee for 2010. 

The introduction of the Green Energy and Green Economy Act, 2009 has had considerable impact on the 

company and its operations, and the IESO has revised its organizational structure to ensure it can deliver 

on its core responsibilities in the changing electricity sector. 

Engagement with customers and stakeholders remains a priority for the IESO. Survey results show 

the company continues to be viewed by customers and stakeholders as a competent, professional and 

technically superior organization that serves as a trusted advisor and operator. 

At the foundation of the IESO’s success lie its employees. As a direct result of their diligence and 

expertise, the IESO is well positioned to play an essential coordinating role in the evolution of reliable, 

sustainable and competitively priced electricity in Ontario. 

Paul Murphy 

President and Chief Executive Officer 

1

IESO 2009 ANNUAL REPORT 

IESO Accomplishments 

The shape of Ontario’s electricity sector is changing, as new players enter the sector, new types of 

generation gain traction, and new legislative frameworks facilitate the development of a more sustainable 

electricity system. 

In addition to fulfilling its primary mandate as market and system operator, the IESO is uniquely 

positioned to play an essential coordinating role in the evolution of reliable, sustainable and 

competitively priced electricity in Ontario. And while the reliable operation of Ontario’s electricity 

system remains the IESO’s main focus, some of the company’s processes and practices are changing as 

implementation of the Government of Ontario’s Green Energy and Green Economy Act, 2009 moves ahead. 

Within a very short timeframe, the Act has encouraged the development of new renewable generation 

resources. It is also driving the enhancement of Ontario’s transmission and distribution systems, and 

will lay the foundation for a smart grid in Ontario. The Act is a far-reaching piece of legislation with 

implications for most, if not all, departments in the IESO. Preparation for implementation of the Act, and 

the associated Feed-in Tariff (FIT) program required immediate attention in 2009, and will continue to 

impact IESO operations in years to come. 

The IESO supported the implementation of government policy through its input into the drafting 

of regulations for connection assessment timelines, the recovery of costs to support government 

conservation and demand management programs, and the design of the FIT contracts for renewable 

generation. IESO contributions to the FIT contract design ensured that generators have an incentive, 

through market price signals, to follow dispatch instructions. 

The IESO’s corporate performance scorecard represents four strategic perspectives that drive the 

performance of the company, while the underlying measures assess progress in delivering on its mission 

and key corporate priorities. 

Reliability 

From a reliability perspective, the IESO’s performance in operating the system and meeting industry 

expectations was solid. For example, the company maintained its perfect compliance record with the 

North American Electric Reliability Corporation (NERC) Disturbance Control Standard, which requires 

the IESO to restore the supply/demand balance within 15 minutes following an unexpected loss of 

generation. The IESO’s reliability performance was reinforced by full compliance with NERC’s high risk 

factor requirements in 2009. 

One major contributor to the IESO’s routinely high standards of performance is the ongoing training of 

market participants and IESO control room operators. Participants learn the importance of timely and 

effective communication through participation in system restoration workshops, post-incident analysis 

and other channels. IESO efforts to engage its interconnected neighbours in an integrated multi-regional 

restoration exercise paid off in 2009, when a highly complex outage scenario tested participants’ readiness 

to respond to a widespread disturbance in system operations. Internally, ongoing training of control 

2


room operators includes regular event reviews, opportunities to practice abnormal operating conditions 

through role-playing scenarios and participation in joint training workshops with market participants 

and representatives from neighbouring jurisdictions across North America. These efforts provide 

operators with the skills, expertise and tools to ensure the reliability of Ontario’s power system. 

Compliance with reliability standards is a requirement for operation in North America’s integrated 

electricity system. In November 2009, auditors from the Northeast Power Coordinating Council (NPCC) 

evaluated the IESO’s compliance with the six reliability standards and 13 requirements in the 2009 NERC 

Compliance Monitoring and Enforcement Program (CMEP) for critical infrastructure protection (CIP). 

After a thorough on-site audit and evaluation, the IESO was found compliant with all relevant CIP 

reliability standards and requirements, and praised for the provision of supporting material that was 

“very well presented and very well organized.” 

Another IESO priority is to actively contribute to relevant regulatory proceedings in Ontario and support 

the development of North American reliability standards. In 2009, the IESO provided meaningful 

contributions to a broad range of regulatory proceedings, both domestically and internationally. 

Customers and Stakeholders 

The IESO continues to be viewed by customers and stakeholders as a competent, professional 

and technically superior organization that serves as a trusted advisor and operator. The company 

is considered a leader in the electricity sector. Some 81 per cent of respondents agreed the IESO’s 

stakeholder engagement processes are effective in facilitating stakeholder input. Similarly, the annual 

Customer Satisfaction Survey revealed the IESO had achieved an average rating of 7.9 out of 10 for those 

questions pertaining to the value of products and services provided to market participants. 

In the area of process assurance, the IESO achieved superior performance levels in 2009. To ensure 

Ontario’s electricity system and market are being managed efficiently, the IESO commissions an 

independent review of the operation and application of the dispatch algorithm and related dispatch 

processes and procedures at least once every two years. After rigorous analysis and testing of 

documentation, procedures and management practices, the reviewers found the IESO compliant with all 

associated Market Rules. 

The IESO is equally committed to establishing and maintaining effective controls over its settlement 

processes. The organization recognizes the importance of having robust controls, processes, and 

procedures to ensure the accurate, complete, and timely delivery of settlement statements and invoices to 

market participants and to ensure the confidentiality of market participant information. A biennial audit 

conducted by external auditors in 2009 found the internal controls established for the IESO’s settlement 

operations are suitably designed and operating effectively. 

3


Effective Use of Funds 

The IESO has always demonstrated sound financial management practices, resulting in lower operating 

costs in each of the last six years. The IESO continued to demonstrate financial prudence in 2009 by 

managing costs to 6.8 per cent below approved targets while simultaneously maintaining the high 

level of service that customers and stakeholders expect. At the same time, the IESO introduced a new 

organizational structure that better positions the company to deliver on its core responsibilities in the 

changing electricity sector. In particular, this new structure will help the IESO respond to the demands 

associated with the implementation of the Green Energy and Green Economy Act, 2009. As part of the IESO’s 

most recent rate application, the IESO committed to no increase in its fees for 2010. 

People 

Considerable progress was made in 2009 with respect to the development of a sustainable and engaged 

workforce. The IESO made a strategic commitment to reduce the environmental impacts of its operations 

and, in 2009, applied for silver-level certification of the system control centre under the Leadership in 

Energy and Environmental Design (LEED) program. Some of the many initiatives undertaken by the 

IESO included completion of an energy audit; introduction of a recycling and composting program; 

conversion from chemical fertilizers to organic alternatives; installation of occupant-controlled lighting; 

installation of low-flow aerators and low-flush fixtures; and installation of a weather station for 

lawn irrigation. 

Like many of its counterparts in North America, the IESO is facing a number of challenges brought on, in 

part, by an aging workforce compounded by fierce competition for skilled employees. While the company 

has always been focused on recruiting, retention, development and succession planning, the Talent 

Management Framework introduced in 2008 brought a new rigour and focus to the process. Building 

on this approach, employee development remains a priority at the IESO and, in 2009, the majority of 

employees created personal learning and development plans. These plans will help ensure employees 

have the necessary learning products and activities to meet personal and organizational learning 

objectives, as well as the skills and capabilities to help the IESO uphold its statutory responsibilities in 

years to come. 

4


Management Report 

Management’s Responsibility for Financial Reporting 

The accompanying financial statements of the Independent Electricity System Operator are the 

responsibility of management and have been prepared in accordance with accounting principles 

generally accepted in Canada. The significant accounting policies followed by the Independent 

Electricity System Operator are described in the Summary of Significant Accounting Policies contained 

in Note 2 in the financial statements. The preparation of financial statements necessarily involves the 

use of estimates based on management’s judgement, particularly when transactions affecting the current 

accounting period cannot be finalized with certainty until future periods. The financial statements have 

been prepared within reasonable limits of materiality and in light of information available up to February 

11, 2010. 

Management maintained a system of internal controls designed to provide reasonable assurance 

that the assets were safeguarded and that reliable information was available on a timely basis. The 

system included formal policies and procedures and an organizational structure that provided for the 

appropriate delegation of authority and segregation of responsibilities. 

These financial statements have been examined by PricewaterhouseCoopers LLP, a firm of independent 

external auditors appointed by the Board of Directors. The external auditors’ responsibility is to express 

their opinion on whether the financial statements are fairly presented in accordance with generally 

accepted accounting principles in Canada. The Auditors’ Report, which follows, outlines the scope of 

their examination and their opinion. 

INDEPENDENT ELECTRICITY SYSTEM OPERATOR 

On behalf of management, 

Paul Murphy 

President and Chief Executive Officer 

Toronto, Canada 

March 8, 2010 

Ted Leonard 

Vice President, Finance 

Chief Financial Officer and Treasurer 


March 8, 2010 

5


Auditors’ Report 

February 11, 2010 

To the Board of Directors of the Independent Electricity System Operator (IESO): 

We have audited the statement of financial position of the IESO as at December 31, 2009 and the statement 

of operations, comprehensive loss and accumulated deficit and cash flows for the year then ended. These 

financial statements are the responsibility of the IESO’s management. Our responsibility is to express an 

opinion on these financial statements based on our audit. 

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those 

standards require that we plan and perform an audit to obtain reasonable assurance whether the financial 

statements are free of material misstatement. An audit includes examining, on a test basis, evidence 

supporting the amounts and disclosures in the financial statements. An audit also includes assessing 

the accounting principles used and significant estimates made by management, as well as evaluating the 

overall financial statement presentation. 

In our opinion, the financial statements present fairly, in all material respects, the financial position of the 

IESO as at December 31, 2009 and the results of its operations and its cash flows for the year then ended 

in accordance with Canadian generally accepted accounting principles. 

Chartered Accountants, Licensed Public Accountants 

Toronto, Ontario 

6


Statement of Operations, Comprehensive Loss and 

Accumulated Deficit 

For the year ended December 31 (in thousands of Canadian dollars) 2009 2008 

$ $ 

REVENUES 

System fees (Note 11) 119,988 132,477 

Other revenue (Note 2b) 1,511 1,906 

TOTAL REVENUES 121,499 134,383 

EXPENSES 

Labour 74,036 76,270 

Computer services, support and equipment 9,275 8,988 

Contract services and consultants 6,860 7,500 

Telecommunications 2,936 2,944 

Other costs 7,255 6,350 

Smart metering program costs (Note 11) 9,962 7,763 

Amortization 24,319 23,360 

TOTAL EXPENSES 134,643 133,175 

Income/(loss) before interest, financial charges and investment income (13,144) 1,208 

Interest and investment income/(loss) 2,304 (2,321) 

Interest expense and financing charges (3,074) (5,945) 

NET LOSS FOR THE YEAR (13,914) (7,058) 

OTHER COMPREHENSIVE INCOME - 29 

COMPREHENSIVE LOSS (13,914) (7,029) 

ACCUMULATED SURPLUS (before change in accounting policy) - 3,014 

Change in accounting policy (Note 3) - (1,596) 

ACCUMULATED SURPLUS/(DEFICIT) - BEGINNING OF YEAR (5,611) 1,418 

ACCUMULATED DEFICIT - END OF YEAR (Note 11) (19,525) (5,611) 

See accompanying notes to Financial Statements. 

7


Statement of Financial Position 

As at December 31 (in thousands of Canadian dollars) 2009 2008 

$ $ 

ASSETS 

Current assets 

Cash and cash equivalents 8,990 12,691 

Accounts receivable 13,500 13,775 

Prepaid expenses 3,693 3,958 

26,183 30,424 

Property and equipment (Note 4) 

In service 74,856 91,581 

Construction-in-progress 4,882 1,781 

79,738 93,362 

Other assets 

Intangible assets (Note 5) 6,685 6,774 

Long-term investments (Note 6) 18,204 14,972 

Prepaid pension cost (Note 7) 3,349 - 

28,238 21,746 

TOTAL ASSETS 134,159 145,532 

LIABILITIES 

Current liabilities 

Accounts payable and accrued liabilities (Note 8) 20,073 22,172 

Accrued interest on debt 66 1,030 

Short-term debt (Note 9) - 78,200 

Rebates to market participants (Note 11) 4,324 1,386 

24,463 102,788 

Long-term liabilities 

Long-term debt (Note 9) 78,200 - 

Accrued pension liability (Note 7) - 1,839 

Accrual for employee future benefits other than 

pensions (Note 7) 51,021 46,516 

129,221 48,355 

TOTAL LIABILITIES 153,684 151,143 

ACCUMULATED DEFICIT (Note 11) (19,525) (5,611) 

TOTAL LIABILITIES AND ACCUMULATED DEFICIT 134,159 145,532 

Commitments and contingencies (Note 13). 

See accompanying notes to financial statements. 

On behalf of the Board: 

8 

James Hinds 

Chair 


William Museler 

Director 

Toronto, Canada


Statement of Cash Flows 

For the year ended December 31 (in thousands of Canadian dollars) 2009 2008 

$ $ 

OPERATING ACTIVITIES 

Net loss for the year (13,914) (7,058) 

Adjustments for non-cash items: 

Amortization 24,319 23,360 

Pension cost 12,524 13,456 

Other employee future benefits cost 6,240 6,252 

Change in fair value of long-term investments held for trading (1,218) 3,127 

27,951 39,137 

Changes in non-cash balances related to operations: 

Change in accounts payable and accrued liabilities (1,760) (636) 

Change in rebates to market participants 2,938 1,386 

Change in accounts receivable 275 55 

Change in prepaid expenses 265 (831) 

1,718 (26) 

Other: 

Contribution to pension fund (17,712) (8,646) 

Payment of employee future benefits (1,735) (1,673) 

(19,447) (10,319) 

Cash provided by operating activities 10,222 28,792 

INVESTING ACTIVITIES 

Net purchase of long-term investments (2,014) (1,381) 

Investment in property and equipment (8,975) (13,645) 

Investment in intangible assets (2,934) (2,304) 

Cash used in investing activities (13,923) (17,330) 

NET CHANGE IN CASH AND CASH EQUIVALENTS (3,701) 11,462 

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 12,691 1,229 

CASH AND CASH EQUIVALENTS - END OF YEAR 8,990 12,691 

See accompanying notes to financial statements. 

Supplementary information: 

(in thousands of Canadian dollars) 

Interest paid 3,279 6,224 

9


Notes to Financial Statements 

1. NATURE OF OPERATIONS 

Independent Electricity System Operator (IESO) is a not-for-profit, non-taxable corporation, created by 

statute effective on April 1, 1999 pursuant to Part II of the Electricity Act, 1998. As set out in the Electricity 

Act, 1998, the IESO operates pursuant to a licence granted by the Ontario Energy Board (OEB). The 

objects of the IESO as contained in the Electricity Act, 1998 and amended, in the Electricity Restructuring 

Act, 2004 and Ontario Regulation 452/06, are as follows: 

• to exercise the powers and perform the duties assigned to the IESO under the Electricity 

Restructuring Act, 2004, the market rules and its licence; 

• to enter into agreements with transmitters giving the IESO the authority to direct the operation of 

their transmission systems; 

• to direct the operation and maintain the reliability of the IESO-controlled grid to promote the 

purposes of the Electricity Restructuring Act, 2004; 

• to participate in the development, by any standards authority, of standards and criteria relating to the 

reliability of the transmission systems; 

• to work with the responsible authorities outside Ontario to co-ordinate the IESO’s activities with their 

activities; 

• to collect and provide information to the Ontario Power Authority (OPA) and the public relating 

to the current and short-term electricity needs of Ontario and the adequacy and reliability of the 

integrated power system to meet those needs; 

• to operate the IESO-administered markets to promote the purposes of the Electricity Restructuring Act, 

2004; 

• to plan, manage and implement the smart metering initiative or any aspect of the initiative; 

• to oversee, administer and deliver the smart metering initiative or any aspect of the initiative; and 

• to establish and enforce standards and criteria relating to the reliability of transmission systems. 

The IESO was designated the Smart Metering Entity by Ontario Regulation 393/07 under the Electricity 

Act, 1998 on March 28, 2007. The regulation came into effect on July 26, 2007. 

The objects of the Smart Metering Entity, as contained in the Electricity Act, 1998, are as follows: 

• to plan and implement and, on an ongoing basis, oversee, administer and deliver any part of the 

smart metering initiative as required by regulation under this or any Act or directive made pursuant 

to sections 28.3 or 28.4 of the Ontario Energy Board Act, 1998, and, if so authorized, to have the 

exclusive authority to conduct these activities; 

• to collect and manage and to facilitate the collection and management of information and data and to 

store the information and data related to the metering of consumers’ consumption or use of electricity 

in Ontario, including data collected from distributors and, if so authorized, to have the exclusive 

authority to collect, manage and store the data; 

• to establish, to own or lease and to operate one or more databases to facilitate collecting, managing, 

storing and retrieving smart metering data; 

10


• to provide and promote non-discriminatory access, on appropriate terms and subject to any 

conditions in its licence relating to the protection of privacy, by distributors, retailers, the OPA and 

other persons, 

i. to the information and data referred to above, and 

ii. to the telecommunication system that permits the Smart Metering Entity to transfer 

data about the consumption or use of electricity to and from its databases, including 

access to its telecommunication equipment, systems and technology and associated 

equipment, systems and technologies 

• to own or to lease and to operate equipment, systems and technology, including telecommunication 

equipment, systems and technology that permit the Smart Metering Entity to transfer data about the 

consumption or use of electricity to and from its databases, including owning, leasing or operating 

such equipment, systems and technology and associated equipment, systems and technologies, 

directly or indirectly, including through one or more subsidiaries, if the Smart Metering Entity is a 

corporation; 

• to engage in such competitive procurement activities as are necessary to fulfill its objects or business 

activities; 

• to procure, as and when necessary, meters, metering equipment, systems and technology and any 

associated equipment, systems and technologies on behalf of distributors, as an agent or otherwise, 

directly or indirectly, including through one or more subsidiaries, if the Smart Metering Entity is a 

corporation; 

• to recover, through just and reasonable rates, the costs and an appropriate return approved by the 

Ontario Energy Board associated with the conduct of its activities; and 

• to undertake any other objects that are prescribed by associated regulation. 

The IESO is required to submit its proposed expenditures, revenue requirements, and fees for the coming 

year to the OEB for review. The submission may be made only with the approval or deemed approval of 

the Minister of Energy and Infrastructure (Minister). 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

a) Basis of financial statement preparation 

The accompanying financial statements have been prepared on a going concern basis and in accordance 

with accounting principles generally accepted in Canada. 

b) Revenue recognition 

System fees earned by the IESO are based on approved rates for each megawatt of electricity withdrawn 

from the IESO-controlled grid, including exports. System fees are recognized as revenue at the time the 

electricity is withdrawn. Rebates are recognized in the year in which the approved regulatory deferral 

account, before such rebates, exceeds regulated limits. 

These financial statements do not include the financial transactions of market participants within the 

IESO-administered markets. 

11


Other revenue represents amounts that accrue to the IESO relating to services the IESO performs and 

charges on a recovery basis, investment income on funds passing through market settlement accounts, as 

well as fines and penalties. Such revenue is recognized as it accrues. 

c) Financial instruments 

Classification 

• The IESO designated its investment portfolio as being “held for trading” and classified its cash 

and accounts receivable as “loans and receivables”. 

• Cash and cash equivalents comprise cash, term deposits and other short-term, highly-rated 

investments with original maturity dates of less than 90 days. 

• Accounts payable and debt have been classified as other financial liabilities. 

Recognition and measurement 

• Held for trading investments are recorded at fair value with gains and losses recorded in the 

statement of operations. Transactions are recorded based on trade dates. Transaction costs are 

charged to operations as incurred. 

• Loans and receivables are initially recorded at fair value and subsequently measured at 

amortized cost using the effective interest rate method. 

• The IESO’s financial liabilities, comprising accounts payable and long-term debt are carried at 

amortized cost. 

• Foreign currency exchange forward contracts are recorded at fair value. Where foreign currency 

exchange forward contracts meet the criteria for hedge accounting, changes in their values are 

reflected in accumulated surplus as other comprehensive income. Where such contracts do 

not meet the criteria for hedge accounting, changes in their value are recognized in the statement 

of operations. 

d) Construction-in-progress 

Construction-in-progress generally relates to the costs of physical facilities, hardware and software, and 

includes costs paid to vendors, internal and external labour, consultants and interest related to funds 

borrowed to finance the project. Costs relating to construction-in-progress are transferred to property 

and equipment in service or intangibles when the asset under construction is deemed to be ready for use. 

e) Property and equipment in service 

Property and equipment are capitalized at cost, which comprises materials, labour, external support, 

overhead, and interest applicable to capital activities. 

f) Amortization 

The capital cost of property and equipment and intangible assets in service is amortized on a straightline 

basis over their estimated service lives. 

12


The estimated service lives in years, from the date the assets were acquired, are: 

Class 

Estimated Average Service Life 

Facilities 38 

Meter Data Management/Repository 6 

Market Systems and Applications 5 to 9 

Infrastructure and Other Assets 4 to 7 

Intangible Assets 4 

Gains and losses on sales of property and equipment are charged to operations. Losses on premature 

retirements for property and equipment and intangible assets are charged to operations. 

The estimated service lives of property and equipment and intangible assets are subject to periodic 

review. The impacts of changes in the estimated lives are amortized on a prospective basis. The most 

recent review was completed in fiscal 2009. 

g) Intangible assets 

Intangible assets are capitalized at cost, which comprises materials, labour, external support, overhead, 

and interest applicable to capital activities. 

h) Pension and other post-employment benefits 

The IESO’s post-employment benefit programs include pension, group life insurance, health care, longterm 

disability and workers compensation benefits. 

The IESO accrues obligations under pension and other post-employment benefit (OPEB) plans and the 

related costs, net of plan assets. Pension and OPEB expenses and obligations are determined annually by 

independent actuaries using the projected benefit method and management’s best estimate of expected 

return on plan assets, salary escalation, retirement ages of employees, mortality and expected health-care 

costs. The discount rate used to value liabilities is based on market rates as at the measurement date of 

September 30. 

The expected return on plan assets is based on management’s long-term best estimate using a marketrelated 

value of plan assets. The market-related value of plan assets is determined using market-related 

values for equities (whereby fund assets are calculated using the smoothed value of assets over five years) 

and market values for fixed income securities, as at the measurement date of September 30. 

Pension and OPEB expenses are recorded during the year in which employees render services. Pension 

and OPEB expenses consist of current service costs, interest expense on liabilities, expected return on 

plan assets and the amortization of plan amendments on a straight-line basis over the expected average 

remaining service life of the employees covered by the plan. Actuarial gains/(losses) arise from, among 

other things, the difference between the actual rate of return on plan assets for a period and the expected 

long-term rate of return on plan assets for that period or from changes in actuarial assumptions used to 

determine the accrued benefit obligations. The excess, if any, of the cumulative unamortized net actuarial 

gain or loss over 10% of the greater of the projected benefit obligation and the market-related value of 

plan assets is also amortized over the expected average remaining service life of the employees covered 

by the plan. 

13


The expected average remaining service life of employees covered by the pension and OPEB plans is 11 

years (2008 - 11 years). 

i) Deferred costs 

Deferred costs represent start-up costs incurred by the IESO during 2006 for the smart metering 

initiative ($1,595,605). In 2009, the IESO adopted CICA Handbook Section 3064, Goodwill and 

Intangible Assets which requires these start-up costs to be written off (Note 3). 

j) Foreign currency exchange 

Transactions denominated in foreign currencies are translated into Canadian dollars at the rate of 

exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign 

currencies at the balance sheet date are translated in Canadian dollars at the rate prevailing at that date. 

Exchange gains and losses arising on settlement of foreign exchange transactions are reported in the 

statement of operations at the date at which the transactions are settled. 

k) Use of estimates 

The preparation of the financial statements in conformity with Canadian generally accepted accounting 

principles requires management to make estimates and assumptions that affect the reported amounts of 

revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities as at the 

date of the financial statements. Actual results could differ from those estimates. 

l) Comparative figures 

Certain 2008 comparative figures have been reclassified to conform to the 2009 financial statement 

presentation. 

3. CHANGE IN ACCOUNTING POLICIES 

The IESO retrospectively adopted Canadian Institute of Chartered Accountants’ (CICA) Handbook 

Section 3064, Goodwill and Intangible Assets in 2009. Upon adoption of the new accounting standard, 

the IESO reclassified computer applications software previously classified as property and equipment 

to intangible assets and expensed start up costs incurred in 2006 previously classified as deferred costs 

($1,595,605). The new standard requires the IESO to provide new disclosures which are included in Note 

5. 

The IESO adopted EIC 173 and revisions to CICA Handbook Section 3862. No material changes to the 

financial statements resulted from these adoptions. 

14


4. PROPERTY AND EQUIPMENT 

As at December 31 

(in thousands of Canadian dollars) 2009 2008 

Property and equipment in service 

Accumulated Net Book Accumulated Net Book 

Costs Amortization Value Costs Amortization Value 

$ $ $ $ $ $ 

Facilities 50,087 13,769 36,318 49,782 12,279 37,503 

Meter Data Management/ 

Repository 18,208 5,638 12,570 16,650 2,557 14,093 

Market systems and applications 207,861 189,620 18,241 206,771 178,029 28,742 

Infrastructure and other assets 75,178 67,451 7,727 73,550 62,307 11,243 

351,334 276,478 74,856 346,753 255,172 91,581 

Construction-in-progress 4,882 - 4,882 1,781 - 1,781 

356,216 276,478 79,738 348,534 255,172 93,362 

In 2009, the impact of adjustments to management’s estimates of remaining asset service lives was a 

decrease in amortization expense of $390,533 (2008 - $6,224,713). 

Interest capitalized to construction-in-progress during 2009 was $34,574. 

5. INTANGIBLE ASSETS 

As a result of adopting the new accounting standard Section 3064, Goodwill and Intangible Assets, in 

2009 (Note 3), the IESO reclassified $34,205,333 in computer applications software previously classified as 

property and equipment to intangible assets. 



Accumulated Net Book Accumulated Net Book 

Costs Amortization Value Costs Amortization Value 

$ $ $ $ $ $ 

Intangible assets 34,205 29,620 4,585 33,048 26,620 6,428 

Construction-in-progress 2,100 - 2,100 346 - 346 

36,305 29,620 6,685 33,394 26,620 6,774 

In 2009, the impact of adjustments to management’s estimates of remaining asset service lives was a 

decrease in amortization expense of $13,043 (2008 - $219,423). 

15


6. LONG-TERM INVESTMENTS 

Long-term investments in a balanced portfolio of pooled funds are valued by the pooled funds manager 

based on published price quotations and amount to $17,930,573 (2008 – $14,501,928). As at December 31, 

the market value allocation of these long-term investments was 60.9% equity securities and 39.1% debt 

securities (2008 – 56.6% and 43.4%respectively). 

Balanced portfolio of pooled funds 



$ $ 

Opening balance 14,502 16,052 

Purchase of investments 2,014 1,381 

Change in fair value 1,415 (2,931) 

Closing balance 17,931 14,502 

Long-term investments in non-bank sponsored ABCP are carried at an estimated fair value of $273,513 

(2008 - $469,840). Fair value is determined based on estimated discounted cash flows. 

In its administration of the IESO-Administered Markets, the IESO directs the investment of market funds 

in highly-rated short-term investments, including previous investments in asset-backed commercial 

paper (ABCP), throughout the settlement cycle. The IESO is entitled to receive the investment interest 

and investment gains, net of investment losses earned on funds passing through the real-time market 

settlement accounts. The IESO is not entitled to the principal on real-time market investments. 

The IESO is not obligated to reimburse the market accounts in respect of investment losses incurred 

on the investments. As a result of investment losses on existing ABCP investments purchased in 2007, 

the accumulated net investment income since 2007 has been negative. Accordingly, the IESO has not 

recognized as other revenue any investment income earned in the market settlement accounts in 2007, 

2008 or 2009. 

7. POST-EMPLOYMENT BENEFIT PLANS 

The IESO provides pension and other employee post-employment benefits, comprising group life 

insurance, long-term disability and group medical and dental plans, for the benefit of current and retired 

employees. 

Pension plans 

The IESO provides a contributory defined benefit, indexed, registered pension plan. In addition to the 

funded, registered, pension plan, the IESO provides certain non-registered defined benefit pensions 

through an unfunded, indexed, non-registered plan. 

16


Other employee future benefits 

The group life insurance, long-term disability and group medical and dental benefits are provided 

through unfunded, non-registered defined benefit plans. 

Summary of accrued benefit obligations and plan assets 

2009 2008 2009 2008 

Pension Pension Other Other 

(in thousands of Canadian dollars) Benefits Benefits Benefits Benefits 

$ $ $ $ 

Accrued benefit obligation 396,936 367,356 67,630 60,037 

Fair value of plan assets 269,791 264,870 - - 

Funded status (127,145) (102,486) (67,630) (60,037) 

Employer contribution after measurement 

date 2,264 2,154 467 449 

Unamortized past service costs 2,323 3,021 172 (8) 

Unamortized net actuarial loss 125,907 95,472 15,970 13,080 

Prepaid/(accrued) benefit cost recognized 

in the statement of financial position 

3,349 (1,839) (51,021) (46,516) 

Prepaid benefit cost in 2009 is shown net of a valuation allowance of $nil. 

Registered pension plan assets 

As at the measurement date of September 30, registered pension plan assets were split by fair value 

between the following categories: 

2009 2008 

Canadian equity securities 21.0% 21.0% 

Foreign equity securities 39.8% 33.0% 

Canadian debt securities 37.5% 45.5% 

Cash equivalents 0.7% 0.5% 

Forward foreign exchange contracts 1.0% 0.0% 

100.0% 100.0% 

Summary of principal assumptions used to calculate benefit obligations 



Benefits Benefits Benefits Benefits 

Discount rate at end of the period 5.8% 6.1% 5.8% 6.1% 

Rate of compensation increase 4.0% 4.0% 4.0% 4.0% 

17


The assumed hospital and drug cost increase is 9.0% per annum initially. The rate is assumed to begin 

decreasing gradually commencing on October 1, 2010 to a rate of 5.0% in 2018 and remain at that level 

thereafter. Dental costs are assumed to increase by 6.0% per annum initially and to begin decreasing 

commencing on October 1, 2010 to a rate of 4.5% in 2013 and remain at that level thereafter. 

Summary of benefit costs and plan contributions 



(in thousands of Canadian dollars) Benefits Benefits Benefits Benefits 

$ $ $ $ 

Benefit cost 12,524 13,456 6,240 6,252 

Employer contributions 17,603 8,448 1,717 1,575 

Plan participants’ contributions 2,749 2,579 - - 

Benefits paid 21,458 16,736 1,717 1,575 

The most recent actuarial valuation of the registered pension plan for funding purposes was at January 1, 

2008, and the date of the next required valuation is January 1, 2011. 

Summary of principal assumptions used to calculate benefit costs 



Benefits Benefits Benefits Benefits 

Discount rate at the beginning of the period 6.1% 5.4% 6.1% 5.4% 

Expected return on plan assets 6.75% 7.0% - - 

Rate of compensation increase 4.0% 3.5% 4.0% 3.5% 

Rate of indexing of pension benefits 2.5% 2.5% - - 

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 



$ $ 

Relating to property and equipment 2,994 4,274 

Relating to intangibles 242 265 

Relating to operations 16,837 17,633 

20,073 22,172 

18


9. DEBT 

Note payable to OEFC 

The note payable to Ontario Electricity Financial Corporation (OEFC) due May 1, 2009 was repaid on May 

1, 2009. 

In April 2009, the IESO executed a new note payable with OEFC in the amount of $78.2 million. The note 

payable to OEFC is unsecured, bears interest at a per annum rate equal to the yield earned on 90 day 

Province of Ontario treasury bills on the quarterly reset date plus 25 basis points and is repayable in full 

on May 1, 2011. Interest accrues daily and is payable in arrears quarterly in February, May, August and 

November of each year. The fair value of the note payable approximates the carrying value. 

Credit facility 

On April 30, 2009, the existing credit facility with a Canadian chartered bank expired and the IESO 

entered into a revised agreement with the same Canadian chartered bank. Under the terms of the new 

unsecured credit facility, the bank will make available to the IESO an amount up to $60 million. The 

credit facility expires on April 30, 2010. Advances under this facility are available in Canadian dollars 

by way of prime rate loan plus 75 basis points or the issuance of Bankers’ Acceptances at market rates 

plus a stamping fee of 175 basis points per annum. Unused portions of this credit facility are subject to 

a commitment fee of 45 basis points per annum. As at December 31, 2009, $nil was drawn on the credit 

facility. 

10. CAPITAL DISCLOSURES 

The IESO’s primary objectives are to maintain and enhance the reliability of Ontario’s power system, 

administer the wholesale electricity market, and serve the needs of our participants and stakeholders. 

In order to fulfill its mandate, the IESO receives fees from market participants (Note 1). The IESO has a 

limited ability to accumulate a surplus from these fees (Note 11). 

On March 31, 2009, the Ontario Energy Board (OEB) issued its order approving the IESO’s application 

fee of $1,000, the usage fee of $0.822/MWh and the IESO’s revenue requirements in the amount of $130.3 

million and capital expenditures in the amount of $22.9 million. 

The IESO submitted the proposed 2010 expenditures, revenue requirements, and fees to the OEB for 

review on November 2, 2009 after deemed approval by the Minister. The Minister provided formal 

approval of IESO’s proposed expenditures, revenue requirements and fees on November 16, 2009. To 

date, the OEB has not approved the IESO’s proposed usage fee for 2010. 

In addition, the IESO maintains a credit facility for short-term funding to support its various capital 

requirements. The IESO has customary covenants associated with the credit facility and is in compliance 

with all of these covenants. 

19


11. ACCUMULATED DEFICIT AND REBATES TO MARKET PARTICIPANTS 

In 2009, the IESO recognized $4,323,840 in rebates to market participants of system fees (2008 – 

$1,386,144), due to a net operating surplus in the year. The IESO’s approved regulatory deferral 

account balance is maintained at a maximum of $5 million. As at December 31, the components of the 

accumulated defict were as follows: 

Accumulated deficit 



$ $ 

Approved regulatory deferral account (a) 5,000 5,000 

Accumulated market penalties and fines (b) 1,372 1,832 

Smart metering entity - accumulated deficit(c) (25,897) (12,443) 

(19,525) (5,611) 

a) Approved regulatory deferral account 



$ $ 

Accumulated surplus - beginning of year 5,000 691 

Revenues (before rebates to market 

participants) 

125,770 135,692 

Rebates to market participants (4,324) (1,386) 

Expenses (99,849) (101,331) 

Amortization (21,239) (20,803) 

Net interest (358) (7,863) 

Accumulated surplus - end of year 5,000 5,000 

b) Accumulated market penalties and fines 



$ $ 

Accumulated surplus - beginning of year 1,832 2,476 

Revenue from penalties and fines 53 77 

Customer education expenses (513) (721) 

Accumulated surplus - end of year 1,372 1,832 

20


c) Smart metering entity - accumulated deficit 



Opening accumulated deficit (before change in 

accounting policy) 

$ $ 

- (124) 

Change in accounting policy - (1,596) 

Accumulated deficit - beginning of year (12,443) (1,720) 

Smart metering program costs (9,962) (7,763) 

Smart metering amortization (3,080) (2,557) 

Smart metering interest expense (412) (403) 

Accumulated deficit - end of year (25,897) (12,443) 

In his approval letter to proceed to the OEB for approval of the 2009 usage fee, the Minister noted the 

intention of the IESO to apply to the OEB separately for a smart meter service fee with respect to the costs 

the IESO has incurred on the smart metering initiative. At that time, the Minister requested, prior to the 

IESO filing an application to the OEB in respect of a smart meter service fee, the IESO provide him with 

a detailed implementation plan, and schedule for the integration of the local distribution companies, to 

enable a broader transition to time-of-use pricing for electricity consumers. The IESO has since provided a 

plan to the Minister and received approval to proceed with an application before the OEB. The permanent 

licence and fee applications to the OEB are in the course of preparation. It is the IESO’s intent, consistent 

with the Electricity Act, 1998 to recover all costs, including capital costs and/or accumulated deficits 

associated with the smart meter entity through a smart meter service fee once approved. 

The IESO’s smart meter service fees as of December 31, 2009 have not yet been established. 

12. FINANCIAL RISK MANAGEMENT 

The IESO is exposed to financial risks in the normal course of its business operations, including market 

risks resulting from volatilities in equity, debt, and foreign currency exchange markets, as well as credit 

risk and liquidity risk. The nature of the financial risks and the IESO’s strategy for managing these risks 

has not changed significantly from the prior year. 

a) Market Risk 

Market risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate 

to cause changes in market prices. The IESO is exposed to three types of market risk: currency risk, 

interest rate risk and equity risk. The IESO monitors its exposure to market risk fluctuations and may use 

financial instruments to manage these risks as it considers appropriate. The IESO does not use derivative 

instruments for trading or speculative purposes. 

21


i) Currency Risk 

The IESO conducts certain transactions in US dollars, primarily related to vendor 

payments, and maintains a US dollar denominated bank account. From time to time, the 

IESO uses currency forward purchase contracts to purchase foreign currencies for delivery 

at a specified date in the future at a fixed exchange rate. In addition, the IESO invests in 

pooled funds with US dollar and other foreign currency denominated investments. The 

reasonably possible currency risks associated with these exposures were not material as at 

December 31, 2009. 

ii) Interest Rate Risk 

The IESO is exposed to changes in interest rates primarily through its variable rate credit 

facility, cash equivalents, and long-term investments. Long-term investments include 

investments in a pooled Canadian bond fund. The reasonably possible interest rate risks 

associated with these exposures were not material as at December 31, 2009. 

iii) Equity Risk 

The IESO is exposed to changes in equity prices through its long-term investments. 

Long-term investments include investments in pooled equity funds. A 30% change in the 

value of equities in the IESO’s pooled fund investments as at December 31, 2009 would 

have resulted in a change for the year (before the impact of adjustments to the approved 

regulatory deferral account (Note 11)) of approximately $3.3 million (2008 - $2.5 million). 

Financial instruments at fair value 


(in thousands of Canadian dollars) Level 1 Level 2 Level 3 Total 

$ $ $ $ 

Cash and cash equivalents 8,990 - - 8,990 

Investment in pooled funds 17,931 - - 17,931 

non-bank ABCP - - 273 273 

26,921 - 273 27,194 

b) Credit Risk 

Credit risk refers to the risk that one party to a financial instrument may cause a financial loss for the 

other party by failing to meet its obligations under the terms of the financial instrument. The IESO 

is exposed directly to credit risk related to cash equivalents and accounts receivable and indirectly 

through its exposure to bond investments in pooled funds. Direct exposure to credit risk is limited to 

the carrying amount presented for these assets on the statement of financial position. The IESO manages 

credit risk associated with cash equivalents (which amounted to $9 million as at December 31, 2009) 

through approved management policy which limits investments to investment grade investments with 

counterparty-specific limits of no more than $20 million. Accounts receivable as at December 31, 2009 

included no material items past due and substantially all of the balance was collected as at January 

21, 2010. As at December 31, 2009, the Canadian bond fund in which the IESO invests comprised of 

investment grade securities rated BBB(low), or better. 

22


c) Liquidity Risk 

Liquidity risk refers to the risk that the IESO will encounter financial difficulty in meeting obligations 

associated with its financial liabilities. The IESO manages liquidity risk by forecasting cash flows to 

identify financing requirements. Cash flows from operations and investment income and maintaining 

appropriate credit facilities reduce liquidity risk. The IESO’s long-term investments in pooled funds are 

normally able to be redeemed within three business days however, the manager of the pooled funds has 

the authority to require a redemption in-kind rather than cash and has the ability to suspend redemptions 

if deemed necessary. 

13. COMMITMENTS AND CONTINGENCIES 

Operating commitments 

The obligations of the IESO with respect to non-cancellable operating leases over the next three years are 

as follows: 

As at December 31 (in thousands of Canadian dollars) 2009 

$ 

2010 2,146 

2011 1,590 

2012 66 

Contingencies 

The IESO is subject to various claims, legal actions, and investigations that arise in the normal course 

of business. While the final outcome of such matters cannot be predicted with certainty, management 

believes that the resolution of such claims, actions and investigations will not have a material impact on 

the IESO’s financial position or results of operations. 

23


Appendix A - IESO Organizational Charts 

James Hinds 

Chair 

Board of Directors 

Rudy Riedl 

Chair 

Human Resources & Governance Committee 

William Museler 

Chair 

Audit Committee 

Roberta Brown 

Director 

Paul Murphy 

Director 

President & Chief Executive Officer 

Board of Directors 

David Cassivi 

Director 

Helen Polatajko 

Director 

Angela Ferrante 

Director 

Howard Shearer 

Director 

Vacant 

Director 

John Wiersma 

Director 

Paul Murphy 

President & Chief Executive Officer 

Bruce Campbell 

Vice President 

Resource Integration 

Bill Limbrick 


Organizational Development 

Chief Information Officer 

Senior Management Team 

Ken Kozlik 


Operations 

Chief Operating Officer 

Terry Young 


Corporate Relations 

Ted Leonard 


Finance 

Chief Financial Officer & Treasurer 

Don Tench 

Director 

Market Assessment & Compliance 

Roy Stewart 

General Counsel & Corporate Secretary 

24


Appendix B - Executive Compensation 

Program Objectives 

The IESO compensation program is an integrated program for all management group staff, designed to 

attract, retain and motivate the calibre of executives required to support the achievement of our statutory 

mandate, business objectives and corporate vision. Accordingly, the compensation philosophy and 

programs have been built on the following objectives: 

• To focus executives on meeting the IESO’s business objectives 

• To attract qualified and talented staff needed to carry out the IESO’s mandate 

• To be able to retain valued staff 

• To have the flexibility to reward results and demonstrated competencies 

• To have compensation levels which are responsible and defensible to stakeholders and customers 

The philosophy underlying these objectives is that total compensation for senior management should be 

sufficient, but not overly sufficient, to attract and retain the skills and competencies necessary to carry out 

the IESO’s mandate. 

Program Governance 

The IESO Board of Directors (the Board) establishes the compensation objectives for these programs. They 

delegate the responsibility to thoroughly review the compensation objectives, policies and programs to 

the Human Resources and Governance Committee of the Board (HRGC) which makes recommendations 

concerning such to the full Board for approval. The Board is composed of ten independent, external 

Directors, appointed by the Minister of Energy & Infrastructure, with broad experience in both industry 

and public sector organizations, plus the Chief Executive Officer. In carrying out their mandate the 

Board members have access to Management’s perspectives as well as those of expert consultants in the 

compensation field (including experts at various times from Towers Watson, Mercer and Hay). These 

programs are reviewed at least annually including business needs, program objectives and design, 

industry compensation trends, internal compensation relativities, and external market relativities. 

In addition to the formal governance and oversight structure in place for compensation matters, the 

IESO annually discloses compensation levels for staff earning $100,000 or more as part of the public 

sector salary disclosure. For the IESO, a further level of public review and assurance is provided through 

a statutory required annual fee review. Compensation matters, including management compensation 

and market relativities, are addressed during the Ontario Energy Board review. A broad range of small 

and large consumers, assisted by their legal and professional advisors, are represented in these public 

proceedings. The IESO is also responsive to various requests by the Ministry of Energy & Infrastructure 

in relation to compensation enquiries such as the Agency Review Panel (ARP) in 2007 which conducted 

an exhaustive review of senior management compensation for the various agencies in the Ontario 

electricity sector. 

25


Market Comparisons 

The IESO regularly benchmarks compensation to similar positions in Canadian industry. The comparator 

employers are segmented into government and non-government categories. Market compensation data is 

gathered for each segment. A 50/50 weighting is applied to each of the government and non-government 

market results to reflect an overall comparator market for executive compensation at the IESO. When 

comparing the compensation of the IESO executives to this overall market, care is taken to assess 

positions of similar size, scope and complexity. 

The comparator employers include fifteen mid-size to smaller Canadian energy sector companies – seven 

government and eight non-government. The list of comparators is outlined below: 

Government Comparators 

Non-Government Comparators 

• Alberta Electric System Operator 

• Alliance Pipeline Ltd. 

• Atomic Energy of Canada Limited 

• ATCO Ltd. & Canadian Utilities Limited* 

• Enmax Corporation 

• Bruce Power 

• EPCOR* 

• Emera Inc. 

• New Brunswick Power Corporation 

• FortisAlberta 

• Newfoundland & Labrador Hydro Electric Corporation • Kinder Morgan Canada Inc. (Pipelines) 

• Saskatchewan Power Corporation 

• Spectra Energy Transmission* 

• TransAlta Corporation* 

*For these larger organizations a full level downward adjustment has been made for compensation comparison purposes (e.g. the IESO CEO level 

is compared to the SVP/EVP level for the external firm). 

While market data is gathered for various components of compensation, emphasis is placed on total 

rewards including the sum of fixed and variable compensation, benefits and pension. Thus, total rewards 

for IESO executives are benchmarked to the 50th percentile or midpoint of total rewards reported in the 

market data. 

This approach includes gathering market data on executive compensation, segmenting and weighting 

government and non-government market data, and focusing on comparisons at the total rewards 

level. The IESO undertook such a benchmarking study in 2008. The results indicated that the IESO’s 

total rewards for the Management Group overall were at the median of this market. In addition to the 

comparisons outlined above, the IESO Board also reviews available compensation data for other North 

American Independent System Operators to determine if broader North American trends should be 

considered. 

Program Description - Roles 

The IESO’s program includes fixed and variable compensation, core and flex benefit plans, and pension 

provisions. IESO Human Resources staff participates in and reviews results from various compensation 

surveys and monitors economic trends such as compensation trends, inflation and unemployment 

rates which impact on compensation, as well as monitoring internal compensation relativities. Based 

on this data and the IESO business priorities, Human Resources staff develops recommendations 

26


on compensation programs for all Management staff. External specialized compensation, benefit 

and pension consultants are utilized to ensure accurate, representative market compensation data is 

obtained, that current industry compensation trends are being utilized, as well as to provide insight 

and recommended adjustments to current programs. An expert, external consultant also reviews the 

recommendations as to the reasonableness and appropriateness of Management’s recommendations. 

Senior Management reviews the recommendations and provides advice to the CEO who determines 

whether the recommendations should be advanced to the HRGC and the IESO Board. The Chair of the 

HRGC reviews the recommendations and supporting data prior to submission to the HRGC, along with 

the input from an expert, external consultant. The Chair determines if additional external expertise is 

required. The analysis and conclusions from these external experts are provided to the HRGC members 

for their consideration. The HRGC reviews in detail the recommendations, the supporting data and 

advice from the expert, external consultant(s) and decides on the recommendations to go to the full 

Board. The Board reviews the submissions and makes a final determination on the recommendations. 

In 2009 the HRGC decided that an external consultant with management compensation expertise should 

be retained by the IESO Board to provide a review of the IESO’s Management Compensation Program. 

The analysis and conclusions from the selected external expert were provided to the HRGC members for 

their consideration. As a result some limitations were placed on the flex benefit plan and on the scope 

of the variable compensation program. In addition the IESO Board approved an in depth review of the 

program design and benchmarks be undertaken in 2010 for implementation in 2011. 

Program Description - Fixed Compensation 

The Board establishes broad salary ranges for each level of executive taking into account comparable 

market relativities. Within these bands individuals are assessed as developmental, mature or expert 

in their position relative to an established competency model. This model consists of behavioural 

competencies, such as customer focus, drive for results, teamwork, leadership, and strategic business 

sense. The assessment is based upon demonstrated competency. Each individual is then awarded a fixed 

compensation level within their band. 

Unfavourable economic conditions were at play in 2008 and 2009 as a result of significant downturns 

in the major global economies. The Government of Ontario responded to these conditions by calling 

for compensation restraint within the public sector. The IESO applied the spirit of the government’s 

guidelines by limiting 2009 salary increases for management staff earning $150,000 or more annually 

to 1.5% and overall limiting the full Management Group to an increase of 2.1%. This maximum of 1.5% 

impacted all Named Executives in the IESO disclosure. Furthermore, the IESO has generally restricted 

salary increases into 2010 for Management Group staff, including executives. 

Program Description - Variable Compensation 

In order to promote a results orientation in the senior team, the variable pay plan is a significant 

component of the total compensation of executives. The CEO’s target for variable compensation for 2009 

was at 65% of fixed compensation and the target for Vice Presidents was 50% of fixed compensation. The 

plan provides for awards above or below target amounts depending on the performance results achieved. 

The IESO Board annually establishes a robust set of performance measures which are evaluated each year 

and these results carry a 70% weight within each executive’s variable compensation award. The remaining 

27


30% results from the assessment of predetermined measures/targets established for each individual 

executive. To address retention, 50% of the earned variable compensation is deferred and paid out over 

a three year period, with accrued but unpaid amounts forfeited in the event of termination with cause or 

voluntary resignation. 

Program Description - Group Benefits 

The group benefit plan provides a core level of health & dental benefits, life insurance, disability coverage 

and vacation which can be adjusted by the executives through the flexible component of the plan. The 

flexible element provides executives the option of adjusting their benefits to meet their individual/ 

family needs including vacation above core amounts, levels of life insurance, health coverage and other 

components. 

Program Description - Pension Plan 

A defined benefit pension plan provides annual retirement income calculated as 2% of pensionable 

earnings (fixed compensation and one-half of variable compensation paid during the highest paid 36 

consecutive months of service) multiplied by years of service, to a maximum of thirty-five years. This 

formula provides a maximum benefit of 70% of highest paid, pre-retirement earnings. The Canadian 

Revenue Agency limits the amount of pension payable from a registered plan and the IESO has a 

supplemental employee retirement plan (SERP) to provide pension income above that payable from the 

registered plan. Pension plan funding is a combination of employer and employee contributions. 

Pension benefits from the plan are designed to provide a level income stream before and after age 65, 

when the IESO pension is reduced to reflect provisions from the Canada Pension Plan. The plan provides 

several benefit options including member’s life only or joint and survivor pensions. As well there are preretirement 

death provisions to provide benefits to surviving spouses or beneficiaries. 

Performance Measures and Impact on Compensation 

The IESO annually establishes corporate performance measures relating to its business priorities during 

the business planning process. These are approved, monitored and assessed by the IESO Board of 

Directors each year. Individual performance measures supporting one or more corporate performance 

measure are also developed for each executive. 

As outlined above the results achieved each year impact on each executive’s variable pay. The following 

chart highlights each of the business perspectives where measures are established and provides a brief 

description of the type of measurement which was approved by the IESO Board of Directors for 2009. 

28


Business Perspective 

Customer & Stakeholders (35% Weight) 

Reliability (35% Weight) 

Effective Use of Funds (15% Weight) 

People (15% Weight) 

Areas of Measurement 

• Customer-facing electricity market operations and processes 

• Support Smart Meter Implementation Plan 

• Smart Metering governance 

• Stakeholdering process effectiveness 

• Customer satisfaction 

• Process assurance 

• Products/services initiatives and improvements 

• Addressing reliability events 

• Ensuring Ontario’s annual System Unsupplied Energy is within acceptable 

limits 

• Compliance with NERC and NPCC reliability standards 

• Customer-facing reliability related operational measures 

• The IESO contributes to relevant Ontario regulatory proceedings and 

effectively manages Ontario and International reliability standard 

development processes 

• Budget performance: Total Spending and Capital Expenditures 

• Delivery of Key Capital Projects 

• Employee engagement 

• Employee development 

• Sustainable employment environment 

A five point rating scale ranging from unsatisfactory to outstanding is used to assess the results for both 

corporate and individual performance objectives and is used to calculate the associated variable pay 

amount. According to this scale corporate results may be rated from zero to two times the target variable 

amount while individual results can range from zero to 1.7 times the target amount (the table below 

outlines the ratings in detail). A payout factor is then determined and applied to the target variable pay 

amount for each executive. 

Type of Performance Corporate Rating Individual Rating 

Exceptional/outstanding 1.8 - 2.0 1.5 - 1.7 

Exceeding expectations 1.3 - 1.7 1.2 - 1.4 

Meeting expectations 0.8 - 1.2 0.8 - 1.1 

Approaching expectations 0.3 - 0.7 0.4 - 0.7 

Unsatisfactory/below expectations 0.0 0.0 

For the 2010 Management Compensation Program these ratings have been limited to a maximum of 1.5 

for both the corporate and individual ratings. 

Other Considerations 

Compensation decisions may at times be impacted by market factors – such as the recruitment of an 

executive with specialized skills/competencies or possessing unique talents within the industry. To this 

29


end individual incumbent arrangements are sometimes established relating to terms of employment 

and the possibility of future termination. The CEO has an employment agreement which outlines terms 

and conditions for a five and one-half year period of employment and includes termination provisions 

of 24 months for severance. Some Vice-Presidents also have provisions which provide 24 months or less 

of severance for termination without cause. In addition, two Vice Presidents (Mr. Campbell and Mr. 

Limbrick) have agreements to provide accelerated pension provisions such that, at age 65, they will each 

have 25 years of credited service. 

Executive Compensation and Pension Statements 

The first table below details the annual compensation for the year ended December 31, 2009 for the 

Executive Officers listed. The information provided in the Summary Compensation Table differs from 

the information published under the Public Sector Salary Disclosure Act (Ontario) for the indicated period 

due to the timing of payment of variable pay. Disclosures under the Public Sector Salary Disclosure Act are 

limited to amounts listed on T4 taxation forms for each year (i.e. includes variable pay paid out in 2009) 

whereas information in the summary compensation table is based on the year for which the variable pay 

was earned. Variable pay is determined early in the year following the year assessed. Under the IESO 

plan 50% of that amount is paid early in the year following the assessed year and 50% is deferred for 

payment in future years. 

The second table below outlines pension plan participation and benefits for each of the Executive Officers 

listed. Specifically detailed are 

• Total years of credited service in the pension plan 

• The increase in the compensatory value of the pension (due to increased service and pensionable 

earnings) during 2009 

• The increase in the non-compensatory value of pension (due to a decrease in the pension discount 

rate) during 2009 

• The accrued pension payable annually if the executive retired as of December 31, 2009 

• The estimated annual pension with service credits projected to age 65 using actual pensionable 

earnings as of December 31, 2009 

Various factors have an impact on pension calculations and, should interest or discount rates vary 

significantly form one year to the next, there will be volatility in year over year pension amounts 

reported – pensions are long-term investments. 

30


SUMMARY COMPENSATION TABLE 

Name and 

Position 

Paul Murphy 

President and CEO 

Ted Leonard 3 

VP Finance 

CFO and Treasurer 

Gary Sherkey 4 

VP Corp. Services 


Ken Kozlik 

VP Operations and 

COO 

Bill Limbrick 

VP Organization 

Development and 

CIO 


VP Resource 

Integration 

Year Salary Variable Pay 1 Other Annual 

Paid Deferred 

Compensation 2 

Total Cash 

Compensation 

Amounts Reported Under 

Public Sector Salary 

Disclosure 

2009 $331,397 $106,088 $106,088 $25,091 $568,664 $591,716 

2009 $185,000 $46,422 $22,865 $3,840 $258,127 $256,739 

2009 $128,704 $64,352 $0 $2,730 $195,786 $484,111 

2009 $228,375 $56,237 $56,237 $13,438 $354,287 $335,879 

2009 $269,705 $66,415 $66,415 $122 $402,657 $430,203 

2009 $275,063 $67,734 $67,734 $1,587 $412,118 $438,103 

¹ Reflects variable pay earned in 2009 and subsequently paid out to each executive in early 2010 

(50%) with deferred amounts (50%) to be paid over the subsequent 2 years with interest. 

² Includes residual payout from IESO’s flex benefit plan. 

3 

Ted Leonard promoted to CFO from Director, Finance on July 1, 2009. 

4 

Gary Sherkey left the IESO on June 22, 2009. The fixed and variable earnings reported have been 

pro-rated for the period of employment. The Public Sector Salary Disclosure includes payment made for 

the previous year’s variable pay and past deferrals of variable pay. 

31


PENSION BENEFITS TABLE 

Name and 

Position 

Paul Murphy 

President and CEO 

Ted Leonard 

VP Finance 


Gary Sherkey 2 

VP Corp. Services 


Ken Kozlik 

VP Operations and 

COO 

Bill Limbrick 

VP Organization 

Development and 

CIO 


VP Resource 

Integration 

Number of Years 

Credited Service 

Increased Pension Value During 2009 Annual Benefits Payable Upon Retirement 1 

Compensatory 

Amount During Year 

Non Compensatory 

Amount During Year 

At Year-End (2009) At Age 65 

32.3 $202,000 $543,000 $263,000 $285,000 

13.8 $71,000 $123,000 $51,000 $130,000 

7.3 ($36,000) $136,000 $45,000 $45,000 

31.1 $117,000 $322,000 $147,000 $166,000 

15.8 $187,000 $153,000 $105,000 $166,000 

19.8 $226,000 $193,000 $135,000 $171,000 

¹ Assumes no increase in pensionable earnings beyond those in effect as of year-end 2009. 

² Accrued benefits are as at June 22, 2009 for G. Sherkey. 

32

Independent Electricity System Operator 

655 Bay Street, Suite 410 

P.O. Box 1 

Toronto, ON M5G 2K4 

www.ieso.ca 

Phone: 905.403.6900 

Toll-free: 1.888.448.7777 

E-mail: customer.relations@ieso.ca

IESO 2009 Annual Report - Independent Electricity System Operator

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?