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Ontario is anticipating very significant growth in electricity demand over the coming decades. At the same time, the nature of the electricity load is changing due to the rollout of electric vehicles, the proliferation of data centres, and the electrification of both built infrastructure and manufacturing processes. Simultaneously, utility customer service tools, power metering systems and almost every aspect of power system operations are automating, digitizing and evolving at pace due to the advent of at-scale software solutions, AI and G-AI. This means that Ontario's highly-regarded local distribution companies (“LDCs”) must adapt to meet a wide array of changes in order to stay competitive -and to help keep the Ontario economy competitive as well. Virtually everything we know about last-mile electricity delivery services is changing.
Energy Innovator Roundtables: Exploring Ontario's changing power landscape
On September 18, 2025, Gowling WLG hosted the first Energy Innovator Roundtable of its 2025 season. The event brought together thought leaders from all areas of the distribution sector, including municipal government officials, LDC board members and executives, non-municipal investors and policy planners. The in-depth discussions focused on the current challenges and potential solutions for LDCs to adapt to Ontario's rapidly changing energy landscape.
Gowling WLG's Energy Innovator Roundtables are held annually in September, October, and November. They cover a range of topics primarily related to innovation and change in the Canadian energy sector. The Roundtables operate under the Chatham House Rule1. The observations and commentary here reflect the authors' personal impressions of the discussion and should not be understood as the official viewpoint of Gowling WLG nor of any of the Roundtable participants.
The need for new solutions
One of the key themes highlighted during the Roundtable discussion was the need for new financial solutions. As LDCs across the province reduce dividend payments to shareholders and seek new injections of equity (either directly through cash calls or indirectly through ‘dividend holidays,' debt-to-equity conversions and/or asset sales), the essential bargain between the “last mile” of the electricity grid and its many local municipal shareholders is fraying. That bargain, struck during the restructuring of the distribution sector after Electricity Act, 1998 came into force, anticipated a robust and profitable distribution sector that provides reliable service, skilled employment opportunities and healthy dividends in cities and towns across the province2.
Considering the unique position of LDCs in the political and commercial landscape of the province, any change to the compact between the remaining LDCs and their largely municipal owners is of significant concern.
The ownership paradox
The story of LDC consolidation begins with the restructuring of the province's electricity sector in the late 1990s and early 2000s. The Electricity Act, 1998 mandated over 300 former municipal power utilities, which were often simply departments within local government, to be incorporated as “local distribution companies,” or LDCs, under Ontario's Business Corporations Act3. This created a unique and often challenging dynamic. Once formed, the LDCs became regulated private corporations, but their shareholders often remained municipalities. This established a tension between the LDCs' regulated business objectives and the municipalities' need for dividends and reliable public service.
This tension, and the broader challenges of municipal governance, came to a head in the Town of Collingwood Judicial Inquiry (“Collingwood Inquiry”). The final report of the Collingwood Inquiry, authored by Justice Frank Marrocco and released in November 2020, provided profound insight into the complex governance issues inherent in municipal ownership of regulated utility assets.
The report underscored how a lack of transparency, inadequate governance protocols, and a failure of municipal oversight can compromise the public interest and damage the reputation of the municipality and its officials. The legacy of the Collingwood Inquiry is its spotlight on the unique risks municipalities face as shareholders of LDCs. It stressed the need for robust governance and strategic oversight, establishing critical “rules of the road” for how LDC mergers, acquisitions, and divestitures should be conducted, and just as importantly, how they should not.
The fragmentation challenge
In 2012, Ontario mandated a Distribution Sector Review Panel (“2012 Panel”) to provide a long-term strategic plan for the sector4. The panel's central finding was that Ontario's distribution sector was a fragmented and inefficient system with over 70 LDCs. Then, as now, many were too small to achieve economies of scale and were struggling to meet the challenges of an aging grid and increasing customer demand. The panel's most significant recommendation was to aggressively pursue LDC consolidation. It argued that larger, more efficient companies would be better positioned to invest in technology, improve reliability, and ultimately lower costs for consumers over the long term.
Compared to other provinces and many jurisdictions globally, Ontario's distribution sector is unique for its large number of municipal utilities. Most other Canadian provinces are dominated by one or two large, vertically integrated Crown corporations (like BC Hydro or Hydro-Québec). This consolidation often allows for greater standardization and investment in large-scale infrastructure projects. In many ways, the issues we face today are the same ones identified by the Collingwood Inquiry and the 2012 Panel. The policy drivers for consolidation are as relevant now as they were in 2012.
So the fundamental question—in light of today's new pressures from financial viability and the energy transition to the advent of "strong mayor" powers—is: how do municipal decision-makers, LDC leaders, investors and provincial power system planners navigate the consolidation landscape to secure the sector's future?
A varied landscape
Ontario's power utility sector, which includes generation, transmission and distribution, employs over 60,000 people. These are often considered high-quality, long-term jobs with competitive wages and benefits. The work is highly skilled, often unionized, and essential to the province's economic and social well-being. While financial pressures do bear heavily on some LDCs, it is not a uniform crisis across the sector. Some larger, more consolidated LDCs are relatively financially stable and are making significant capital investments. Although the landscape is not uniform, the pressures are typically most acute for the smaller LDCs.
All LDCs, regardless of size, are facing the same pressures to modernize their grids to handle the shift to a more electrified economy. This requires significant capital investment to adopt and support new technologies which often work more effectively at scale.
The LDCs face unique challenges to raising capital
Ontario's LDCs have limited ability to raise capital. The Ontario Energy Board (“OEB”) must approve any rate set by an LDC and debt-equity-ratios must be maintained.
In addition, the LDCs are required to meet an ownership threshold to retain their tax-exempt status, as discussed in our previous article5. For LDCs owned directly by municipalities, at least 90 per cent of the shares or the capital must be owned by one or more municipalities. This acts as an effective bar on non-municipal investment, such as investment from the Canadian pension fund. Falling below the threshold constitutes a departure tax event. Since most of an LDC's value lies in depreciable property, the departure tax event will likely trigger recaptured depreciation, which can be expensive.
Conclusion
The challenges facing Ontario's LDCs are multifaceted, stemming from a unique governance structure inherited from the post-1998 sector restructuring. The original "bargain" of municipal ownership—providing reliable local service and healthy municipal dividends—is now strained by the need for massive capital investment to accommodate the energy transition and electrification boom. While some LDCs remain financially stable, the pressures are mounting as the service requirements of the sector morph and change. The ownership paradox, highlighted by the Collingwood Inquiry and the 2012 Panel, reveals a fundamental tension between the LDCs as regulated businesses and their municipal owners' financial and political objectives.
Moving forward, securing the future of the "last mile" of Ontario's electricity grid requires a fundamental recalibration of this relationship. Business as usual is not a viable option.
The highly regulated nature of the sector, coupled with tax rules that discourage external investment and non-municipal ownership, creates a significant hurdle to raising the necessary capital. While policy changes from the government are an ideal solution, they are often slow. The long-term health of the entire system, as well as the province's economic and social well-being, depends on a modernized, financially robust distribution sector that can meet the demands of a rapidly electrifying world and help put the province on a footing to compete worldwide.
Footnotes
1. Under the Chatham House Rule, participants may share the information or ideas from the discussions but may not attribute any information or idea to a participant or the participant's affiliation.
2. Electricity Act, 1998, SO 1998, c 15, Sched A.
3. Business Corporations Act, RSO 1990, c B16.
4. Ontario Distribution Sector Review Panel, Renewing Ontario's Electricity Distribution Sector: Putting Consumers First (Toronto: ODSRP, 2012) online:< https://thinkingenergy.ca/wp-content/uploads/2021/03/Report-of-the-Ontario-Distribution-Sector-Review-Panel.pdf >.
5. Gowling WLG, “Ontario government announces changes to the Electricity Act: Will the federal government follow through to remove barriers to LDC consolidation and modernization?” (November 8, 2024).
Read the original article on GowlingWLG.com
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