Canada: Making Sense Of M&A Activity In The Electricity Distribution Market

Ontario is experiencing a slight uptick of merger activity in its electricity distribution utilities market. In April 2013, Hydro One Inc. (Hydro One) entered into an agreement with Norfolk County to acquire 100% of Norfolk Power Inc., and now awaits a decision from the Ontario Energy Board (OEB) on whether the merger has been approved. Hydro One is also said to be in discussions with Midland Power Utility Corporation and Oshawa Power & Utility Corp. about further potential purchases.

An increase of merger activity in the local distribution companies (LDC) sector marks a change from recent years. After the province experienced a frenzy of LDC consolidations in the late 1990s and early 2000s, which saw the number of LDCs drop from 307 to 89, merger activity in the LDC sector ground to a near halt.

Hydro One's renewed interest in acquiring smaller LDCs comes on the heels of a report, Renewing Ontario's Electricity Distribution Sector: Putting the Consumer First (the Report), put out by the Ontario Ministry of Energy's Distribution Sector Review Panel (the Panel) in 2013. The Report concluded that the current number of LDCs operating in the province –80–was too many, and urged further consolidation in the sector to reduce costs and take advantage of scale economies. The Panel's position was that 8 to 12 large regional distributors would be the optimal number to achieve these goals.

The Report made several recommendations as to how the province could best facilitate a transition from the current model to a regionally-structured one. Among other things, the Report recommended that:

  • the Ontario government give "clear and unambiguous direction to Hydro One Inc. to lead and engage in the discussion of the merger of its distribution assets with the appropriate interested utilities";
  • the province enter into discussions with the federal government to facilitate the removal of barriers to private LDC investment;
  • LDC mergers no longer be subject to OEB review and approval;
  • LDCs be given a two-year period in which to voluntarily consolidate; and
  • the government pass legislation to force further LDC consolidation in the event that sufficient consolidation, or progress towards consolidation, had not been achieved by 2015.

Hydro One's recent actions suggest that the Report's recommendations have not fallen on deaf ears. It will be interesting to see whether and to what extent the Report's other, more radical, recommendations also receive traction. Certainly, the implementation of a number of the Report's proposals would be unqualifiedly positive. In particular:

  • The current regulatory policy that requires the OEB to approve all LDC mergers is unnecessary. Managers and shareholders of LDCs are in the best position to gauge whether a merger will be of net benefit to the company and its shareholders. Furthermore, the efficacy of the existing OEB review process is questionable, as evidenced by the toothless "no harm" test that the Board is required to apply, and the fact the Board has never in its history rejected a merger proposal.
  • The current federal and provincial tax policies relating to distribution utilities are harmful. The regulations permit tax-free mergers of LDCs owned by municipalities, or with Hydro One or Ontario Power Generation, but impose significant costs (in the form of "departure taxes" and "transfer taxes") on private investors that acquire more than minority holdings in LDCs. These policies have succeeded in almost completely deterring private investment in the sector: aside from one LDC that is majority-owned by private investors, and a handful of LDCs in which private investors have acquired minority interests, Ontario's LDCs are otherwise all owned by the province or municipalities. In light of the increasingly substantial capital needs of LDCs (to upgrade their existing infrastructure and invest in new technology), it would benefit all parties to enable private investors to invest in or own LDCs. From an investor perspective, LDCs tend to be considered attractive investments due to the stable rates of return that they generate.

It is less easy, however, to endorse the Panel's other recommendations, particularly its suggestion that the province should be strongly encouraging mergers, or even more heavy-handedly, pursuing mergers by legislative edict. As CD Howe Institute's report Mergers by Choice, Not Edict: Reforming Ontario's Electricity Distribution Policy (the Institute Report) noted, there is good reason to be cautious about the Panel's central claim that further consolidation in the industry will achieve efficiencies. As the Institute Report stressed, the data on LDCs from Ontario and elsewhere simply does not establish that a strong correlation between LDC size and efficiency exists.

Moreover, the fact that there has been so little merger activity in the LDC sector in recent years should be considered telling. As the Institute Report points out, LDCs would likely have amalgamated already if they had seen value in doing so:

presumably, the small utilities that remain are either efficiently run, sufficiently isolated to make them unattractive acquisitions, or are themselves hostile to being acquired by other municipally owned LDCs that they judge to be unattractive.

As such, the Institute Report concluded that the government should avoid getting into the business of making centralized decisions as to mandatory consolidations, and rather allow merger decisions to be driven by the specific, business-oriented plans of LDCs' managers. To facilitate this process, policymakers should focus on ensuring that managers have all available options open to them, which, at a minimum, entails requiring regulators to back off and opening the doors to allow private investment to flow in.

Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.