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March 25, 2013 – While provincially appointed panels have recommended that Ontario force local electricity distribution companies (LDCs) to merge into a handful of large, regional operations, it is unclear that this would be a better deal for the people of Ontario, according to a report from the C.D. Howe Institute. In “Mergers by Choice, Not Edict: Reforming Ontario’s Electricity Distribution Policy,” the authors recommend instead that Ontario government policy should be neutral towards mergers and acquisitions, permit private sector participation, and allow individual LDCs and municipalities to make their own choices.

The authors, Stephen Fyfe, Mark Garner and George Vegh, find that although many LDCs may be smaller than the optimal size, there is no evidence to suggest that a few very large, amalgamated LDCs would have lower costs per customer. The unfortunate experience surrounding forced amalgamations among municipal governments offers an example of how mergers do not necessarily lead to realized savings.

A more fundamental question than scale is that of ownership. Ontario tax policy is neutral toward mergers of publicly owned LDCs, but restricts private sector participation in the sector. As a consequence, tax policy seriously inhibits consolidations involving investments by commercially owned companies. The province should remove barriers to private sector investment in the distribution sector, which it could achieve by eliminating taxes on sales of LDCs to private companies, conclude the authors.

“Government should reform tax policies that currently impose barriers on private investment,” said co-author Stephen Fyfe, “and permit individual distribution companies to pursue commercially sensible mergers and to seek the private investment they need to renew their aging capital stock.”

To preserve the provincial tax base, if Ontario were to eliminate taxes on the sale of LDCs to private companies, the federal government should enact changes to the Income Tax Act. It should either allow LDCs to remain tax exempt with as much as 49 percent private ownership or, even better, introduce a transfer tax system in which it remits to the province, at least temporarily, the corporate taxes it will collect from privatized utilities.

Click here for the full report.

For more information contact: Stephen Fyfe, National Practice Group Leader, Tax, Borden Ladner Gervais LLP;  Mark Garner, regulatory consultant and former Managing Director of Policy and Applications at the Ontario Energy Board; George Vegh, head of McCarthy Tétrault’s Toronto energy regulation practice; Benjamin Dachis, Senior Policy Analyst, C.D. Howe Institute, 416-865-1904, email: cdhowe@cdhowe.org