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The Ontario government is considering a significant overhaul of the province's energy sector, including a selloff of municipally owned distribution utilities and a merger of two provincially owned planning agencies.

The politically sensitive reforms were debated internally before this spring's budget, and remain in play – albeit at a slower pace than Finance Minister Dwight Duncan would have preferred.

Multiple sources have confirmed that both measures were floated in early drafts of Mr. Duncan's budget. But he was thwarted – at least temporarily – around the cabinet table, leading to the version he tabled on March 27 containing only a vague promise to launch "a comprehensive review of the electricity sector and its various agencies."

Insiders suggest that Energy Minister Chris Bentley was less hawkish than Mr. Duncan, and that other cabinet members shared Mr. Bentley's concerns about upheaval in a sector that has already caused the governing Liberals no shortage of headaches. So the changes were punted until after the budget, but not taken off the table entirely.

Of the two, the merger of the two planning agencies – the Ontario Power Authority and the Independent Electricity System Operator – remains a more imminent possibility, largely because it would be an easier and less substantive initiative.

Actual savings from the merger would be relatively modest. But there could be considerable symbolic value, as Dalton McGuinty's Liberals try to show both commitment to austerity and sensitivity to consumers' anxiety about rising energy bills.

The opposition Progressive Conservatives have repeatedly criticized the "alphabet soup" of provincial agencies, and NDP Leader Andrea Horwath made a similar call for consolidation on Tuesday as she laid out her latest demands in return for supporting Mr. Duncan's budget. That could help provide impetus for the merger to happen, as Mr. McGuinty's minority government looks for common ground with the third party.

But within the energy sector, the province's 80 "local distribution companies" – utilities, such as Toronto Hydro, that are mostly owned by municipalities – are considered a bigger and riskier target.

Proponents of selling them off argue that putting distribution in the hands of a few private companies would make for a more efficient system, with savings passed down to consumers. And the sales would provide municipalities with large cash infusions, reducing the pressure on the cash-strapped province to provide funding for infrastructure and services.

To encourage that privatization, Mr. McGuinty's government would need to eliminate a "transfer tax," which currently requires that 33 per cent of the sale price of an LDC is paid to the province. It would also negotiate with the federal government to try to maintain an arrangement in which LDCs don't pay tax to Ottawa, with all of it going to the province instead. And it might consider selling off the distribution wing of Hydro One, the provincial transmission utility.

Among the concerns about moving forward with such a plan is that private companies would snap up only the more profitable LDCs – leaving taxpayers on the hook for less desirable (often more remote) ones. And the biggest worry, politically, is that the government would be accused of a fire sale, aimed at short-term revenues rather than long-term stability.

As an MPP from the city of London, Ont., Mr. Bentley is well aware of the potential for controversy. Late last year, a rumoured attempt by the Alberta-based utility company EPCOR to buy London Hydro met with public disapproval, and proved an embarrassment for Mayor Joe Fontana.

With the potential for backlash well in mind, Mr. Bentley – known in government circles for his caution – appears to have persuaded Mr. McGuinty to move slowly if at all. According to senior government sources, the review promised by the budget will soon translate into a "blue-ribbon panel" on LDC reform.

Unlikely to report back this year, the panel will represent a less aggressive approach than Mr. Duncan and his officials wanted. But both agency consolidation and LDC selloffs – long bandied about in the energy sector – are nevertheless growing a little closer to reality as the province struggles to get its troubled finances in order.