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The Ontario Municipal Employees Retirement System (OMERS), Enersource Corp. and PowerStream Inc. are among the organizations that have expressed an interest to the government in buying a chunk of Hydro One, The Globe and Mail has learned.Tim Fraser/The Globe and Mail

One of Canada's largest pension funds and two electricity distribution companies are circling Hydro One, as Ontario weighs a partial privatization of the Crown corporation.

The Ontario Municipal Employees Retirement System (OMERS), Enersource Corp. and PowerStream Inc. are among the organizations that have expressed an interest to the government in buying a chunk of Hydro One, The Globe and Mail has learned. They are looking to use the privatization as an opportunity to shake up the province's electricity sector with the merger of several distribution companies.

Premier Kathleen Wynne, helped by an advisory council led by former banker Ed Clark, is crafting at least two privatization options, part of an effort by the government to raise cash from its assets to help fund an ambitious $29-billion infrastructure program. The first, unveiled by Mr. Clark last fall, would see Hydro One's local distribution networks hived off and sold while its transmission business remained under government control. The other, revealed this week by The Globe, would keep Hydro One intact and sell an equity stake on the stock market, starting with a 10-to 15-per-cent initial public offering (IPO).

Government and industry sources say several local distribution companies and other potential investors interested in taking part in the privatization have met with Mr. Clark's council.

OMERS approached the government even before Ms. Wynne started planning Hydro One's privatization. OMERS's idea, sources said, is to merge many of Ontario's 70-odd distribution companies into a handful of larger entities, which would be owned in whole or in part by OMERS. Some of those companies are now owned by Hydro One, others by municipalities.

OMERS manages the pensions of 450,000 Ontario municipal employees and retirees. It holds $72-billion in assets, including 10 per cent of Enersource and majority control of Bruce Power nuclear, through its Borealis infrastructure division. The fund declined a request for comment Wednesday.

Enersource and PowerStream, two of the largest distribution companies in the province, are said to be particularly interested in Brampton Hydro One, which Mr. Clark recommended selling last fall. Enersource is 90 per cent owned by the city of Mississauga, with the remainder held by Borealis; PowerStream is co-owned by three municipalities north of Toronto.

Some industry sources have indicated the companies could be looking at a deal that would merge Enersource, PowerStream and Brampton Hydro One – possibly with involvement from OMERS – to establish a large, contiguous electricity utility with 720,000 customers covering most of Toronto's northern and western suburbs.

PowerStream, the province's third-largest local distribution network, has led consolidation in the sector, merging with and buying several other municipally-owned distributors in adjoining regions over the past decade.

"Our strategy has been to grow organically and through consolidation. We've had discussions with a bunch of different parties," said PowerStream spokesman Eric Fagen, who confirmed the company has met with Mr. Clark's council.

"We are looking for any opportunity that can grow us as a utility."

In his interim report last fall, Mr. Clark encouraged electricity consolidation, something that would offer economies of scale and other efficiencies, as well as bringing more private capital into the largely publicly-owned sector. The industry also favours more mergers, but contends regulatory red tape and taxes make it needlessly difficult.

OMERS has publicly signalled its interest in infrastructure, pledging to increase its exposure in such investments from 14.7 per cent of its portfolio last year to 21.5 per cent in the coming years.

Ontario Energy Minister Bob Chiarelli this week offered encouragement to investors, promising the province will privatize part of Hydro One in some fashion: "The Premier and cabinet have decided that there will be a divestiture of some of the ownership interest in Hydro One."

The province has yet to decide what form that privatization will take. Ms. Wynne will present the options to cabinet in the coming weeks and is expected to unveil the result when the government tables its next budget this spring.

After Mr. Clark unveiled the initial proposal to sell off distribution assets, he asked for input from potential buyers. Once the government and the council began hearing from the industry and investors, who pitched them on several different ideas, they decided to start exploring the IPO idea as an alternative privatization option. Sources said push-back from unions representing Hydro One employees may also have played a role: The IPO model is believed to be more palatable to the unions than the original proposal, since the government would maintain a stake.