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KPMG-Westario-PR-Rpt-0001 Final Report

September 12th, 2005

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Introduction

KPMG was asked to conduct a high level assessment of the prudence of management of the CIS systems implementations, upgrades and conversions undertaken by Westario Power Holding Limited (Westario) in response to impending deregulation and as defined in the OEB’s Guidelines for Reporting LDC1 Transition Costs.

This summary report discusses the related background, our review approach, the key findings and observations for Westario’s systems implementation related activities.

CIS Project Background In 2000, Westario was formed through the amalgamation of eight municipal electric utilities into one new Local Distribution Company (LDC). This was in response to the requirements of Bill 35, the Energy Competition Act, 1998. The utilities were Brockton, Hanover, Huron Kinloss, Kincardine, Minto, Saugeen Shores, South Bruce & Wingham. Westario now located in Kincardine, Ontario has over 21,000 customers and a current staff of 37 people. There is no Information Technology department. RDII Utility Consulting & Technologies Inc. (RDII) was engaged by a planning group consisting of representatives from some of the eight utilities to assist with integration of the utilities and the selection of system/solution to operate the newly created organization. In 2000, through a competitive process, Westario selected Daffron & Associates (Daffron) and commenced a CIS software conversion and implementation. Daffron has offered comprehensive application software and services for the utility industry since 1976, serving 160 electric, water and gas utilities and over 3.65 million consumers worldwide. The Daffron product was selected based on a thorough evaluation process; and information obtained that it was deregulation ready and provided all accounting and utility features required in an integrated package. However, Westario, along with several other utilities in Ontario, experienced tremendous difficulties attempting to implement the Daffron solution. Westario decided to drop the Daffron solution for another alternative due to a lack of confidence in the vendor’s ability to be ready for market opening.

In order to meet the rapidly approaching deregulation market ready date, Westario decided to go for a shared services model and selected Canadian Niagara Power Company Limited (CNP) as the principal service provider and SAP as the underlying technology solution. Bluewater Power Distribution Corporation (Bluewater) was originally a part of the shared agreement but eventually split from the consortium. In addition, Westario engaged Spearhead Inc now called New Dimensions Solutions Inc to

1 Local Distribution Company



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assist with the implementation. An aggressive deadline of 3 months was set in order to meet the market ready date.

It has been represented by Westario that only the SAP project costs were recorded as transition costs which now form the basis of the regulatory asset submissions for the OEB.

Our Prudence Review Approach

Our prudence review focused on the execution of reasonable processes in the following areas:

• System solution selection and contracting; and

• Project Management and controls.

The Project Management and controls assessment had three key areas of focus:

• Project Initiation and Planning;

• Project Governance & Monitoring; and

• Project Execution & Control.

In conducting this work we have referenced related components of the Project Management Institute’ s “Project Management Body of Knowledge” (PMBOK, ANSI Standard/PMI 99-001-2000) which represents contemporary practices in Project Management in place at the time of implementing these systems.

This high level review comprised selected interviews and the review of project data and communications produced both during and subsequent to completion of the project.

Key Findings

General Observations

In general, some of the key processes for solution selection, contracting, project management and control were reasonably consistent with practices that we believe would be applied to projects of the scale, complexity and criticality. Relatively few specific concerns or points for improvement were noted. However, management’ s attention is drawn to the following as area of potential future improvement:

• The significant challenges with IT project estimation are well understood. However, there is the opportunity for future improvements in the due diligence applied to a potential vendor or outsourcing partner’ s project plans and estimates.



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While cost growth occurred on the project, we received representations and data supporting management’ s assertion that:

• Reasonable cost management processes were in place;

• Growth drivers were substantially due to environmental factors; and

• Management and their contractors aggressively attempted to address the risks and issues.

We also found some positive examples of prudent management decision making, strong engagement of the leadership and the execution of reasonable Project Management processes in certain aspects of the CIS initiative.

However, based on the information provided for our review, there were also some deficiencies in the rigor of some key Project Management processes associated with Project Monitoring. Specific examples included:

• Despite management’ s engagement and attention to certain detailed cost growth items, there were some deficiencies in costs tracking, forecasting and control;

• Though management was kept informed on a daily basis, the format and content of project reporting provided for our review was somewhat deficient; and

• Key documentation and records have not been readily available limiting our ability to provide positive conclusions on some other processes.

Based on the information provided, these observations would suggest that the Project Management practices used by Westario on the CIS initiative were not fully consistent with contemporary Project Management practices for projects of this scale, complexity and criticality.

Further details of our findings are discussed below.

Solution selection and contracting

We found that in general, the approach taken to the CIS solution selection and contracting was consistent with reasonably prudent practices given the originally intended scale of the project. Specific observations include:

• A reasonable list of candidate solution providers was developed and proposals

were solicited through a formalized Request For Proposal;



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• A number of proposals were received and evaluation of the proposals included both summary and detailed evaluation matrices concluding with the selection of Daffron as the solution provider;

• Westario then entered into contractual arrangement with Daffron to implement their CIS software solution;

• After significant challenges with Daffron and the inability for Westario to achieve complete market ready deregulation functionality, Westario began looking for an alternate CIS solution;

• Westario entered into shared services discussions with CNP and Bluewater and explored a number of compelling arguments in favor such a solution. According to Guy Cluff, President and CEO of Westario; “One significant factor in our decision to partner with CNP and Bluewater was the demonstrated market readiness capability of their systems, including the compliancy of their EBT communication system.”;

• Based on market analysis, discussions and subsequent negotiations with CNP, Westario entered into a shared services arrangement with CNP and continues to operate under that model today; and

• Contracts with CNP, SAP, and New Dimensions were finalized supporting the overall project plan and budgeting.

Though certain documentation related to the negotiations was not available, documentary evidence was provided indicating that reasonable processes were executed to choose the Daffron solution in 2000 and to team with CNP in 2001 for the SAP solution.

Project Initiation and Planning

Certain of the project initiation and planning processes were executed with a rigor consistent with successful projects of the scale and complexity.

• Representations were made that the Westario Board, Technical Coordinating Committee (TCC) and Executive were engaged in the review and approval of the project at initiation. We see evidence of that in the Board and TCC minutes;

• A “Detailed Action Plan” document was prepared by RDII and outlined key business and regulatory steps including the CIS initiative from Sept ’ 00 to Dec ’ 02 at the outset of the project;



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• A Rollout document dated December 2001 was prepared by New Dimensions. The document comprised of a Consulting Services Agreement. Furthermore, a reasonably detailed project plan was created early in the project; and

• There were a scope of work attachments which primarily addresses consulting resources assigned to the project along with their rates. Another attachment entitled “ Project Schedule and Costs” was also provided. These were at a very high level.

However, specific deficiencies were also noted in the versions of the Action Plan and Rollout document forwarded for our review. These included:

• We saw no evidence of a Project Charter or (“ Project Definition Statement” ) and requirements document (“ Business Process Definition” ) which should be reasonably explicit and sufficiently granular for a project of this scale and complexity for either the Daffron or SAP solutions; and

• Specific items of information related to detailed timelines and budgets were incomplete. Even though the “ Action Plan” document and project plan appeared comprehensive in presenting the task list, it did not provide details of the resources and their allocation to the scheduled tasks.

Project Governance & Monitoring

We found that Project Governance and Monitoring processes were executed consistent with reasonable practices for a project of this scale and complexity.

These included:

• Project Structure. Guy Cluff – President/CEO, Westario, was the overall Project Sponsor for the initiative. Pat Bell – Finance Manager (retired), Westario, was Westario’ s senior representative, member of the TCC and worked along with Marcus Venth – Project Manager, New Dimensions, – responsible for configuring the SAP solution. Client relationship management was provided by Steve Sinkoff, SVP/GM of New Dimensions Solutions Inc. who worked closely with Guy and Pat;

• Roles and responsibilities of the teams, the TCC and the Board were reasonably articulated as were issues management and escalation processes;

• Frequent status meetings were held ensuring a strong focus on project objectives, and attention to the resolution of issues. Representations were made that the TCC itself met as required; evidence support weekly meeting;



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• The Board met as required and formal meeting minutes were provided. Records indicate that the members of the Board, while not dedicated to the project, appeared to have maintained reasonable oversight and effective decision making throughout the process;

• Representations were made that the project schedule progress was tracked through meetings between the Westario and contracted Project Managers; and

• Examples of communication related to management action on critical project issues were provided for our review. These demonstrated attention to potential cost driving issues such as increasing resources and increasing timelines.

However, the following deficiencies in monitoring processes were noted based on the absence of certain documentation.

• Project activities and progress;

• Project budget - in terms of actual costs incurred to date, estimates to complete and variance management;

• Defect statistics;

• Project changes (supporting a reasonable change request process); and

• Problems & Issues lists and responsive management action.

Project Execution & Control

It was difficult to determine whether the approach to Project Execution and Control was consistent with reasonable practices for projects of a similar scale, risk and complexity. Our observations included:

• We could not determine whether Scope was defined through a project definition documentation and was then controlled with a reasonable change request process that included suitable impact analysis;

• Though detailed project plans had been completed, they were not subsequently used to monitor the progress of the project;

• It was unclear whether the costs were tracked against project plans, corrective actions for variances were reasonably managed and potential project variances identified and mitigation planned;

• We understand that resource usage was, to a certain extent, planned and then tracked through the costs tracking processes;



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• There was effective project communications including reasonably planned, attended and documented steering committee meetings, and conventional electronic means of communication; records of communication were sourced relatively easy and from our limited sample, appeared sufficient;

• We understand that problem and issue management was maintained throughout the project and tracked through steering committee reporting. We were unable to verify this;

• We were unable to verify whether project risks were systematically managed through out the project;

• We were unable to verify whether Quality Management was conducted through out the project; and

• A project library was maintained with reasonable access to Westario’ s project data after the completion of the project.

Documents

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