Benjamin Dachis is a senior policy analyst at the C.D. Howe Institute
The Advisory Council on Government Assets, led by Ed Clark, announced this week that big changes are in store for the province's beer sales and electricity system. Although much public attention has been on the locally novel idea of allowing beer sales in grocery stores, the biggest potential consequence of the Clark report is to enable cities to sell their electricity assets.
The main money maker for the province, in the current plan, is selling a majority interest in its Hydro One transmission and distribution business. That would bring in $5-billion to pay down provincial debt, and a further $4-billion earmarked for infrastructure investments.
Mr. Clark recommended that the province go further still. Starting in January, the province could temporarily remove an onerous tax that makes it difficult for cities to bring in private capital for electricity investment. The existing tax bite is up to one-third of the value of any purchase of a municipal utility. The tax is so high that sales don't happen.
Removing that barrier would kick-start privately led consolidation of municipally owned distributors.
The key deal to watch, recommended in the report, would merge the Brampton arm of Hydro One with the electricity distributors owned by the cities of Hamilton, St. Catharines, Mississauga, Barrie, Markham and Vaughan. The province's stake in that entity would be 17 per cent, valued at about $600-million. That puts an overall value of the newly merged operation at about $3.6-billion.
Once the tax changes are in place, the next step would be for those municipalities to decide if they would rather sell their stakes in the new company or hold onto them. Combined, the cities would earn about $3-billion from a sale, given Mr. Clark's valuation.
Over the course of their remaining terms in office, municipal councils across the province that still own electricity assets will need to make the same decision.
As of 2013, there were 73 local electricity distributors operating across the province. Most are owned by municipalities. They range in size from tiny Hydro 2000 outside of Ottawa, with barely more than 1,000 customers, to the behemoth Toronto Hydro.
According to 2013 data from the Ontario Energy Board, municipal governments in Ontario were sitting on about $14-billion worth of distribution property and equipment. Collectively, cities owned about 60 per cent of total electricity distribution assets in Ontario, with the province's Hydro One assets representing the rest. The change in the tax rules opens up the ability for cities to sell their electricity assets without paying a tax; $14-billion can buy a lot of new transit lines or buses, or pay down debt.
End-delivery charges are now over one-third of the total bill for a typical residential customer. So getting distribution policy right matters.
While raising money is important, so too is keeping the cost of electricity down. Merging the smallest of operations would likely mean lower operating costs. But as public sector companies grow, mergers with other, large operations will be less likely to result in savings. Mergers led with private capital could bring cost discipline that would keep costs lower than otherwise.
Municipal governments don't need to own distribution companies to keep costs down. The Ontario Energy Board keeps a close regulatory eye on all price changes regardless of who owns the companies. Mr. Clark summed up worries of provincial ownership of regulated electricity assets as "adding a belt when already wearing suspenders." The same applies to cities.
The province's moves to sell its electricity assets will provide funds labelled for infrastructure. It's now time that cities across the province take a close look at their electricity assets too.