In April 2012, the Minister of Energy established the Ontario Distribution Sector Review Panel (“Panel”) to provide advice on how to improve efficiencies in the electricity distribution sector.

The Panel released its report last week.

The key recommendations of the report are:

The 73 LDCs studied should be consolidated into 8 to 12 regional distributors.

  • two of the new distributors should service northeastern and northwestern Ontario
  • the remaining 6 to 10 regional distributors serving southern Ontario should have:
    • at least 400,000 customers
    • boundaries that are contiguous
  • owners of existing LDCs will get shares in the new regional distributor in proportion to the value of the assets they contribute to the new distributor

Affiliates will not be included in a consolidation.

For Hydro One Communities, the report recommends that:

  • it remain a separate entity
  • there should not be an across the board sale of its assets

Hydro One Inc. be given clear and unambiguous direction to discuss the merger of its distribution assets with the appropriate regional distributor.

A Transition Advisor should be appointed to oversee the consolidation process.

LDCs will be required to report within six months of acceptance by the Government of the Panel’s recommendations on the progress of consolidation.

The Progress Report will include evidence of an agreement among LDCs to proceed to consolidation within two years.

Upon receiving the Report, the Transition Advisor may:

  • indicate that a proposed consolidation may not result in an efficient contiguous region or strand a service territory; and
    • require the merging LDCs to provide a revised Progress Report

At the end of the six month period the Transition Advisor will provide a Status Report to the Government which will:

  • provide information on the status of consolidation
  • indicate those proposed mergers that do not result in an efficient contiguous region or strand a service territory
  • identify LDCs that have not been taking steps to create a regional distributor

If more than six months are required by a proposed regional distributor to finalize their voluntary agreements, the Government may give them an additional three months.

At the end of the six month period or the period extended by the Government, the Transition Advisor must issue a Final Report. If it is clear from either the Status Report or the Final Report that the formation of a regional distributor cannot be achieved voluntarily, the report recommends that the Government legislate a consolidation.

  • if the consolidation is legislated, the assets put into the regional distributor will be valued at book value

LDCs that enter into an agreement within the six or nine month period and submit a licence application for a new distributor to the Ontario Energy Board (OEB) within two years should be allowed to recover their prudent transaction costs, including the cost of a third party facilitator.

Despite the requirement that the new regional distributor apply to the OEB for a new licence, the merger will be deemed by the Government to have a net benefit to customers.

Any monies from the disposal of excess utility assets are expected to be reinvested in the regional distributor to strengthen the system.

Savings from increased efficiency are expected to be shared between the shareholders’ customers of the new distributor.

Municipalities holding promissory notes that are above market value should either retire them or renegotiate them at current rates.

Municipalities should be permitted to make loans to distributors in which they are shareholders.

  • The board of a new regional distributor:
    • should have at least two-thirds of the directors independent
      • the Panel prefers 100% of the Board be independent

Comments and Analysis

The program set out in the Panel’s report is ambitious. The question is whether it is overly ambitious. Consolidation in the electric LDC sector has been a goal since “corporatization” of LDCs around the year 2000. While the number of LDCs dropped from over 300 to 73 at the current time, the pace of consolidation has slowed considerably.

Key issues and obstacles in relation to achievement of the report’s recommendations include the following:

  • The timing of the release of the report is less than optimal in terms of its adoption by the provincial government. With the Liberals going into a leadership convention, the legislature prorogued, and elections likely in spring, it may be six months or longer before the provincial government can act on the recommendations contained in the report.
  • If the provincial government (of any political stripe) wishes to move forward with mandated LDC consolidation, it will likely need to deal with a significant number of municipalities that are comfortable with the status quo. They prize local control of their LDC and the jobs and functions located in the municipality.
  • Corporatization of LDCs a dozen years ago, and mergers and acquisitions that have occurred since, were and are expensive and time consuming for municipalities and directors and officers of LDCs.
  • The transfer tax is a requirement that 33% of the fairmarket value of an LDC is paid to the province in the case of a sale or amalgamation. The provincial government has opened numerous transfer tax “holidays” or exemptions over the years to encourage consolidation for public sector acquisitions. These have had limited effect. It is not clear that reopening such an exemption would be any more effective.
  • While the potential for savings on the consumer’s electricity bill due to increased efficiencies in the distribution sector is real, on the typical customer’s bill, 22% of the total amount is distribution charges. As such, a 10% reduction in distribution charges will only reduce the total bill by about 2%. Further, the biggest component of the bill, by far, is the commodity charge (i.e. the cost of actually generating the electricity, which makes up 51% of the bill) which is expected to increase significantly over the next several years.
  • Finally, to the extent the recommendations are adopted, we could see a significant increase in private, as opposed to municipal, ownership of the distribution sector. Previous efforts to privatize significant public players in the electricity business, Hydro One (for transmission) and Ontario Power Generation (for generation,) encountered significant opposition and were not successful.