Overhead power lines are cross over Kingston, Ont., on March 8, 2017.Lars Hagberg/The Canadian Press
Thomas Timmins, Robert Hull and Paul Carenza are lawyers with Gowling WLG.
The government of Ontario unveiled a bold plan last month to amend the Electricity Act, aiming to remove barriers to consolidation among local distribution companies, commonly known as municipal electricity utilities. These proposed changes signal a push toward a more streamlined, efficient electricity distribution sector – one with the scale to meet the demands of a rapidly electrifying economy.
But for this vision to succeed, the federal government must step up and address a crucial barrier: the restrictive ownership cap that limits private investment in municipal utilities.
Ontario’s electricity distribution sector is currently a patchwork of 61 utilities, varying widely in size, capacity, and customer base. By consolidating these fragmented utilities, Ontario could boost efficiency, lower electricity rates, and improve service reliability. Furthermore, by extending and expanding existing tax incentives, Ontario hopes to attract private capital investment – a critical resource as the province prepares for the massive grid expansion required by net-zero targets.
Under the province’s current plan for the Electricity Act, LDCs will enjoy enhanced tax incentives designed to make consolidation more attractive. For instance, it is proposed that smaller utilities be made from the transfer tax levied on merging entities, while larger ones will face a reduced rate. Yet, these measures only go so far. The real barrier to attracting capital lies in federal tax rules that effectively limit private ownership of municipal corporations to 10 per cent. If municipal ownership falls below 90 per cent, any transfer of assets attracts a costly departure tax, which can be prohibitively expensive for larger utilities.
To meet Ontario’s net-zero electrification goals, industry projections estimate capital needs of $30-billion or more. Yet without greater access to private capital, Ontario risks being unable to fund the essential infrastructure upgrades and grid modernization that will be required. Lowering the non-municipal ownership cap would allow LDCs to maintain their income tax-exempt status, avoid the departure tax, and attract a greater capital investment and interest from private investors. Without this change, Ontario’s LDCs will continue to face financial constraints that could hamper their ability to adapt to the evolving energy landscape.
For years, LDC advocates have lobbied the federal government to address this restrictive threshold. There is a case to be made for special provisions for the energy sector, where efficiency and innovation are crucial.
Critics argue that tax policies should remain consistent across sectors. But in this case, enabling private investment in utilities and facilitating consolidation isn’t just beneficial for the energy sector – it’s essential for national infrastructure resilience and economic growth.
The timing of federal action is also a concern. With a minority government and potential election pressures, Parliament may be prorogued, delaying any policy changes even further. This legislative uncertainty leaves Ontario’s grid modernization ambitions hanging in the balance.
Ontario has laid the groundwork for a more resilient, efficient electricity distribution sector, but Ottawa’s co-operation is needed to complete the vision. If the federal government were to lower the non-municipal ownership cap, it would be a transformative step, opening up the sector to much-needed private capital while also aligning with Canada’s broader economic and environmental goals.
Ultimately, Ontario’s electricity distribution landscape and its readiness for the energy transition depend on a unified effort. The stakes are high: with demand for electrification growing, and grid modernization crucial for economic resilience, both provincial and federal policymakers must prioritize this issue. The collaboration needed now could define the efficiency, reliability, and sustainability of Ontario’s electricity sector for decades to come.