1.0 Introduction

Hydro Ottawa came into being on November 1, 2000 as a result of the Ontario government’s restructuring of the electricity industry. It is incorporated under the Ontario Business Act and is governed by a Board of Directors (“Board”) which is appointed by its sole shareholder, the City of Ottawa, as detailed in the Shareholder Declaration.

The Hydro Ottawa corporate structure is set out in the chart below.

The Board subsequently established an Advisory Board and various Committees to act as sources of expertise and business advice. The Hydro Ottawa Advisory Board and various Committees are set out in the chart below.

From November 2000 to October 2004, there were five members on the Board of Directors, two of which were the President and Chief Executive Officer of Hydro Ottawa and the Mayor of the City of Ottawa. There was a range of four to six members on the Advisory Board from 2002 to 2004.

Hydro Ottawa Holding Inc. Board of Directors		Hydro Ottawa Holding Inc. Advisory Board
Hydro Ottawa Holding Inc. Board of Directors		Hydro Ottawa Holding Inc. Advisory Board

	Audit Committee
	Audit Committee

	Compensation Committee
	Compensation Committee

	Governance Committee
	Governance Committee

	Nominating Committee
	Nominating Committee

	Local Distribution Company Committee
	Local Distribution Company Committee

	Energy & Telecommunications Committee
	Energy & Telecommunications Committee

At the May 18, 2004 Corporate Services and Economic Development Committee of Council, the City of Ottawa formally became aware that Hydro Ottawa had awarded a number of service contracts to various members of the Board of Directors, Advisory Board or persons or companies affiliated with these Board members.

At its meeting on October 27, 2004, Council passed the following motion requesting that the Auditor General investigate service contracts that were awarded to members of the Board of Directors of Hydro Ottawa.

WHEREAS the Council of the City of Ottawa is morally obligated to demonstrate transparency and accountability in all of its operations, including Hydro Ottawa;

WHEREAS some outstanding questions remain regarding services contracts to members of the board of directors;

THEREFORE BE IT RESOLVED that the City of Ottawa’s Auditor General investigate the matter and report back to Council as soon as possible.

Council requested that the Office of the Auditor General (“OAG”) review these contracts. The Auditor General subsequently agreed to undertake this project.

Based on an examination of Hydro Ottawa documentation and information, the OAG identified and examined transactions between Hydro Ottawa and the following Board members or Advisory Board members, as well as transactions with contractors that were identified as being parties to which these Board members had an affiliation.

· Mr. Glen Scott Shortliffe,

· Dr. Adam Chowaniec,

· Mr. John A. Gorman, and

· Mr. Richard Raymond.

Based on information reviewed for the period of the audit there were no other Board members that had contracts awarded to them.

1.1 Audit Objective

The objective of this review was to examine, for specific contracts, payments made to any member of the Board, Committee of the Board, Advisory Board, and any affiliated person or company, to determine:

1. If these contracts were awarded in compliance with Hydro Ottawa’s procurement policies and procedures,

2. If the payments under these contracts were made in compliance with Hydro Ottawa’s payment policies and procedures,

3. If the level of any payments made under these contracts was reasonable in relation to the services received by Hydro Ottawa, and

4. If the awarding of these contracts to Board members was consistent with best governance practices.

1.2 Audit Scope and Approach of this Review

The scope of review included contracts awarded and payments made by Hydro Ottawa and its subsidiaries, to any individual Board member, and/or affiliated person or company, during the period from November 2000 to October 2004.

The audit approach included the following:

· detailed reviews of the identified contracts, invoices, payments, and file documentation provided by the Hydro Ottawa companies;

· review of Hydro Ottawa meeting minutes to the extent necessary to determine attendance and disclosures;

· reviews of procurement and payment policies and practices in place at the Hydro Ottawa companies;

· interviews with management of Hydro Ottawa companies;

· interviews with former Board members or affiliated parties providing consulting services, including a review of their files;

· review and comparison of governance practices to documentation relating to best governance practices; and

· ongoing communication with Hydro Ottawa management regarding issues identified for their validation and/or attention.

Hydro Ottawa staff were cooperative in providing information and explanations to OAG auditors during the audit.

This report is not intended for general circulation or publication. It is not intended to be reproduced or used for any purpose, other than that outlined above, without our written permission in each specific instance. We do not assume any responsibility or liability for losses occasioned to any party as a result of the circulation, publication, reproduction or use of this report contrary to the provisions of this paragraph.

This report is based on our review of the documents available to date as described above. In the event that further documents or other information becomes available that could impact our findings, we reserve the right to review such records and reconsider and amend the findings set out in this report.

2.0 Management Response

Hydro Ottawa welcomes the opportunity to provide a management response to the Auditor General’s report on the audit of contracts awarded to former members of the Board of Hydro Ottawa.

We appreciate the Auditor General’s acknowledgement of the corporation’s recently-adopted Conflict of Interest and Conduct Guidelines for Directors. Under that policy, members of the Board or their spouses are now prevented from entering into contractual arrangements with the corporation for the provision of services. Conflict of interest provisions, included in the guidelines, also require full and complete disclosure of relevant information to the Board of Directors. As the Auditor General has indicated in his report, under this new guideline, contracts with Board members or their spouses would simply not be permitted.

We also consider it of the utmost importance that, in respect of the contracts subject to audit, the Auditor General’s findings are consistent with the corporation’s view that payments for the contracted services were reasonable and value for money was obtained.

Hydro Ottawa prides itself on being a well-managed and progressive company providing reliable, cost-effective service to our customers. We are still a young organization that has recently increased our focus on governance. As best practices in the public and private sectors evolve, so too, will the company’s

policies. We will work with our auditors and our shareholder to ensure that we have adopted the best governance practices in our industry.

With the leadership of our Board of Directors and our shareholder, Hydro Ottawa has already made significant progress in improving our management and governance practices. While we are proud of our many important achievements over the past four years, we recognize both the need and the opportunity for ongoing improvements.

Already, with the help of experts from organizations such as the Conference Board of Canada, the corporation’s governance framework has been reviewed and initiatives are being implemented to reflect best practices in this area.

We are particularly pleased to note that all of Hydro Ottawa’s implemented and planned initiatives concerning governance and management practices are in line with both the spirit and the intent of the Auditor General’s recommendations. In fact, as noted below, Hydro Ottawa has already put into place many of the specific measures recommended in the Auditor General’s report, with others soon to follow.

We see this congruence between what the corporation has set in motion and what the Auditor General considers appropriate as an important sign of Hydro Ottawa’s commitment to good governance.

The Auditor General’s recommendations will further assist Hydro Ottawa in its continuing efforts to improve the corporation’s governance and management practices.

That being said, the report points out areas of deficiency regarding compliance to policy and certain administrative activities such as record keeping and documentation. As our responses to the detailed recommendations indicate, we intend to act quickly to correct those deficiencies.

Providing reliable and cost-effective service to our customers is a key priority of Hydro Ottawa. The corporation recognizes that good governance and sound management practices are essential to the achievement of these goals. Moreover, Hydro Ottawa is aware that good governance and sound management

are of even more significance for a private corporation with a very public mandate. Our shareholders are the residents of Ottawa and we owe them the highest standards of behavior and accountability. We are committed to meeting these standards.

3.0 Summary of Findings and Recommendations

In terms of the contracts between Hydro Ottawa and its former Board members and identified affiliated parties, the following contractual amounts, by Board member, were the subject of review by the OAG.

SUMMARY OF CONTRACTS ENTERED INTO WITH BOARD MEMBERS AND/OR AFFILIATED PARTIES OR COMPANIES

For the Period November 2000 to October 2004

Board Member and/or Advisory Board Member

Total Contractual Amount

Mr. Glen Scott Shortliffe

$459,782

Dr. Adam Chowaniec

(1) 471,899

Mr. John A. Gorman

310,886

Mr. Richard Raymond

14,518

Total

$1,257,085

Note:

(1) Contract value estimated for the future years of the contracts regarding Gridway Computing and Tundra Semiconductor Corp.

Findings with respect to each of the above noted amounts are summarized in Sections 3.1 to 3.4 below, and further detail and discussion by Board member is set out in Sections 4 to 7 of this report.

3.1 Mr. Glen Scott Shortliffe & Identified Affiliated Parties

During the period April 2001 to October 2004, Hydro Ottawa entered into four contracts with companies affiliated with Mr. Shortliffe and paid a total of $459,782 to these companies as consulting fees related to Mr. Shortliffe. In addition to the consulting fees, Hydro Ottawa paid directly to Mr. Shortliffe Board stipend and meeting fees, totalling $92,523, for the period from March 2001 to October 2004.

3.1.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

These contracts, for consulting services, were awarded on a sole source basis by Mr. Ron Stewart, former President and Chief Executive Officer. The Hydro Ottawa procurement policy provides for sole source acquisitions of goods or services based on signing authority limits and for specific reasons provided that there is a written explanation with supporting documentation for the sole source acquisition. Prior to January 2004, there were no written explanations identified with the reason for sole sourcing. The minutes of the January 2004 Governance Committee and Board meetings reflected descriptions by Mr. Stewart that the contracts were approved for these services because they were required, unique and at the most-favoured client rates. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

The contracts were based on a per diem and did not include an upset limit or a detailed statement of work. Although the Hydro Ottawa procurement policy did not specify these requirements, the procurement policy should be reviewed, as this would not be considered best practice.

Consulting Services vs Chair Duties

Notwithstanding the description provided by Mr. Stewart to the Governance Committee and Board, as noted above, Mr. Stewart advised the OAG that the Mayor of the City of Ottawa had an understanding with Mr. Shortliffe that he be compensated for his time. Mr. Stewart indicated that he confirmed this arrangement with one of the staff members in the Mayor’s Office. In addition, Mr. Stewart stated that he was under the impression, based on discussions with Mr. Shortliffe, that Mr. Shortliffe was supposed to be almost a full time Chairman. When asked by the OAG if a full time Chair was warranted, Mr. Stewart indicated he did not think a full time chair was necessarily warranted.

Mr. Stewart indicated that he sought the advice of Hydro Ottawa legal counsel to determine whether this arrangement was legally appropriate. Mr. Stewart stated that Hydro Ottawa counsel advised that the arrangement was legal and counsel then prepared the contract.

The Mayor advised the OAG that he had suggested to Mr. Stewart that Hydro Ottawa enter into a contract with Mr. Shortliffe. The Mayor indicated he had met with Mr. Stewart to discuss the duties expected of Mr. Shortliffe prior to Hydro Ottawa entering into the contract for Mr. Shortliffe’s services. The Mayor indicated that he understood the contract was for Mr. Shortliffe to perform specific tasks related to the issue of acquiring the rural Hydro One customers within the limits of the new City of Ottawa. The Mayor indicated that he understood the contract would be for a short period of time. The Mayor also indicated that the general terms of the contract were discussed with Mr. Stewart.

Mr. Shortliffe indicated that the stipend and meeting fees he received were for attendance at board and committee meetings and were for those purposes only. Mr. Shortliffe indicated that he was to be compensated for his time beyond chairing board meetings and attending committee meetings. In our opinion, consulting contracts with Mr. Shortliffe were for Chair duties beyond chairing and attending board or committee meetings.

In our opinion, Mr. Stewart, as President and Chief Executive Officer and as a member of the Board of Hydro Ottawa had a number of options available to him in proceeding with the contracts. He could have:

· advised the Board of Hydro Ottawa of the contracts and their dollar value;

· requested that the Board of Hydro Ottawa seek the approval of City of Ottawa Council to enter into the contracts;

· disclosed the contracts and their dollar value in the financial statements;

· not entered into the contracts if he felt the services were not warranted.

The Shareholder Declaration between the City of Ottawa and Hydro Ottawa sets the annual stipend (honorarium) for the Chair at $12,000 (prior to August 25, 2004) plus an additional meeting fee of $400 for each meeting attended. The declaration further specifies that remuneration for Board members is to be as determined by the City of Ottawa.

The payments made to companies affiliated with Mr. Shortliffe for consulting services increased his compensation for Chair duties beyond the level approved by Council. The total payment made over the terms of the contracts was $459,782 which included $4,046 for reimbursement of Chair expenses. Therefore, over the period of the contracts, Mr. Shortliffe was paid $455,736 more for Chair duties than was approved by Council.

It is our opinion that the invoices and payments relating to the contracts circumvented the rules established in the Shareholder Declaration. This type of arrangement, not approved by the City of Ottawa Council, is not in compliance with the requirements of the Shareholder Declaration and overrides any fiscal controls.

In addition, this arrangement was in contravention of the terms of the contracts as the contracts specifically stated that payments were to be for consulting services and not for Chair duties.

3.1.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

Payments were in accordance with the payment policies, however, there was a lack of supporting documentation in a number of instances.

In addition, due to the billings being based on a seven and a half hour day rather than an eight hour day as per the contract, there was an overpayment to Mr. Shortliffe of $2,789 from four invoices.

3.1.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

There was a lack of working files and documentation at Hydro Ottawa to support the work invoiced and paid in relation to Mr. Shortliffe. Hydro Ottawa was unable to provide further detail.

Due to the lack of supporting information from Hydro Ottawa, as previously noted, we met with Mr. Shortliffe and he confirmed that he was paid for performing Chair duties.

3.1.4 Disclosures of Transactions

Contracts awarded to Mr. Shortliffe and affiliated parties were disclosed in the Board minutes for the years 2001, 2002 and 2004, but the amount of the expenditure for the services was not disclosed. The contracts provided to Mr. Shortliffe for 2003 were not disclosed in 2003. These were only disclosed at the Governance Committee meeting in 2004 and not at the Board meeting as required by the Board policy.

In terms of Hydro Ottawa financial statements, the contracts for Mr. Shortliffe were not disclosed in the notes to the financial statements until the year 2003. The 2003 notes included a comparative amount for 2002, however the 2002 comparative amount was not correct.

The contract amounts for 2001 and 2002 were not disclosed in the 2001 or 2002 financial statement notes.

3.2 Dr. Adam Chowaniec & Identified Affiliated Parties

During the period January 2002 to October 2004, Hydro Ottawa entered into a number of contracts with persons or companies affiliated with Dr. Adam Chowaniec. The estimated value of contracts to obtain goods or services from Dr. Adam Chowaniec or companies affiliated with Dr. Adam Chowaniec was $427,831. In addition, the estimated value of contracts for Hydro Ottawa to provide services to companies affiliated with Dr. Adam Chowaniec was $44,068. The total value of all contracts between Hydro Ottawa and Dr. Adam Chowaniec and affiliated parties was $471,899. In addition to the these contracts, Hydro Ottawa paid Board stipend and meeting fees, totalling $39,173, directly to Dr. Adam Chowaniec for the period January 2002 to October 2004.

3.2.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

Compliance with Hydro Ottawa procurement policies and procedures is summarized by company.

Precept Incorporated

Dr. Claudia Chowaniec is the spouse of Dr. Adam Chowaniec and she is the President of Precept Incorporated. Dr. Claudia Chowaniec provided services through Precept Incorporated to Hydro Ottawa to support development and implementation of a communications strategy, to conduct an environmental scan, and to plan, facilitate and support strategic planning workshops and strategy sessions.

The work was awarded by Mr. Ed Lane, former Chief Financial Officer, Mr. Stewart, and Ms. Helen Reeves, former Vice-President of Communications.

We were advised that Hydro Ottawa initially obtained the services of Precept Inc. in 2001 (prior to Dr. Claudia Chowaniec’s husband, Dr. Adam Chowaniec, being on the Board of Hydro Ottawa) through a review of proposals and then sole-sourced the services for 2002 to 2004 without written justification for doing so as required by Hydro Ottawa policy.

The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

Amiga 2 Corporation

Dr. Adam Chowaniec is the President of Amiga 2 Corporation, and he provided advisory services regarding telecommunication services to Telecom Ottawa. The contract was awarded by Mr. Stewart on a sole source basis.

The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

In addition, the contracts included a daily per diem rate but did not include an upset limit or detailed statement of work, which would not be considered best practice.

GridWay Computing

Dr. Adam Chowaniec is a Director on the Board of this company. GridWay Computing provides back up and storage of computer files. The contract was awarded on a sole source basis by Mr. Dave Dobbin, the Chief Operating Officer of Telecom Ottawa.

The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Telecom Ottawa policy.

Given that there is a competitive market in this area of services, Telecom Ottawa could have undertaken a formal competitive proposal process.

BelAir Networks

Dr. Adam Chowaniec is a Director on the Board of this company. BelAir Networks provides equipment for wireless internet access. The contract was awarded on a sole source basis by Telecom Ottawa.

The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Telecom Ottawa policy.

Given that there is a competitive market in this area of services, Telecom Ottawa could have undertaken a formal competitive proposal process.

3.2.2 Compliance with Payment Policies and Procedures

Compliance to payment policies and procedures is summarized by company.

Precept Incorporated

Payments were in accordance with Hydro Ottawa payment policies and procedures.

Amiga 2 Corporation

Payments were in accordance with Hydro Ottawa payment policies and procedures, however, there was a lack of supporting documentation in a number of instances.

Invoices provided by Hydro Ottawa were signed by Mr. Stewart. However, since services were provided to Mr. Dobbin then Mr. Dobbin should have provided the necessary documentation to substantiate the receipt of the services.

GridWay Computing

Payments have been made in accordance with Telecom Ottawa policies and procedures.

BelAir Networks

Payments have been made in accordance with Telecom Ottawa policies and procedures.

3.2.3 Reasonability of Payments in Relation to the Services Received

Reasonability of payments is summarized by company.

Precept Incorporated

Although Hydro Ottawa did not have sufficient information available to assess the reasonability of the services invoiced, Dr. Claudia Chowaniec provided sufficient and appropriate supporting information that allowed us to conclude that the amounts invoiced and paid were reasonable.

Amiga 2 Corporation

Although Hydro Ottawa did not have sufficient information available to assess the reasonability of the services invoiced, Dr. Adam Chowaniec provided sufficient and appropriate supporting information that allowed us to conclude that amounts invoiced and paid were reasonable.

GridWay Computing

Telecom Ottawa was able to provide explanations and some supporting documentation and Dr. Adam Chowaniec also provided explanations regarding the services provided that allowed us to conclude that the amounts invoiced and paid were reasonable.

BelAir Networks

Telecom Ottawa was able to provide explanations and evidence. Dr. Adam Chowaniec also provided explanations regarding the specialized nature of the technology that allowed us to conclude that the amounts invoiced and paid were reasonable.

Tundra Semiconductor Corp.

Services provided to Tundra Semiconductor Corp. were based on Telecom Ottawa’s standard list price and considered to be provided at full retail value and therefore considered reasonable.

3.2.4 Disclosures of Transactions

Disclosure in minutes is summarized by company.

Precept Incorporated

For the 2002 consulting services, Dr. Adam Chowaniec disclosed in the in-camera January 17, 2002 Board meeting that Dr. Claudia Chowaniec, his spouse, has acted and was currently acting as a consultant to Hydro Ottawa. There were no dollar amounts indicated.

Consulting services provided by Dr. Claudia Chowaniec through Precept Incorporated for 2003 were not disclosed in 2003. These were only disclosed at the Governance Committee meeting in 2004 and not at the Board meeting as required by the Board policy.

For the 2004 consulting services, they were disclosed at the Board meeting in April 2004, including disclosure of the dollar amount and nature of the services.

Amiga 2 Corporation

The consulting services provided by Dr. Adam Chowaniec through Amiga 2 Corporation for 2003 was not disclosed in 2003. These were only disclosed at the Governance Committee in 2004 and not at the Board of Directors meeting as required by Board policy.

The consulting services provided by Dr. Adam Chowaniec through Amiga 2 Corporation for 2004 were disclosed at the January 2004 Governance Committee and Board meetings. The amount was not disclosed in the meeting minutes.

GridWay Computing

At the Energy and Telecommunications Committee meeting of February 26, 2004, the Committee Chair, Dr. Adam Chowaniec, requested that the minutes reflect that GridWay Computing had entered into a contract with Telecom Ottawa for back-up services. The amount was not disclosed in the meeting minutes. This item did not appear in the Board of Directors minutes as required by Board policy.

BelAir Networks

There was no declaration of interest by Dr. Adam Chowaniec related to BelAir Networks in the Board or Committee meeting minutes.

Tundra Semiconductor Corp.

Dr. Adam Chowaniec disclosed at the January 17, 2002 in-camera Board meeting that he is the Chief Executive Officer of Tundra Semiconductor Corp. and that he has acted as CEO of a range of companies in the past. There were no dollar amounts indicated.

At the Energy and Telecommunications Committee meeting of February 26, 2004, the Committee Chair, Dr. Adam Chowaniec, requested that the minutes reflect his interest in Tundra Semiconductor Corp. as he is Chair of Tundra Semiconductor Corp. and they have entered into a contract for internet service with Telecom Ottawa. Mr. Dobbin indicated that the contract was entered into at full retail value. The amount was not disclosed in the meeting minutes. This item did not appear in the Board of Directors minutes as required by Board policy.

3.2.5 Financial Statement Disclosure

In terms of Hydro Ottawa financial statements, the contracts with companies affiliated with Dr. Adam Chowaniec are summarized below by company.

Precept Incorporated

Financial statement note disclosure commenced only for the year ended 2003. There was no comparative amount disclosed for 2002 in the 2003 note.

The contract amount for 2002 was not disclosed in the 2002 financial statement notes.

Amiga 2 Corporation

The contract amount was disclosed for the year ended 2003.

GridWay Computing

Contracts were established during 2004 which should, in our opinion, be disclosed in the notes to the 2004 financial statements. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board.

BelAir Networks

Tundra Semiconductor Corp.

3.3 Mr. John A. Gorman & Identified Affiliated Parties

During the period April 2002 to July 2004, Hydro Ottawa entered into contracts with companies affiliated with Mr. John A. Gorman totalling $310,886. In addition, Hydro Ottawa paid Board stipend and meeting fees, totalling $37,150, directly to Mr. Gorman for the period January 2002 to July 2004.

3.3.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

Mr. Gorman is President or Senior Partner in companies that provided government and public affairs communication services to Hydro Ottawa. These contracts were awarded on a sole source basis by Mr. Stewart. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

In 2004, a termination notice clause including 60 days notice was added to the contract, which was contrary to the termination clause from the standard form of agreement reviewed at the October 14, 2003 Governance Committee meeting and also contrary to the termination clause in the 2003 contract. The reasons for deviating from the standard form of agreement or previous agreements were not provided with the meeting minutes of the Governance Committee where the contract was approved. It is our opinion that the 60-day termination clause should not have been included based on prior Committee direction.

In addition, the contracts included a daily per diem rate but did not include an upset limit or detailed statement of work, which would not be considered best practice.

The 2004 contract was changed from a per diem contract to a monthly, lump sum retainer. Using the retainer a consultant is able to bill a lump sum each month regardless of the amount of time worked by the consultant during that month. In our opinion, this arrangement does not achieve best value for non-competitive award of contracts and the procurement policy should be reviewed to limit the use of this arrangement.

As there is a competitive market for some of the consulting work completed, Hydro Ottawa could have undertaken a formal competitive proposal process for part of the contracts.

3.3.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

Payments were in accordance with the payment policies, however, there was a lack of supporting documentation in a number of instances.

There was a total of $1,220 overpaid as a result of arithmetic errors relating to three invoices. We were advised by Hydro Ottawa that they have been refunded this amount from PACE-Public Affairs and Community Enterprise, a company affiliated with Mr. Gorman, in March 2005.

3.3.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

Although Hydro Ottawa did not have sufficient information available to assess the reasonability of the services invoiced, Mr. Gorman provided sufficient and appropriate supporting information to conclude that the amounts invoiced and paid were reasonable.

3.3.4 Disclosures of Transactions

Contracts with companies affiliated with Mr. Gorman were disclosed in the Board minutes for the years 2002 and 2004, but the amount of the expenditure for the services was not disclosed. Consulting services provided by Mr. Gorman for 2003 were not disclosed in 2003. These were only disclosed at the Governance Committee meeting in 2004 and not at the Board meeting as required by Board policy.

In terms of Hydro Ottawa financial statements, the contracts with companies affiliated with Mr. Gorman were disclosed commencing only for the year ended 2003, which included comparative amounts for 2002, however the 2002 comparative amount was incorrect.

The amount for 2002 was not disclosed in the 2002 financial statement notes.

3.4 Mr. Richard Raymond & Identified Affiliated Parties

During the year 2002, Hydro Ottawa entered into a contract with Mr. Richard Raymond for consulting services which totalled $14,518. In addition to these consulting fees, Hydro Ottawa paid Board stipend and meeting fees, totalling $70,859, directly to Mr. Raymond for the period from November 2000 to October 2004.

3.4.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

The contracts, for consulting services, were awarded by Mr. Stewart on a sole source basis. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

In addition, the contracts included a daily per diem rate but did not include an upset limit or detailed statement of work, which would not be considered best practice.

3.4.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

Payments were in accordance with the payment policies, however, there was a lack of supporting documentation in a number of instances.

3.4.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

Although Hydro Ottawa did not have sufficient information available to assess the reasonability of the services invoiced, Mr. Raymond provided sufficient and appropriate supporting information to conclude that amounts invoiced and paid were reasonable.

3.4.4 Disclosures of Transactions

Contracts with companies affiliated with Mr. Raymond were not disclosed in the Board minutes for the year 2002, but were disclosed in 2001 even though no transactions occurred in 2001.

The transactions for 2002 were not disclosed in the 2002 financial statements.

3.5 Award of Contracts to Hydro Ottawa Board Members and Best Governance Practices

The decision by Hydro Ottawa to award consulting contracts to members of its Board of Directors and/or affiliated persons or companies is not consistent with best practices for effective governance and conflicts with widely accepted principles for director independence. Hydro Ottawa has recently approved the Board of Directors’ Conflict of Interest and Conduct Guidelines to restrict this practice in the future. These new guidelines state that:

“Except for approved expenses for Board or Board-related activities, no amounts are to be paid to Directors beyond the amount stipulated by the Shareholder Declaration….

Directors and their spouses shall not be involved in either the actual performance of services or direct supervision of performance of services…of anyone else under contract to Hydro Ottawa while they are serving as a Director of Hydro Ottawa.”

Under the new guidelines, none of the contracts would be permitted except contracts such as those involving BelAir Networks, GridWay Computing, and Tundra Semiconductor Corp. Permitting these contracts to occur is reasonable as long as the Board member affiliated with the companies does not have a material ownership interest in the companies.

For 2003, the Board adopted financial statements, which disclosed related party contracts. In finalizing the 2003 financial statements for Hydro Ottawa, the Audit Committee indicated that in the interest of transparency, all related party contracts would be disclosed. Such a disclosure practice, in our opinion, represents an important element of effective governance and should be maintained in the future for any transactions with affiliated persons or companies or Board of Director members. Although financial statement disclosures are guided by the CICA Handbook, they are a matter of judgement. Hydro Ottawa should seek Council’s guidance and discuss their reporting requirements for future disclosures. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board.

As part of the OAG workplan provided to Council in December 2004, the OAG will be conducting a Governance Review at Hydro Ottawa in 2006.

3.6 Other Item -Records Management

File Management

Based on the lack of file support for the contracts examined, there needs to be better file management and retention policies and procedures.

Unsigned Minutes

Based on the review of minutes, we found that 41% of minutes of Board and Committee meetings were missing either one or both signatures of the Chair and/or Corporate Secretary as required. As a matter of routine procedure, minutes should be prepared and signed on a timely basis.

3.7 Recommendations and Management Responses

The recommendations are as follows:

1. That Hydro Ottawa, in collaboration with its shareholder, City of Ottawa, specify and clearly define expected Board member duties and responsibilities and that where Hydro Ottawa requires additional compensation for Board-related duties that approval is obtained from the Shareholder;

Management Response: Hydro Ottawa has developed, and the Board of Directors has approved, a document describing the role of the Chair. This will be presented to City Council for approval on July 13, 2005. Once approved, City Council will be asked to amend the Shareholder Declaration to incorporate the description of the role of the Chair. The Governance Committee will be considering, as part of its work plan for 2005, a Board mandate describing the role of the Board and directors and recommending a Board mandate for the approval of the Board. Hydro Ottawa recognizes that all board compensation must comply with the Shareholder Declaration and that any changes to such compensation must be approved by the Shareholder.

2. That Hydro Ottawa review its contracting policies and practices to ensure that:

· contracts are required to include an upset limit and a detailed statement of work,

· written justification for the use of sole sourcing is provided, and

· the use of lump sum retainers is not permitted;

Management Response: First, it is important to reiterate that members of the Board and their spouses are now prevented from entering into contractual arrangements with the corporation for the provision of services.

In addition, Hydro Ottawa has identified the need to review its procurement policies as part of its 2005 internal audit plan approved by the Board of Directors earlier this year. The intent is to undertake a comprehensive review of corporate procurement and contracting for all professional and other services. The audit coverage will include issues such as the appropriateness of related policies and procedures, and compliance to them; and an assessment of the relevant business processes from value added and best practice standpoints. The scope of the audit will include Hydro Ottawa Holding Inc. and its subsidiary companies.

Appropriate interim measures have been implemented to ensure that the scope of work and total estimated cost are systematically identified in contracting documents, and that the use of sole source provisions is documented with contract awards.

3. That Hydro Ottawa review its payment practices and establish and document a policy to confirm checking of invoices to ensure errors are captured prior to cheque issuance;

Management Response: While the Corporation does have procedures for checking the accuracy of invoices, they are not formally documented. Hydro Ottawa will establish and document a formal Invoice Payment Policy by July 31, 2005. The policy will be communicated to all staff to ensure they understand their individual and corporate responsibilities in this regard. In the interim, Accounts Payable staff will be instructed to scrutinize all payments thoroughly for payment accuracy. A follow-up by Hydro Ottawa’s internal audit in 2006 will assess compliance with the new policy.

4. That Hydro Ottawa review its records and project management policies and practices to ensure that source documents with an appropriate level of detail to evidence transactions are appropriately retained;

Management Response: Hydro Ottawa will, by August 31, 2005, incorporate appropriate records and project management requirements into its existing procurement and contracting policies as well as into a payment policy that will be developed. These requirements will be communicated to all staff within the corporation. Records classification structure and records retention schedules have been developed and are in the process of validation leading to their implementation.

5. That Hydro Ottawa ensure that minutes and financial statements appropriately disclose related party transactions including the dollar value and appropriate detail. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board;

Management Response: Hydro Ottawa, in conjunction with its external auditors, has determined its annual financial statement disclosure of related party transactions based on generally accepted accounting principles (CICA 3840 “Related Party Transactions”) and industry practice. Irrespective of disclosure requirements, consulting contracts with Board members are no longer permitted. Any transactions with entities affiliated with members of the Board of Directors will be in the normal course of Hydro Ottawa business and at fair market value, and where significant influence does not exist with respect to the Board member on both sides of the transaction, it is the determination of Hydro Ottawa and its auditors that no financial statement disclosure will be required. However, Hydro Ottawa will consult with its

Shareholder to determine appropriate Hydro Ottawa related party disclosure in the context of a private company with commercial sensitivities that is owned by a public shareholder.

Hydro Ottawa will reflect in the minutes of the Board the disclosure by directors of the nature and extent of their interest in any contract awarded to entities with which they are affiliated. This disclosure in the minutes will include the nature of the products or services to be provided and the value of the contract or the basis for the consideration payable.

6. That Hydro Ottawa ensure that all minutes of Board and Committee meetings are prepared and signed on a timely basis.

Management Response: Minutes are prepared following all meetings of the Board and its committees and are presented for confirmation at the next meeting of the Board or committee. This practice has been followed consistently by Hydro Ottawa since its inception. Hydro Ottawa will ensure that all minutes are signed by the Chair of the Board or relevant committee at the meeting confirming the minutes.

4.0 Discussion of Mr. Glen Scott Shortliffe & identified affiliated parties

Mr. Shortliffe was a member of the Hydro Ottawa Board from March 2001 until October 2004. During this period he was the Chair of the Board of Hydro Ottawa Holding Inc. and Chair of the Compensation Committee. He was also a member of the Audit Committee, Governance Committee, Energy & Telecommunications Committee, and Local Distribution Company Committee.

During the period April 2001 to October 2004, Hydro Ottawa entered into four contracts with either Sussex Circle Inc. or Glen Scott Shortliffe & Associates. Mr. Shortliffe was a Partner of Sussex Circle Inc. and was the President of Glen Scott Shortliffe & Associates during the period of these contracts. From these contracts, Hydro Ottawa paid a total of $459,782 to Sussex Circle Inc. and Glen Scott Shortliffe & Associates as consulting fees related to Mr. Shortliffe – as summarized in the table below.

SUMMARY OF PAYMENTS TO MR. GLEN SCOTT SHORTLIFFE OR AFFILIATED PARTIES

For Contracts Entered into during the Period April 2001 to October 2004

Contractor

Relationship to Contractor

Apr-01 to Dec-01

Jan-02 to Dec-02

Jan-03 to Dec-03

Jan-04 to Oct-04

Total

Sussex Circle Inc.

Partner

$70,018

$60,682

$130,700

Glen Scott Shortliffe & Associates

President

$83,465

$166,890

$78,727

$329,082

Total Contract Payments

$70,018

$144,147

$166,890

$78,727

$459,782

Stipend & Meeting Fees

$16,800

$22,000

$25,200

$28,523

$92,523

Total Payments

$86,818

$166,147

$192,090

$107,250

$552,305

In addition to the consulting fees, Hydro Ottawa paid directly to Mr. Shortliffe, Board stipend and meeting fees totalling $92,523, in his positions as Hydro Ottawa Board Chair, Committee Chair or Committee member. The annual stipend paid to Mr. Shortliffe was $12,000 from 2001 until it was revised in August 2004. Payments to Mr. Shortliffe and affiliated parties totalled $552,305.

4.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

There were contracts entered into by Hydro Ottawa for consulting services of Mr. Shortliffe for each of the four years, which were signed by Mr. Stewart as the President and Chief Executive Officer under his delegated signing authority. The contracts were

“to retain the services of the Consultant to provide advisory services related to the operation and management of the Client’s enterprise as may be requested and assigned by the President and Chief Executive Officer of the Clients as well as by managers reporting directly to such person”.

4.1.1 Award of Contracts

There was no evidence of a competitive process for the award of these contracts, therefore the payments totalling $459,782 would be considered sole source acquisitions of services. The Hydro Ottawa procurement policy provides for sole source acquisitions of goods or services based on signing authority limits and for specific reasons such as timeliness, proprietary knowledge or products, engineering design requirements and other reasonable factors provided that there is a written explanation with supporting documentation for the sole source acquisition. Prior to January 2004, there were no written explanations identified with the reason for sole sourcing. The minutes of the January 2004 Governance Committee and Board meetings reflected descriptions by Mr. Stewart that the contracts were approved for these services because they were required, unique and at the most-favoured client rates. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

Consulting Services vs Chair Duties

· advised the Board of Hydro Ottawa of the contracts and their dollar value;

· requested that the Board of Hydro Ottawa seek the approval of City of Ottawa Council to enter into the contracts;

· disclosed the contracts and their dollar value in the financial statements;

· not entered into the contracts if he felt the services were not warranted.

The reimbursement of Chair expenses would have been permitted under the Shareholder Declaration. However, the reimbursement should not have been made under a consulting contract but should have been made directly to the Chair.

In addition, this arrangement was in contravention of the terms of the contracts as the contracts specifically stated that payments were to be for consulting services and not for Chair duties.

4.1.2 Contract Terms

Each of the contracts:

· specified the term,

· specified the requirement for monthly billings,

· contained a records and audit clause, and

· contained a services clause which stated:

“The services to be provided by the Consultant shall be such advisory services relating to the operation and management of the Client’s enterprise as may be requested and assigned by the President and Chief Executive Officer of the Clients as well as by managers directly reporting to such person. The Services shall not include any work, expenses or disbursements related to the review of reports or other documents submitted to the Board of Directors of Hydro Ottawa Holding Inc. (or any committee thereof), nor any work, expenses and disbursements related to the attendance at meetings of the Board of Directors or any committee thereof.”

The contracts were for a per diem and did not include an upset limit or ceiling expenditure amount or a detailed statement of work. Although the Hydro Ottawa procurement policy did not specify these requirements, the procurement policy should be reviewed, as this would not be considered best practice.

4.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

The practice for approval of suppliers’ invoices submitted to Hydro Ottawa Accounts Payable for payment required that the invoice approver confirm that the goods or services were received as contracted and that the arithmetic calculations on the invoice were accurate.

In the case of invoices related to Mr. Shortliffe, Mr. Stewart was approving payments in accordance with the payment policy. However, there was a lack of appropriate supporting documentation. Many of the invoices submitted to Hydro Ottawa for payment were lacking sufficient details to determine and conclude on whether the work invoiced as consulting services related to the operation and management of Hydro Ottawa as specified in the contract, or were Board related duties which were clearly not to be compensated under the contract. Although signing and approving the supplier invoices, Mr. Stewart was unable to provide further detail regarding the work done by Mr. Shortliffe.

In response to questions about the invoices related to Mr. Shortliffe, Mr. Stewart indicated, “…consulting services were a way of compensating Mr. Shortliffe for the extra time he spent on Hydro Ottawa duties….”. Mr. Stewart stated that he was under the impression that Mr. Shortliffe was to be a full time Chairman, and that there was a fine line between Mr. Shortliffe’s duties as a Chair and the duties as a consultant. Further, Mr. Shortliffe stated at the May 18, 2004 Corporate Services and Economic Development Committee meeting,

“So when I accepted the job, it was with the understanding and agreement of the Mayor that Hydro Ottawa senior management would arrange for me to be compensated for my professional time…My contract had clearly stipulated the terms and conditions regarding my work for the company, and the procedures for documenting my time spent on company business.”

The terms of the contracts affiliated with Mr. Shortliffe contain a records and audit clause which stated the following:

“(1) In order to provide data for the calculation of fees on a time basis, the Consultant shall keep a detailed record of hours worked by staff in the performance of Services for the Client.

(2) The Consultant shall keep a separate record of hours worked by staff in relation to the following types of services:

i Services related to the transmission and distribution of electricity (chargeable to Hydro Ottawa Limited);

ii Services related to competitive ventures, including water heater rentals and generation of electricity (chargeable to Energy Ottawa Inc.); and

iii Services related to the overall operation and management of all activities undertaken by the Clients (chargeable to Hydro Ottawa Holding Inc.).”

Based on the above, Mr. Shortliffe was to maintain a detailed record of time incurred, and the time was to be maintained in relation to the areas of services noted above.

As discussed in section 4.1.1 it was subsequently found that the contracts were to compensate Mr. Shortliffe for Chair duties and not consulting services as outlined in the contract.

4.2.1 Supplier Invoices Review – Mr. Shortliffe

Analysis of the invoices submitted in relation to the services of Mr. Shortliffe identified a number of invoiced tasks that in our opinion were Board related duties and should not have been invoiced as consulting services. For example, billings related to Committees, Council, subsidiary company sessions, discussions with other Board or Committee members, briefing sessions, strategy meetings, and breakfast, lunch, and dinner engagements which should normally be considered part of Board duties. The information provided on the invoices related to Mr. Shortliffe do not allow for the quantification of these amounts.

Other items listed on Mr. Shortliffe’s invoices did not allow sufficient information to assess whether the item being invoiced was Board related or consultant related. Following are a few examples of such items:

· “Document review” appeared on the invoices a total of 476 times representing 37% of all tasks invoiced.

· “Analysis” appeared on the invoices a total of 96 times representing 7% of all tasks invoiced.

· “Drafting” appeared on the invoices a total of 60 times representing 5% of all tasks invoiced.

Based on the above three descriptions, it is not possible to determine documents reviewed, analysed, or drafted and whether they are appropriately charged as consulting services.

Mr. Shortliffe was unable to provide additional details regarding the invoices, however he confirmed that duties performed related to Chair duties. Documentation which we would have expected for some of the duties was not available at Hydro Ottawa.

4.2.2 Payment Errors

The 2004 contract with Mr. Shortliffe specified that the per diem rate be based on an eight-hour day. Amounts relating to 2004 were invoiced and paid based on a seven and a half hour day, which resulted in an overpayment on four invoices totalling $2,789.

There were also two errors in payments of meeting fees to Mr. Shortliffe during the period from March 2001 to October 2004 resulting in an overpayment in the amount of $200.

4.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

There was a lack of working files and documentation at Hydro Ottawa to support the work invoiced and paid in relation to Mr. Shortliffe. Hydro Ottawa was unable to provide further detail.

Mr. Shortliffe met with us and indicated that duties performed were related to Chair duties.

4.4 Disclosures of Transactions

In terms of disclosure of these transactions, both the Hydro Ottawa Board minutes and financial statements were reviewed.

4.4.1 Disclosure in the Minutes

As a Board member, where there is a material contract or transaction, it is the member’s responsibility to disclose the nature and extent of their interest in writing to Hydro Ottawa or request to have the disclosure entered in the minutes.

The consulting services of Mr. Shortliffe were disclosed in either the regular or in-camera minutes of the Hydro Ottawa companies within each year, except for 2003 which did not appear as a specific disclosure of interest within the year and was only disclosed at the Governance Committee in 2004 and not at the Board of Directors meeting as required by Board policy.

The amount of the consulting services was not disclosed in the minutes for any of the years except for 2003, where the 2003 amount of $165,927 was only disclosed in 2004 at the Governance Committee and not the Board of Directors meeting as required by Board policy. The amount differed slightly from the total of invoices provided by Hydro Ottawa by $963.

4.4.2 Financial Statement Disclosure

The amount and nature of the consulting services provided by Mr. Shortliffe was disclosed in the financial statements starting for the year ended 2003. These financial statements also disclosed the 2002 comparative amount, however the 2002 comparative amount was not correct.

A review of the invoices provided by Hydro Ottawa for this audit revealed that the amount disclosed for 2003 should have been $883 higher and that the comparative 2002 amount should have been $15,346 higher.

In the 2002 financial statements the contract in the amount of $144,147 was not disclosed. Also, the 2001 contract amount of $70,018 was not disclosed, resulting in a total amount of $215,048 which was not disclosed in the financial statements for 2001 to 2003.

It is our opinion that the information should have been disclosed in the financial statements for the 2001 and 2002 fiscal years. Although financial statement disclosures are guided by the CICA Handbook, they are a matter of judgement. Hydro Ottawa should seek Council’s guidance and discuss their reporting requirements for future disclosures. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board.

5.0 discussion of DR. Adam Chowaniec & identified affiliated parties

Dr. Adam Chowaniec was appointed as a member of the Advisory Board to the Board of Hydro Ottawa effective January 2002 until the term concluded October 2004. This appointment resulted in his attendance at the Board of Director meetings. He was Chair of the Energy & Telecommunications Committee. He also attended Compensation Committee and Governance Committee meetings.

During the period from January 2002 to October 2004, Hydro Ottawa entered into supplier contractual arrangements with Precept Incorporated, Amiga 2 Corporation, BelAir Networks and GridWay Computing. In addition, Hydro Ottawa entered into an agreement to provide internet services to Tundra Semiconductor Corp. Dr. Adam Chowaniec’s relation to these companies is summarized in the table below.

From January 2002 to October 2004, Dr. Adam Chowaniec, or the above noted supplier companies, entered into agreements with Hydro Ottawa companies estimated to be valued at $427,831. In addition, it was estimated that Tundra Semiconductor Corp. entered into an agreement with an estimated value of $44,068 related to revenues of Telecom Ottawa. These are summarized in the table below.

In addition to the payments noted above, Dr. Adam Chowaniec received $39,173 for stipend and meeting fees. Total payments that were received (or to be received) by affiliated parties totalled $467,004. There was also revenue of $44,068 to Telecom Ottawa from an affiliated party of Dr. Adam Chowaniec. Total payments and receipts to Dr. Adam Chowaniec and affiliated parties were $511,072.

SUMMARY OF PAYMENTS (RECEIPTS) TO (FROM) DR. ADAM CHOWANIEC OR AFFILIATED PARTIES

For Contracts Entered into during the period from January 2002 to October 2004

Contractor

Relationship to Contractor

Jan-02 to Dec-02

Jan-03 to Dec-03

Jan-04 to Dec-04

Total

Precept Incorporated

Spouse is President

$66,675

$ 47,815

$ 12,840

$127,330

Amiga 2 Corporation

President

4,815

5,618

$ 10,433

BelAir Networks

Board Member

167,580

$167,580

GridWay Computing

Board Member

122,488

(1)

$122,488

Total Contract Payments

$66,675

$52,630

$308,526

$427,831

Stipend & Meeting Fees

$12,650

$13,800

$ 12,723

$ 39,173

Tundra Semiconductor Corp.

Total Contract Receipts

Chair of the Board

$ 44,068

(2)

$ 44,068

Total Payments & Receipts

$79,325

$66,430

$365,317

$511,072

Notes:

(1) Includes estimate of $87,400 relating to contractual obligations for remaining 19 months of contract term.

(2) Includes estimate of $28,126 relating to contractual obligations for approximately 24 months.

The companies listed in the table will be addressed separately for each of the following sections.

As the Tundra Semiconductor Corp. contract relates to sales (revenues) of Telecom Ottawa and not purchases (expenses) this will only be addressed in the sections, as appropriate.

5.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

The compliance with Hydro Ottawa’s procurement policies and procedures is addressed for each of the companies previously described.

5.1.1 Precept Incorporated

Dr. Claudia Chowaniec, spouse of Dr. Adam Chowaniec, is the President of Precept Incorporated.

Precept Incorporated provided the following services to Hydro Ottawa:

· support development and implementation of a communications strategy,

· conduct of the environmental scan;

· planning and facilitation of the strategic planning workshop June 2002,

· plan and conduct Hydro Ottawa’s June 2003 Business Strategy Session, and

· support for Hydro Ottawa's 2004 strategic planning activities.

Dr. Claudia Chowaniec initially provided services to Hydro Ottawa in 2001 prior to the appointment of her husband to the Advisory Board. Although she indicated that she had submitted a proposal that was compared by Hydro Ottawa to other proposals, files to evidence this evaluation were not available from Hydro Ottawa. Interviews with Mr. Stewart, and with Mr. Lane, the former Chief Financial Officer of Hydro Ottawa, confirmed that there was a file of other proposals for 2001 that were reviewed at that time and Dr. Chowaniec’s proposal was judged the best based on the price and services to be provided. The 2001 portion of her work was not included in the scope of this audit as they were provided while her husband was not a member of the Advisory Board.

Dr. Claudia Chowaniec provided the OAG with a copy of the purchase order in place in early 2002 that was signed by Mr. Stewart and included the timeframe, the approximate number of days, the per diem rate, and the requirement for monthly invoices to a maximum of $21,735. Hydro Ottawa had no record of the purchase order. There was additional work proposed and accepted for 2002. It was indicated by Mr. Stewart and Mr. Lane that the 2002 work was awarded based on the prior award of the 2001 work and the competitiveness of that proposal.

For 2003 there was no contract or purchase order. There was a proposal from Dr. Claudia Chowaniec that listed the key project steps and the amount of time and the billing rates. The proposal was signed as accepted by Mr. Lane. It was indicated this work was awarded based on prior year comparisons.

For 2004 there was a purchase order that specified services and contained an upset contract limit. The contract was approved at Governance Committee with a list of key project steps and estimated days at a reduced per diem rate. The report to Governance Committee included an explanation by Mr. Stewart of Dr. Claudia Chowaniec’s particular knowledge of the enterprise and the successful components needed for a strategy session. At the meeting, Mr. Stewart recommended that services be retained without a competitive process and that the rate charged for the services was competitive with rates charged by companies providing similar levels of services with comparable levels of expertise.

In the absence of a formal competitive process, this work would be considered as the sole source acquisition of services and in accordance with the procurement policy would require a written explanation with supporting documentation for the sole source acquisition. Prior to April 2004, for Precept Incorporated, there were no written explanations with supporting documentation identified with the reason for sole sourcing. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy. As the initial award in 2001 was based on the review of proposals, sole sourcing is not unreasonable based on the prior experience of the consultant.

Work was awarded by the following:

· Mr. Lane for $64,935 or 51%;

· Mr. Stewart for $34,575 or 27%; and

· Ms. Reeves for $27,820 or 22%.

The total value of the contracts for Precept Incorporated for 2002-2004 was $127,330.

5.1.2 Amiga 2 Corporation

Dr. Adam Chowaniec provided advisory services on the telecommunications industry through his holding company Amiga 2 Corporation. The contracts were

There was no evidence of a competitive process for the award of the contracts to Amiga 2 Corporation, therefore the payments totalling $10,433 would be considered sole source acquisitions of services. The Hydro Ottawa procurement policy provides for sole source acquisitions of goods or services based on signing authority limits and for specific reasons provided that there was a written explanation with supporting documentation for the sole source acquisition. Prior to January 2004, there were no written explanations identified with the reason for sole sourcing. The minutes of the January 2004 Governance Committee and Board meetings reflected descriptions by the President that the contracts were approved for these services because they were required, unique and at the most-favoured client rates. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

For 2003, there was no contract in place with Amiga 2 Corporation. There was only a draft unsigned contract in place for consulting services with Amiga 2 Corporation. For 2004, there was a signed contract in place with Amiga 2 Corporation for consulting services that was signed by Mr. Stewart under his delegated signing authority.

Contract Terms

Each of the contracts:

· specified the term,

· specified the requirement for monthly billings,

· contained a records and audit clause, and

· contained a services clause which stated:

The contracts did not include an upset limit or ceiling expenditure amount or detailed statement of work. Although the Hydro Ottawa procurement policy did not specify this requirement, the procurement policy should be reviewed, as this would not be considered best practice.

5.1.3 GridWay Computing

Dr. Adam Chowaniec is a member of the Board of Directors of GridWay Computing.

There was a contract in place for a period of twenty-four months signed in August 2004 by Mr. David Dobbin, the Chief Operating Officer of Telecom Ottawa for backup and storage services. There was also an opportunity for Telecom Ottawa to resell the services. The contract did not contain an upset limit or estimated contract value.

The actual invoices to December 2004 were $35,088, and for purposes of this audit, the net cost of $87,400 has been estimated for the remainder of the contract term for a total estimated net total cost of $122,488.

There was no evidence of a competitive process for the award of this contract, therefore the $122,488 would be considered a sole source acquisition of services. The Telecom Ottawa procurement policy did provide for sole source acquisitions of goods or services based on signing authority limits and for specific reasons provided that there was a written explanation with supporting documentation for the sole source acquisition. Mr. Dobbin provided, in memo format, the sole source rationale. The rationale was not documented in Telecom Ottawa files at the time the contract was awarded and was only documented when the OAG requested the information. The contracting procedures were not followed in that the justification for sole sourcing was not documented at the time of award as required by the Telecom Ottawa policy.

Given that there is a competitive market in this area of services, Telecom Ottawa could have undertaken a formal competitive proposal process.

5.1.4 BelAir Networks

Dr. Adam Chowaniec is one of six members of the Board of Directors of BelAir Networks. BelAir Networks provides outdoor WiFi transmission equipment which allows wireless network and internet access.

There were four separate purchase orders issued by Telecom Ottawa based on written quotes provided by BelAir Networks totalling $123,653 U.S. that converted to $167,580 Canadian. The four individual invoices were signed by Directors of Telecom Ottawa.

There was no evidence of a competitive process for the award of this contract, therefore the $167,580 would be considered a sole source acquisition of services. The procurement policy did provide for sole source acquisitions of goods or services based on signing authority limits and for specific reasons provided that there was a written explanation with supporting documentation for the sole source acquisition. Mr. Dobbin provided, in memo format, the sole source rationale. This rationale was not documented in Telecom Ottawa files at the time the contract was awarded and was only documented when the OAG requested the information. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Telecom Ottawa policy. Given that there is a competitive market in this area of services, Telecom Ottawa could have undertaken a formal competitive proposal process.

5.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

The compliance with Hydro Ottawa’s procurement policies and procedures is addressed for each of the companies previously described.

5.2.1 Precept Incorporated

Precept Incorporated invoices were signed and approved as follows: 2002 and 2004 by Mr. Stewart; 2002 and 2003 by Mr. Lane; and for 2003 by Ms. Reeves. There was some documentation on file at Hydro Ottawa, as well as further documentation from Dr. Claudia Chowaniec to evidence the services received.

5.2.2 Amiga 2 Corporation

There was no signed contract for 2003 with Dr. Adam Chowaniec. There was a signed contract for 2004 with Amiga 2 Corporation which contained a clause that this compensation was not to relate to Board duties or for the review of documents or reports going to the Board. Invoices provided by Hydro Ottawa were signed by Mr. Stewart. However, since services were provided by Amiga 2 Corporation to Mr. Dobbin then Mr. Dobbin should have provided the necessary documentation to substantiate the receipt of the services.

In interviews with Mr. Stewart and subsequently with Dr. Adam Chowaniec and Mr. Dobbin it was determined that the work related to duties beyond what would normally be expected of a Board member.

5.2.3 GridWay Computing

There was a signed contract, as well as supplemental emails, in support of rate calculations. Supplier invoices detailing the quantity of back–up and storage and showing the rate were provided by Telecom Ottawa. These had been approved by the appropriate operating management Directors of Telecom Ottawa.

5.2.4 BelAir Networks

There were quotations from the supplier in support of the purchase orders that detailed the goods and services in US dollars. The invoices, also in US dollars were consistent with the quotations and purchase orders and were approved by the appropriate operating management Directors of Telecom Ottawa.

5.2.5 Payment Error

There was one error in the payment of meeting fees to Dr. Adam Chowaniec during the period from January 17, 2002 to October 31, 2004 resulting in an overpayment in the amount of $400.

5.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

The following paragraphs discuss the reasonability of the payments to, or received from, each of the companies affiliated with Dr. Adam Chowaniec.

5.3.1 Precept Incorporated

There was some documentation available from Hydro Ottawa to support the payments provided. Dr. Claudia Chowaniec was able to provide explanations and further supporting documentation regarding services provided.

5.3.2 Amiga 2 Corporation

There was a lack of working files or documentation available from Hydro Ottawa to support the payments provided. Dr. Adam Chowaniec was able to provide further explanations and supporting documentation regarding services provided. These were also confirmed by Mr. Stewart and Mr. Dobbin.

5.3.3 GridWay Computing

Mr. Dobbin was able to provide explanations and some supporting documentation and Dr. Adam Chowaniec also provided explanations regarding the services provided. We were also able to verify the reasonableness of rates based on industry comparatives.

5.3.4 BelAir Networks

Mr. Dobbin was able to provide explanations and demonstrate physical location of units and their use. Dr. Adam Chowaniec also provided explanations regarding the specialized nature of the technology. We were also able to verify the reasonableness of rates based on industry comparatives.

5.3.5 Tundra Semiconductor Corp.

Services provided to Tundra Semiconductor Corp. were based on the standard list price and considered to be provided at full retail value and therefore considered reasonable.

5.4 Disclosures of Transactions

In terms of disclosure of these transactions, both the Hydro Ottawa Board minutes and financial statements were reviewed.

5.4.1 Disclosure in Minutes

The January 17, 2002 in-camera Board meeting, wherein Dr. Adam Chowaniec was appointed to the Advisory Board, addressed the related party disclosure and indicated that where there is a material contract or transaction, it is the member’s responsibility to disclose the nature and extent of their interest in writing to the Corporation or request to have the disclosure entered in the minutes.

Precept Incorporated

Dr. Adam Chowaniec disclosed in the in-camera minutes of the January 17, 2002 Board meeting that Dr. Claudia Chowaniec, his spouse has acted and was currently acting as a consultant to Hydro Ottawa. There were no dollar amounts indicated.

The 2003 consulting services were not disclosed in the minutes for 2003. These 2003 consulting services, in the amount of $47,815 were disclosed in 2004 at the Governance Committee and not the Board of Directors meeting as required by Board policy.

For the 2004 consulting, a disclosure was made at the Governance Committee of April 2004 that was taken to the Board in April 2004 and included disclosure of the contract with Precept Incorporated including the dollar amount, nature, and with an explanation from Mr. Stewart of the reason for sole sourcing.

Amiga 2 Corporation

The consulting services provided by Dr. Adam Chowaniec through Amiga 2 Corporation for 2003 were not disclosed in 2003. These were only disclosed at the Governance Committee in 2004 and not at the Board of Directors meeting as required by Board policy.

GridWay Computing

At the Energy and Telecommunications Committee meeting of February 26, 2004, the Committee Chair, Dr. Adam Chowaniec, requested that the minutes reflect that GridWay Computing has entered into a contract with Telecom Ottawa for back-up services. The amount was not disclosed in the meeting minutes. This item did not appear in the Board of Directors minutes as required by the Board policy.

BelAir Networks

There was no declaration of interest by Dr. Adam Chowaniec related to BelAir Networks in the Board or Committee meeting minutes.

Tundra Semiconductor Corp.

Dr. Adam Chowaniec disclosed in the in-camera minutes of the January 17, 2002 Board meeting that he is the Chief Executive Officer of Tundra Semiconductor Corp. and that he has acted as CEO of a range of companies in the past. There were no dollar amounts indicated.

5.4.2 Financial Statement Disclosure

In terms of Hydro Ottawa financial statements, the contracts with companies affiliated with Dr. Adam Chowaniec are summarized below by company.

Precept Incorporated

Financial statement note disclosure commenced only for the year ended 2003. There was no comparative amount disclosed for 2002 in the 2003 note.

The contract amount for 2002 was not disclosed in the 2002 financial statement notes.

Amiga 2 Corporation

The contract amount was disclosed for the year ended 2003.

GridWay Computing

Contracts were established during 2004 which, in our opinion, should be disclosed in the notes to the 2004 financial statements. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board.

BelAir Networks

Tundra Semiconductor Corp.

Contracts were established during 2004 which, in our opinion should be disclosed in the notes to the 2004 financial statements. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board.

6.0 Discussion of Mr. John A. Gorman & Identified affiliated parties

Mr. John A. Gorman was appointed as a member of the Advisory Board to the Board of Hydro Ottawa effective January 17, 2002. As a result, he attended Board meetings, as well as Compensation Committee, Governance Committee, Energy & Telecommunications Committee and Nominating Committee meetings. Mr. Gorman resigned effective July 16, 2004.

During the period April 2002 to July 2004, Hydro Ottawa entered into contracts for services with 1180776 Ontario Inc., PACE-Public Affairs and Community Enterprise (1479038 Ont. Inc.) and Ottawa Insider. John Gorman was the President of 1180776 Ontario Inc. for 2002, President of PACE-Public Affairs and Community Enterprise for 2002 and 2003, Partner of Ottawa Insider for 2003 and 2004, and Senior Partner of Public Affairs & Community Entreprises (1479038 Ont. Inc.) for 2004.

Mr. Gorman or companies affiliated with Mr. Gorman received $310,886 for consulting fees or other goods or services in addition to the $37,150 Mr. Gorman received for stipend and meeting fees for a total of $348,036. The following table summarizes the consulting fees payments made to these companies.

SUMMARY OF PAYMENTS TO MR. JOHN GORMAN OR AFFILIATED PARTIES

For Contracts Entered into during the period April 2002 to July 2004

Contractor

Relationship to Contractor

April-02 to Dec-02

Jan-03 to Dec-03

Jan-04 to Dec-04

Total

1180776 Ontario Inc.

President

$30,645

$ 30,645

PACE Public Affairs and Community Enterprise (1479038 Ont. Inc.)

President & Senior Partner

$52,322

$136,039

$ 88,134

$276,495

Ottawa Insider

Partner

1,873

1,873

$3,746

Total Contract Payments

$82,967

$137,912

$90,007

$310,886

Stipend & Meeting Fees (January 2002 to July 2004)

$14,246

$14,600

$8,304

$37,150

Total Payments

$97,213

$152,512

$98,311

$348,036

6.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

There were contracts entered into by Hydro Ottawa for the consulting services of Mr. Gorman or companies affiliated with Mr. Gorman for each of the years, which were signed by Mr. Stewart under his delegated signing authority. The contracts were

6.1.1 Contract Award

There was no evidence of a competitive process for the contracts awarded by Mr. Stewart to 1180776 Ontario Inc. or PACE-Public Affairs and Community Enterprise, therefore the payments totalling $307,140 would be considered sole source acquisitions of services. As noted previously, the Hydro Ottawa procurement policy provides for sole source acquisitions of goods or services based on signing authority limits and for specific reasons provided that there was a written explanation with supporting documentation for the sole source acquisition. Prior to January 2004, there were no written explanations identified with the reason for sole sourcing. The minutes of the January 2004 Governance Committee and Board meetings reflected descriptions by Mr. Stewart that the contracts were approved for these services because they were required, unique and at the most-favoured client rates.

The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

The 2004 contract also contained a termination notice clause for 60 days contrary to the termination clause from the standard form of agreement which was reviewed at the Governance Committee October 14, 2003 and also contrary to the termination clause in the 2003 contract. The reasons for deviating from the standard form of agreement or previous agreements were not provided with the meeting minutes of the Governance Committee where it was approved. The explanation provided by Hydro Ottawa was that the Governance Committee had the delegated authority, and the rationale for the termination clause would have taken into consideration the reduced retainer rate that had been negotiated, and because PACE-Public Affairs and Community Enterprise had committed resources, the termination clause would provide compensation for lost opportunity if exercised. The termination clause was to recognize different business circumstances. It is our opinion that the 60-day termination clause should not have been included based on prior Committee direction.

For 2004, a monthly retainer (or lump sum amount) was established based on the services to be provided as follows:

"government and public affairs services set out in a schedule to the contract relating to the operation and management of the Client's enterprise as may be requested by the President and Chief Executive Officer of the Clients as well as by managers reporting directly to such person. The Services shall not include any work, expenses or disbursements related to the review of reports or other documents submitted to the Board of Directors of Hydro Ottawa Holding Inc....”.

Based on the contract, the services to be provided included issues management, councillor relations, general communications, annual meeting preparation, plenary meetings, and ad hoc work.

Although there is a listing of services to be provided, the fixed retainer is paid regardless of the level of services provided.

Although the procurement policy did not limit the use of retainers or lump sum billings, the procurement policy should be reviewed, as these would not be considered best practice, especially in the case of non-competitive contract awards.

The contracts for 2002 and 2003 were in the name of 1180776 Ontario Inc. Invoices and payments for September 2002 to December 2003 were made in the name of Pace Consulting. The contracts should have been revised to reflect the complete and correct company names and addresses.

We found that a competitive market exists for some of the services invoiced such as planning and coordinating of community meetings, the development of the code of conduct, and general communication. Hydro Ottawa could have undertaken a formal competitive proposal process for part of the contracts.

6.1.2 Contract Terms

Each of the contracts:

· specified the term,

· specified the requirement for monthly billings,

· contained a records and audit clause, and

· contained a services clause which stated:

The contracts did not include an upset limit or ceiling expenditure amount or a detailed statement of work until the monthly retainer was established for 2004. Although the Hydro Ottawa procurement policy did not specify these requirements, the procurement policy should be reviewed, as this would not be considered best practice.

6.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

There were signed contracts in place for each of the years which specified the term and also contained a clause that this compensation was not to relate to Board duties or for the review of documents or reports going to the Board.

Invoices were signed as follows:

· Mr. Stewart for $193,092 or 62%

· Ms. Reeves for $51,871 or 17%

· Directors of Communications for $54,851 or 18%

The total value of the invoices was $310,886. There was one invoice totalling $10,272 or 3% where the processing stamps were not available as the copy was provided by Mr. Gorman and the copy of this invoice was not available at Hydro Ottawa.

Retainers were invoiced in 2004. There was no detailed support provided for the billings for the months of May 2004, or September to December 2004. The billings totalled $47,046.

Although Mr. Gorman resigned in July of 2004, he continued to be paid under the contract awarded while he was an Advisory Board member. In August 2004, Council directed Hydro Ottawa that no amount over and above the set stipend be paid to Directors, family members, or entities in which they have a substantive ownership interest except for approved expenses for Board or Board-related activities. Instead of enforcing the two-month notice period, PACE-Public Affairs and Community Enterprise was permitted to continue to work for four months. According to Mr. Stewart, he gave Mr. Gorman the choice of receiving two months of payment as a settlement or working and being paid for four months. Mr. Gorman chose the latter, and Mr. Stewart indicated that Hydro Ottawa received better value through this arrangement. Mr. Gorman provided explanations, files and documentation in support of work performed during this time.

6.2.1 Payment Errors

There was a total of $1,220 overpaid as a result of arithmetic errors relating to three invoices. We were advised by Hydro Ottawa that they have been provided a cheque refunding this amount from PACE-Public Affairs and Community Enterprise in March 2005.

There were also three errors in the payments of meeting fees to Mr. Gorman during the period from January 17, 2002 to July 16, 2004 resulting in a net underpayment in the amount of $400.

6.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

There was a lack of working files and documentation at Hydro Ottawa to support the work invoiced by companies affiliated with Mr. Gorman. However, Mr. Gorman was able to provide explanations, additional information and working files to support the work performed, including the five retainers which were invoiced in 2004 where there was no detailed support provided.

6.4 Disclosures of Transactions

In terms of disclosure of these transactions, both the Hydro Ottawa Board minutes and financial statements were reviewed.

6.4.1 Disclosures in the Minutes

The minutes of the January 17, 2002 in-camera Board meeting, wherein John Gorman was appointed to the Hydro Ottawa Advisory Board, indicated that where there is a material contract or transaction, it is the member’s responsibility to disclose the nature and extent of their interest in writing to the Corporation or request to have the disclosure entered in the minutes.

The consulting services were disclosed in either the regular or in-camera minutes of the Hydro Ottawa companies within each year except for 2003 that was not disclosed until 2004. The amount of the consulting services was not disclosed in the minutes for any of the years except for 2003, where the 2003 amount of $115,669 was disclosed at the Governance Committee in 2004 and not the Board of Directors as required by the Board policy. For 2003, the amount disclosed was understated by $22,243 based on the invoices provided by Hydro Ottawa.

6.4.2 Financial Statement Disclosures

The amount and nature of the consulting services related to Mr. Gorman was disclosed in the financial statements starting for the year ended 2003. These financial statements also disclosed the 2002 comparative amount.

A review of the invoices provided by Hydro Ottawa revealed that the amount disclosed for 2003 should have been $6,066 higher, and the comparative amount for 2002 should have been $30,645 higher.

In the 2002 financial statements the contracts of $82,967 were not disclosed resulting in a total amount of $89,033 which was not disclosed in the financial statements for 2002 to 2003.

7.0 Discussion of Mr. Richard Raymond & Identified Affiliated parties

Mr. Richard Raymond was a member of the Board of Hydro Ottawa from November 2000 until October 2004. During this time he was Chair of the Energy Ottawa Inc. Board of Directors until it was re-organized April 2001 and Chair of the Governance Committee for part of 2002 and 2003. He also attended Compensation Committee, Audit Committee, Energy & Telecommunications Committee, and Local Distribution Company Committee meetings.

Hydro Ottawa entered into consulting contracts with Mr. Richard Raymond for the period April 2001 to December 2003. During 2002, $14,518 was paid by Hydro Ottawa for consulting services. In addition to these fees, Mr. Raymond received $70,859 during the period November 2000 to October 2004 for Board stipend and meeting fees for a total of $85,377.

SUMMARY OF PAYMENTS TO MR. RICHARD RAYMOND OR

AFFILIATED PARTIES

For contracts entered into during the period April 2001 to December 2003

Contractor

Relationship to Contractor

Nov-00 to Dec-01

Jan-02 to Dec-02

Jan-03 to Dec-03

Jan-04 to Oct-04

Total

Richard A. Raymond

1427524 Ontario Limited.

Signing Officer

$14,518

$14,518

Total Contract Payments

$14,518

$14,518

Stipend & Meeting Fees (November 2000 to October 2004)

$19,336

$18,200

$14,600

$18,723

$70,859

Total Payments

$19,336

$32,718

$14,600

$18,723

$85,377

7.1 Compliance with Hydro Ottawa’s Procurement Policies and Procedures

There were contracts entered into by Hydro Ottawa for the consulting services for each of the calendar years April 1, 2001 to December 31, 2003. The contracts were

7.1.1 Contract Award

The contracts Hydro Ottawa entered into were made directly with Mr. Richard Raymond and were signed by Mr. Stewart under his delegated signing authority. There was no evidence of a competitive process for the award of these contracts, therefore the 2002 payments totalling $14,518 would be considered as sole source acquisitions of services. The contracting procedures were not followed in that the justification for sole sourcing was not documented as required by the Hydro Ottawa policy.

Invoices were submitted in the name of Richard A. Raymond with directions on the invoices to make cheques payable to 1427524 Ontario Limited. As the intention was to pay Mr. Raymond’s company, the contract should have been revised to reflect the company name as the supplier, not Mr.Raymond.

7.1.2 Contract Terms

Each of the contracts:

· specified the term,

· specified the requirement for monthly billings,

· contained a records and audit clause, and

· contained a services clause which stated:

7.2 Compliance with Hydro Ottawa’s Payment Policies and Procedures

Supplier invoices were signed by Mr. Stewart, but there was a lack of supporting documentation.

Some of the invoices submitted to Hydro Ottawa lacked sufficient detail to determine if the duties related to the review of reports submitted to the Board which is not permitted under the terms of the agreement.

7.2.1 Payment Errors

There was a total of $30 overpaid as a result of arithmetic errors relating to one invoice.

There were also six errors in payments of meeting fees to Mr. Raymond during the period from November 2000 to October 2004, resulting in an overpayment in the amount of $1,800.

7.3 Reasonability of Payments in Relation to the Services Received by Hydro Ottawa

There was a lack of working files and documentation at Hydro Ottawa to support the work invoiced. Generally descriptions provided on invoices related to attending meetings or a conference. Some invoices did not contain sufficient detail to determine what services were provided and if payments made were reasonable for services provided. Through meetings with Mr. Raymond, sufficient and appropriate information was obtained to conclude that the amounts invoiced and paid were reasonable.

There were payments that were for Board duties such as attending a conference that should not have been reimbursed through contracts. If payments to Mr. Raymond were related to Director duties then this should not have been done through the contracting process, instead Council approval should have been requested for an increased stipend as required by the Shareholder Declaration.

The total payment made over the terms of the contracts was $14,518 which included $846 for reimbursement of Board-related expenses.

The reimbursement of Board expenses would have been permitted under the Shareholder Declaration. However, the reimbursement should not have been made under a consulting contract but should have been made directly to the Board member.

7.4 Disclosures of Transactions

In terms of disclosure of these transactions, both the Hydro Ottawa Board minutes and financial statements were reviewed.

7.4.1 Minutes Disclosure

As a Board member, where there is a material contract or transaction, it is the member’s responsibility to disclose the nature and extent of their interest in writing to the Corporation or request to have the disclosure entered in the minutes. The consulting services were not disclosed in either the regular or in-camera minutes of the Hydro Ottawa companies for 2002. We noted that there was disclosure in 2001 even though there were no invoices or payments in 2001.

7.4.2 Financial Statement Disclosure

The amount of $14,518 relating to 2002 and nature of the consulting services was not disclosed in the financial statements. In our opinion this should have been disclosed in the 2002 financial statements. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board.

8.0 Award of Contracts to Hydro Ottawa Board Members and Best Governance Practices

A review of best practices for effective corporate governance, particularly regarding director independence, compensation and financial/material relationships was undertaken as part of the audit. The decision by Hydro Ottawa to award consulting contracts to members of its Board of Directors and affiliated parties is not consistent with current best practices for effective governance and conflicts with generally accepted principles for director independence.

For 2003, the Board adopted financial statements which disclosed related party contracts. In finalizing the 2003 financial statements for Hydro Ottawa at Audit Committee, Committee members indicated, “that the company should be transparent in the financial reporting and be prepared to defend the services it retained from Directors and Advisory Board members”. Such a disclosure practice, in our opinion, represents an important element of effective governance and should be maintained in the future. Although financial statement disclosures are guided by the CICA Handbook, they are a matter of judgement. Hydro Ottawa should seek Council’s guidance and discuss their reporting requirements for future disclosures. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board. The related party notes in the financial statements should disclose in appropriate detail the value and nature of the transaction.

The Report on Corporate Governance at Hydro Ottawa prepared in August 2004 by Borden Ladner Gervais LLP stated that while there was nothing illegal about the awarding of contracts to Board members:

“…director independence is the cornerstone of good governance. This requires that directors not have significant interests which could compromise, or be perceived to compromise, the ability of a director to exercise his or her judgment with a view to the best interests of the corporation.”

The recent Sarbanes-Oxley Act in the United States has established the principle that director independence is defined as having “no consulting, advisory or other compensatory fee except in the capacity as board or committee member”. This position is consistent with that of several organizations and agencies across North America. For example:

· The Ontario Securities Commission and Canadian Securities Administrators guidelines for good governance state that Directors must have “no direct or indirect material relationship with the issuer”.

· The TSX General Requirements state all Directors must be “free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with a director’s ability to act with a view to the best interests of the corporation…”.

· The New York Stock Exchange guidelines for director independence prohibit directors from having a material relationship with the corporation.

· The NASDAQ guidelines for director independence which state that any director receiving remuneration in excess of $60,000 per year is not considered independent.

Hydro Ottawa has recently approved its Board of Directors’ Conflict of Interest and Conduct Guidelines to restrict this practice in the future. These new guidelines state that:

“Except for approved expenses for Board or Board-related activities, no amounts are to be paid to Directors beyond the amount stipulated by the Shareholder Declaration….

Under the new guidelines, none of the contracts would be permitted except contracts such as the ones involving BelAir Networks, GridWay Computing, and Tundra Semiconductor Corp. which would still be permitted under these guidelines. Permitting these contracts to occur is reasonable as long as the Board member affiliated with the companies does not have a material ownership interest in the companies.

There are additional governance best practices which Hydro Ottawa should address in the future. Some of the more important include:

· clearly defined statement of Board member duties and responsibilities,

· clear policies and procedures to guide the Board in carrying out its role,

· clear structure of responsibility which differentiates between what the Board can do and what managers and employees can do,

· procedures for external communication, including with Council,

· annual objectives and/or performance indicators for the Board,

· annual evaluation of the Board’s and individual member’s performance,

· regular review of the quality of the agendas and minutes,

· Board evaluations of past strategies, objectives and budgets,

· Board-approved annual internal audit plan,

· Board evaluation of CEO performance, and

· Board participation in succession planning for senior staff.

As part of the OAG workplan provided to Council December 2004, the OAG will be conducting a Governance Review at Hydro Ottawa in 2006.

9.0 Other Issue - Records Management

File Management:

For the contracts reviewed as part of this audit, Hydro Ottawa did not usually have project management files or documentation to support the services provided.

There are also specific examples where financial source documents were not available from Hydro Ottawa or Telecom Ottawa and were obtained from the contractors. This included two invoices, one purchase order, four quotations and one contract. There was also another contract not initially available from Hydro Ottawa which was subsequently located by Hydro Ottawa two and a half months after it was requested by the OAG.

In the case of Precept Inc., we were advised by one of the consultants and former Chief Financial Officer that a proposal process had occurred in 2001. However, Hydro Ottawa did not have procurement files available to evidence the procurement process used or evidence of proposals from other firms.

Based on the lack of file support for the contracts examined, Hydro Ottawa should review its records management policies and procedures to ensure that source documents with an appropriate level of detail are maintained and retained.

Unsigned Minutes

During the audit, we reviewed all available minutes for the time period from November 2000 to October 2004. We found many minutes that were missing one or both signatures of the Chair and/or Corporate Secretary as required. Overall 41% of the Board and Committee meeting minutes were not signed as detailed below:

Board/Committee	Number of Meetings	Minutes missing Signatures (1)	Percentage Calculated
Hydro Ottawa Holding Inc – Board of Directors	44	6	14%
Audit Committee	18	18	100%
Nominating Committee	6	6	100%
Energy Ottawa Inc	3	1	33%
Local Distribution Company Committee	7	1	14%
Governance Committee	10	7	70%
Energy & Telecommunications Committee	8	1	13%
Compensation Committee	17	4	24%
Hydro Ottawa Limited – Board of Directors	3	3	100%
Total	116	47	41%

(1) Missing one or both signatures of the Chair and/or Corporate Secretary

The corporate minutes are an important record of corporate direction and strategy as set by the Board. As a matter of routine procedure, minutes should be prepared and signed on a timely basis.

10.0 Recommendations and Management REsponses

The recommendations are as follows:

1. That Hydro Ottawa in collaboration with its shareholder, City of Ottawa, specify and clearly define expected Board member duties and responsibilities and that where Hydro Ottawa requires additional compensation for Board related duties that approval is obtained from the Shareholder;

2. That Hydro Ottawa review its contracting policies and practices to ensure that:

· contracts are required to include an upset limit and a detailed statement of work,

· written justification for the use of sole sourcing is provided, and

· the use of lump sum retainers is not permitted;

3. That Hydro Ottawa review its payment practices and establish and document a policy to confirm checking of invoices to ensure errors are captured prior to cheque issuance;

5. That Hydro Ottawa ensure that minutes and financial statements appropriately disclose related party transactions including the dollar value and appropriate detail. Hydro Ottawa should confirm with its shareholder, the City of Ottawa, the requirement to disclose all financial relationships with members of its Board; and

Shareholder to determine appropriate Hydro Ottawa related party disclosure in the context of a private company with commercial sensitivities that is owned by a public shareholder.

6. That Hydro Ottawa ensure that all minutes of Board and Committee meetings are prepared and signed on a timely basis.