The Province's Distribution Sector Review Panel has issued a
Report recommending major changes in the electricity distribution
sector. If carried out, the recommendations will have significant
impacts on municipalities and on the electricity utilities they
At present, there are 76 local distribution electricity
utilities (LDCs). As a result of 1998 legislation, all of those
LDCs are Ontario Business Corporations Act companies.
Almost all are owned by municipalities, either wholly by one
municipality or jointly by a number of municipalities.
The Report found that the present system adds materially to
customer costs, as a result of a number of factors:
Smaller LDCs have higher per capita costs for operations,
maintenance, and administration, on average approximately 75%
higher than for larger LDCs
The duplication of equipment and facilities among neighbouring
Smaller LDCs have to pay more to raise money
There are significantly increased regulatory costs of having to
oversee so many LDCs
The Report concludes that, if its recommendations were followed,
electricity costs could be reduced by some $1.2 billion over ten
years, for an annual savings of about $70 per customer.
The Report recommends consolidating the 76 LDCs into between 8
and 12 regional distributors. Two of those distributors would be in
the north, with the remaining 6 to 10 distributors in the balance
of the Province. Each of these would have a minimum of 400,000
The Report also proposes that a period of two years be granted
for the voluntary merger of LDCs. If, at the end of that two-year
period the recommendations in the Report have not been carried out,
the Report recommends legislation requiring consolidation.
The Report proposes a number of incentives to encourage
voluntary merger. These include allowing LDCs to recover their
legitimate transition costs and avoiding an Ontario Energy Board
In order to protect their investments, municipalities owning the
LDCs to be consolidated should receive equity in the new regional
distribution utilities in proportion to the valuation of their
assets used to create each of those new regional distributors. The
objective is to ensure that LDCs' shareholders' fiscal
positions are not adversely affected by the changes in the
The Report recommends that the government eliminate restrictions
that prevent municipalities from making loans to distributors.
Two-thirds of the board of directors of the regional
distributors should be composed of independent directors, although
it would be preferable to have 100% independent board membership.
It is also advised that the new regional distributors encourage
their members to acquire proper training in the areas of governance
and the roles of boards of directors.
Implications: Making the Decision to Merge
LDCs have been an important source of revenue for the
municipalities that own them. As a result, many municipalities will
be reluctant to surrender ownership, even with the Report's
recommendation on the allocation of shares in the new regional
Municipalities and their LDCs will face difficult questions
surrounding whether to merge, with whom to merge and how the assets
of the LDCs should be valued. They will also have to address the
impact of the merger on the assets, liabilities, rights and
obligations of the merging entities and of the continuing entity
formed by the merger. They will also face complex questions in the
negotiation and finalization of the merger transaction and related
documentation and concerning corporate governance, not just in the
decisions related to the merger, but also in the post-merger
governance arrangements. It will be essential that municipalities
receive effective, independent advice about merger decisions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Government of Alberta recently announced a number of policy changes that will impact the Alberta Electricity Market, composed of its generators, transmitters, distributors, retailers, electricity consumers and wholesale electricity market.
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