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A fleet vehicle makes its way into the Hydro One Claireville Transfer Station in Vaughan, Ont.

Tim Fraser/The Globe and Mail

The Ontario government has signalled it is open to removing barriers that have prevented widespread consolidation and private investment in the province's electricity distribution business - possibly including a tax holiday for electricity distribution companies undertaking mergers.

"We're looking at those barriers, and others that may stand in the way of meaningful consolidation, and we hope to reduce and eliminate these barriers where we can," Energy Minister Bob Chiarelli told the Electricity Distributors Association on Monday, according to notes prepared for his speech. "Reforms that will offer new opportunity to maximize shareholder value and drive real, meaningful and sustained rate mitigation for Ontario consumers are coming."

Ontario's electricity distribution industry is a patchwork consisting of some 70 mostly municipally-owned distribution companies, Hydro One's distribution business than serves 1.4 million mostly rural customers, and a handful of other interests. The system is wracked with inefficiencies, with dozens of distributors serving less than 20,000 customers each and lacking scale to invest in modernizing the infrastructure. Mr. Chiarelli described it as a "balkanized grid of utilities that … just doesn't make sense."

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Mr. Chiarelli's comments come as Premier Kathleen Wynne and her adviser on government assets, ex-banker Ed Clark, prepare privatization options for the province's electricity distribution regime – an effort she hopes will bring billions of dollars into government coffers to pay for new transit lines. The Globe and Mail reported this week the main option is expected to be the sale of equity in Hydro One, the provincial transmission and distribution utility, on the stock market.

Last fall, Mr. Clark recommended using the Hydro One privatization to encourage consolidation.

His suggestion, he told The Globe at the time, was to allow Brampton Hydro One to merge with one or two other area utilities into a single corporation with private investors. Hydro One's other distribution networks would then either be spun off into a single company with equity sold to the private sector, or could be broken into two or three large pieces and merged with other electricity companies. Mr. Clark said the private sector is interested in consolidation.

"All it's waiting for is the government to say, 'We want this game to happen and we are prepared to put our assets in motion,' " he said.

There are, however, other significant barriers to consolidation, according to the Ontario Energy Association, a lobby group representing larger utilities. The group points to tax laws and regulations that all but prohibit private investors from buying in. For example, the Ontario Electricity Act imposes a 33-per-cent transfer tax on the sale of any assets owned by municipal utilities. Municipal owners can only sell 10 per cent of their local energy distributors to outside buyers; if they sell any more, they trigger a departure tax, as they lose their federal income tax-free status.

By reducing these tax barriers and making other regulatory changes, "the province can help mitigate future cost increases that are ultimately borne by energy customers and also assist LDCs in upgrading infrastructure with the assistance of private capital," OEA president Bob Huggard said in a letter to Finance Minister Charles Sousa last month.

Industry sources read Mr. Chiarelli's comments as the clearest sign yet the government will deal with these problems. They say Mr. Clark's panel is considering a proposal to provide a three- to five-year tax holiday for any companies that participate in consolidation.

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A senior government source said "it's much too early to say" if the government will present such a tax holiday in its budget this spring, but added "there's openness to that, for sure" at the cabinet level.

The source said the decision will depend on the tradeoff between how much tax revenue the government could lose and how much ratepayers could save as a benefit of consolidation. Those figures have not yet been furnished by the panel to the Premier's office.

"The government is interested in anything that can bring down rates," the source said. "That's our motivation. But it's early on."

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