Market update: Final recommendations on Hydro One and broader LDC consolidation

6 minute read
01 April 2015

The Premier’s Advisory Council on Government Assets released its much-anticipated final report on April 16th on the structure of Ontario’s electricity sector. The report is known popularly as the “Clark Report,” after the Council’s Chair, Ed Clark, and is entitled “Striking the Right Balance: Improving Performance and Unlocking Value in the Electricity Sector in Ontario.

The report updates the initial report released by the Advisory Council released last fall and, as anticipated by some and reported on in the media, substantially revises several of the preliminary recommendations made at that time with respect to the structuring and privatization of Hydro One. In sum, the final report concludes that the Province should proceed with the partial sale of its interest in Hydro One by way of an initial public offering. The initial report previously recommended that its transmission and distribution businesses be separated into two entities and that a majority stake in the newly segregated distribution business (60%-65%) be sold to private investors. The initial recommendation to merge Hydro One Brampton into a larger GTA area electricity distributor remains unchanged.

One item of particular note is the report’s focus on catalyzing faster consolidation of the LDC sector through, among other things, the merger of Hydro One Brampton with three other LDCs (Enersource, PowerStream and Horizon) and by addressing current barriers and incentives, such as taxes, that impede consolidation. The report’s final recommendations (which are anticipated to be incorporated into the Province’s 2015 budget that will be presented on April 23) with respect to the privatization of Hydro One, Hydro One Brampton and the LDC sector at large are as follows:

1. The Province should proceed immediately with a sale or merger of its interest in Hydro One Brampton to or with Enersource, PowerStream and Horizon, intended to catalyze consolidation in the Greater Toronto and Hamilton Area and to strengthen competition in the electricity distribution sector by increasing the number of LDCs with the capacity to drive further consolidation.

2. The Province should amend the transfer tax rules and departure tax rules that apply when municipal electricity utilities leave the payment-in-lieu of taxes regime on a time-limited basis and implement these changes as quickly as possible.

3. The Province should proceed with a partial sale of a portion of its interest in Hydro One as an integrated entity, including both the transmission and distribution businesses, to create a growth-oriented company centred in Ontario.

4. The partial sale of the Province’s interest in Hydro One should be by way of an initial public offering so that the company will be widely held, predominantly by Canadians.

5. The government should indicate its intention to retain its remaining shares after selling down to 40%, and the balance should be widely held with no other individual shareholder having more than a 10% holding.

6. Hydro One should be required to maintain its head office and substantially all of its strategic management functions in Ontario.

7. The mandate and powers of the Ontario Energy Board should be strengthened to ensure that changes in industry structure do not put upward pressure on rates.

8. Governance of Hydro One should be adjusted to meet the requirements for a widely-held public company, and certain legislative and government regulatory and policy requirements that are applicable to government entities should be removed.

9. Governance of the company should be vested in its Board of Directors; all directors would be independent with the requisite skills and board experience for an operation of the company's size and owe a fiduciary duty to the company.

10. To ensure the Province has additional powers to protect both the public interest and its investment through the company in Ontario's transmission and distribution systems, Hydro One should not be allowed to do any of the following:

(a) sell all or substantially all of the Ontario-based transmission assets of the company;

(b) sell all or substantially all of the Ontario-based distribution assets of the company; or

(c) change the jurisdiction of incorporation of the company. 

11. The Province, Hydro One management, and unions should finalize agreements on pensions and labour costs in advance of the Hydro One IPO to address issues raised by the Leech Report and the Ontario Energy Board with respect to pensions and compensation.

The last major consolidation of Ontario’s LDCs occurred in the late 1990s which reduced the number of separately owned LDCs from 307 to 89. Since that time, Hydro One agreed or completed the purchase of Norfolk Power, Haldimand Hydro and Woodstock Hydro Services, and Cambridge and North Dumfries Hydro completed the purchase of Brant County Power. The report’s final recommendations, if implemented, could very well drive the next major wave of LDC consolidation in Ontario as well as a broaden the ownership base beyond the public sector.

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