Recently, reports of behind-the-scenes consideration of the sale
of a minority stake in city-owned Toronto Hydro have surfaced. Some
(including Mayor Tory himself) have criticized any such potential
deal as a "fire sale." Others cite the need for new
sources of revenue to fund needed infrastructure. Whether Toronto
Hydro remains wholly owned by the city or not, current or future
owners should not expect that the heavily regulated monopoly will
continue to churn out dividends the way it always has. Disruptive
technologies may leave owners with a very different type of company
in a very few years.
A sale of part of Toronto Hydro, while unprecedented in the
corporation's history, would be unsurprising given the
industry's current climate. The province is selling a minority
stake in Hydro One, its electricity transmitter and distributor, as
part of a public offering. This past fall, the shareholders of
Enersource (Mississauga), Horizon Utilities (Hamilton and St.
Catharines) and PowerStream (Markham, Richmond Hill, Vaughan,
Barrie and others) approved a proposal to merge the three companies
and purchase Hydro One Brampton. Energy Minister Bob Chiarelli has
encouraged and applauded these transactions as ways to increase
efficiencies and "bend the cost curve."
Just as consumers empowered by technology are choosing Uber over
traditional taxis, electricity distribution customers are being
empowered in ways that threaten the utilities' traditional
The current grid was developed to accommodate the one-way travel
of electricity, from large central generation plants (think Niagara
Falls and nuclear power plants) to consumer. However, the declining
cost of "distributed" small scale renewable and other
generation, electricity storage, private "micro-grids,"
and "demand response" (shifting consumption from
expensive peak times) means that the grid must become
"smart" and be able to accommodate electricity flow in
different directions. These trends also mean that consumers at some
point may have the option of "cutting the cord" to the
distributor and relying on their own resources. In Germany, one in
six companies now generates its own electricity, a year on year
increase of 50%.
Once a customer disconnects from the distribution system, costs
increase for the remaining customers (who need to make up the lost
revenue). Increasing costs for the remaining customers means
greater incentives for them to disconnect. And so on. When enough
customers have disconnected, there is not enough revenue to
maintain and operate the network. This has been described as the
utility "death spiral." Exaggerated? Probably. Cause for
The industry is responding. Ontario has made a massive
investment in smart meters and the smart grid. The Ontario Energy
Board has adopted a rate design that "decouples"
electricity consumed by customers and the revenue received by
distributors. And many utilities, including Toronto Hydro, have
begun to sell products and services related to (i) reducing
consumption through increased efficiency, (ii) reducing emissions
through the use of renewable sources, (iii) increasing grid
efficiency through a two-way, networked smart grid, and (iv)
increasing grid flexibility to integrate distributed
Crucially, these activities are outside of the traditional
regulated-monopoly distribution business. Utilities will need to
compete with generators, energy services companies and technology
and telecom companies.
These competitive service offerings represent a business model
some are calling "Utility 2.0." While challenging, the
Utility 2.0 model would provide tremendous new opportunities for
incumbents, if they recognize and respond to them.
It took Uber only three years to disrupt the taxi industry. They
did so by servicing customers outside of the regulated industry who
then became a political constituency. Regulation is now scrambling
to catch up.
The pace of change in the electricity sector is unlikely to
match that of Uber. Opportunities and challenges may arise over the
next five years or over the next couple of decades. In any case,
existing and future owners of Toronto Hydro will be making a bet on
the speed and direction of these changes, whether they know it or
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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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