HYDRO OTTAWA HOLDING INC.	REPORT
SOCIÉTÉ DE PORTEFEUILLE D’HYDRO OTTAWA INC.	RAPPORT

June 19, 2007

Le 19 juin 2007

To / Destinataire: Mayor and Members of City Council

City of Ottawa / Le maire et les membres du Conseil

SUBJECT: HYDRO OTTAWA HOLDING INC. – ANNUAL REPORT, ANNUAL GENERAL MEETING OF THE SHAREHOLDER AND REMUNERATION OF DIRECTORS

OBJET: RAPPORT ANNUEL DE LA SOCIÉTÉ DE PORTEFEUILLE HYDRO OTTAWA INC., ASSEMBLÉE GÉNÉRALE ANNUELLE DES ACTIONNAIRES ET RÉMUNÉRATION DES ADMINISTRATEURS

RECOMMENDATIONS

That Council approve:

1. That the Annual Report and Financial Statements of Hydro Ottawa Holding Inc. for the Year 2006 be received;

2. That Ernst & Young LLP be appointed as the auditor of Hydro Ottawa Holding Inc. for the Year 2007;

3. That the amendment to By-law No. 1 of the Hydro Ottawa Holding Inc. in the form set out in this report be confirmed;

4. That the remuneration provided to members of the Boards of Directors of Hydro Ottawa Holding Inc. and Hydro Ottawa Limited be amended to adjust the Board of Directors and committee meeting attendance fees paid to directors (to $800 per meeting) and chairs of committees (to $1,000 per meeting) as set out in this report; and

5. That the Mayor and the City Clerk be authorized to sign a written resolution on behalf of the City of Ottawa as shareholder of Hydro Ottawa Holding Inc. setting out the resolutions approved by the City Council.

RECOMMANDATIONS

Que le Conseil municipal approuve les recommandations suivantes :

1. Que soient reçus le rapport annuel et les états financiers de 2006 de la Société de portefeuille Hydro Ottawa inc.;

2. Que la société à responsabilité limitée Ernst and Young soit désignée vérificatrice de la Société de portefeuille Hydro Ottawa inc. pour l’année 2007;

3. Que la modification au Règlement n^o 1 de la Société de portefeuille Hydro Ottawa inc. soit confirmée sous la forme présentée dans le rapport;

4. Que la rémunération versée aux membres du conseil d’administration de la Société de portefeuille Hydro Ottawa inc. soit rajustée pour tenir compte des jetons de présence payés aux administrateurs et aux présidents de comité pour leur participation aux réunions du conseil et des comités, qui s’élèvent à 800 $ et à 1 000 $ par réunion respectivement, comme il est énoncé dans le rapport;

5. Que le maire et le greffier municipal soient autorisés à signer, au nom de la Ville d’Ottawa à titre d’actionnaire de la Société de portefeuille Hydro Ottawa inc., une résolution écrite énonçant les résolutions approuvées par le Conseil municipal.

BACKGROUND

Under the Ontario Business Corporations Act and the terms of the Shareholder Declaration issued by the City of Ottawa, Hydro Ottawa Holding Inc. (“the corporation”) is required to place before its shareholder, the City of Ottawa, annual financial statements relating to the corporation. As a privately held corporation, Hydro Ottawa Holding Inc. is not required to prepare an annual report relating to its activities and the activities of its subsidiaries Hydro Ottawa Limited, Energy Ottawa Inc. and Telecom Ottawa Holding Inc. In August 2004, the City Council requested that Hydro Ottawa Holding report regularly on matters affecting the group of companies. The Annual Report is a component of the response to this request while also providing the financial reporting information required to be provided to the shareholder.

The Annual Report of Hydro Ottawa Holding Inc. for 2006 will be distributed separately. The consolidated financial statements included in the report consolidate financial information relating to Hydro Ottawa Limited, Energy Ottawa Inc. and Telecom Ottawa Holding Inc. and its subsidiaries. The Business Corporations Act requires that the financial statements of the corporation be placed before the annual meeting of the shareholder.

Auditor Selection

The shareholder is also required to appoint an auditor for the corporation at the meeting. Last year, the City of Ottawa approved the appointment of Deloitte & Touche as auditors for Hydro Ottawa Holding Inc. This was a one-year extension of an initial three-year term that has now ended upon completion of the audit of the 2006 financial statements.

In February 2007, Hydro Ottawa Holding issued a request for proposals (RFP) for external audit services for a three-year term. The RFP was sent to the four accounting firms that audit the financial statements for the ten largest electricity distribution companies in Ontario. The Board of Directors appointed a committee made up of four directors (from the Boards of Hydro Ottawa Holding and Hydro Ottawa Limited, including the President and Chief Executive Officer) and the Chief Financial Officer to review proposals received and recommend one firm for selection. This committee and the Board of Directors has recommended that Ernst & Young be appointed as the auditor of Hydro Ottawa Holding Inc. and its subsidiaries for the year 2007. Ernst & Young has considerable experience in auditing the financial statements of electricity distribution companies and their affiliated companies. The City Manager has been consulted in relation to the proposed appointment and concurs with this recommendation.

By-law Amendment

In June 2006, on the recommendation of the Nominating Committee of Hydro Ottawa Holding Inc., City Council appointed a number of directors to the Board of Directors of Hydro Ottawa Holding. Among the appointments, City Council appointed Pierre Richard to a term of four years and recommended that he be appointed as Chair. The organizing by-law of the corporation limited the terms of appointment of directors to three years. In order to give effect to the appointment made by City Council, the Board of Directors amended the organizing by-law to provide that the Chair of the corporation have a four-year term. The Ontario Business Corporations Act requires that the shareholder (through City Council) confirm the amendment of the by-law at its next meeting in order that it may continue to have effect. The full text of the amendment is attached at Annex “A”.

Remuneration of Directors

The Shareholder Declaration for Hydro Ottawa Holding Inc. provides that the shareholder establishes the remuneration paid to the directors of Hydro Ottawa Holding and its subsidiaries (including Hydro Ottawa Limited). The Shareholder Declaration also requires that the Board of Directors review director remuneration every other year and bring forward recommendations to City Council at the meeting considering the annual financial statements. Those levels of remuneration have not been adjusted since the corporations were created in October 2000, with the exception of an adjustment to the remuneration of the Chair approved in August 2004.

In 2006, Hydro Ottawa Holding retained the consulting firm SpencerStuart to conduct a review of director remuneration. SpencerStuart is a firm that specializes in director and executive recruitment and studies and monitors governance practices in Canada and other countries, including director remuneration. This review demonstrates that the remuneration paid to directors of Hydro Ottawa companies is below that paid to other Ontario public utilities of comparable size.

A number of legislative provisions in areas including occupational health and safety, environmental compliance and licence compliance impose a duty of due diligence on directors in the exercise of their responsibilities. Directors are also responsible for setting strategic directions for the corporation and its subsidiaries and monitor the performance of management. Directors of the corporation spend a significant amount of time in preparing for meetings of the respective Boards of Directors and their committees, including the review of numerous reports.

The responsibilities of the chairs of the committees of the Boards are significantly more involved. They must establish the annual schedule of meetings of their committees, establish the agendas of meetings and frequently review draft reports and other materials proposed to be included with agendas. They preside at meetings of the committees and report to their respective Boards of Directors on matters arising from committee meetings. Currently, committee chairs receive no additional remuneration for fulfilling these additional duties. It is an emerging corporate practice to provide additional remuneration to directors who chair committees.

SpencerStuart has recommended adjustments to the remuneration of directors, including adjusting meeting attendance fees for directors to $800 per meeting and providing committee chairs with a fee of $1,000 per meeting. (See extract from the report of SpencerStuart attached at Annex ‘B’). The Board of Directors of Hydro Ottawa Holding, based on the recommendations of SpencerStuart, is recommending that the fee paid to directors (other than the chair of a committee) for attending at meetings of the Boards of Directors and committees of Hydro Ottawa Holding Inc. and Hydro Ottawa Limited be adjusted to $800 per meeting. It is also recommended that the fee paid to the chair of a committee for attending and chairing a committee meeting be $1,000 per meeting. No adjustment to the annual stipend paid to directors is recommended.

_________________________________ Pierre Richard Q.C. Chair

________________________________ Rosemarie T. Leclair President and Chief Executive Officer

Annex “A”

Amendment to By-Law No. 1 of

Hydro Ottawa Holding Inc

(the “Corporation”)

1. Section 3.2 of By-law No. 1 of the Corporation with respect to the term of directors by adding thereto the following paragraph as paragraph (a) and renumbering all subsequent paragraphs:

3.2 Term of Directors - The term of office of each Director (other than an ex officio Director) shall:

(a) in the case of the Chair of the Board of Directors, for a term of four years;

Annex “B”