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Report: Sell municipal hydro assets to free capital for infrastructure

Posted on April 20, 2017

A new report from the C.D. Howe Institute has recommended that Canadian cities sell their local electricity distribution companies (LDCs) and recycle the capital into infrastructure investments.

Capital from the sale of electricity distribution companies should be invested in critical municipal infrastructure, said the new report. In Surge Capacity: Selling City-owned Electricity Distributors to Meet Broader Municipal Infrastructure Needs, author Steven Robins wrote why there is no compelling public policy rationale for municipalities to hold these assets.

“There’s huge potential in Ontario and Alberta for cites to hold equity sales in electricity distribution to jumpstart other infrastructure investments,” said Robins.  “Additionally, both provinces have regulators that have demonstrated their ability to protect consumer interests, by setting the rates for both municipally and privately owned electricity distribution.”

The author argues that many of Canada’s cities — particularly in Alberta and Ontario — own local electricity distribution companies. In fact, Alberta and Ontario have 57 municipally owned utilities, which deliver electricity to 27 per cent of Canadian electricity customers.

Robins further notes that the remainder of Canada’s electricity distribution is provided by provincially held utilities that serve 61 per cent of customers and that these companies often also own transmission and generation assets. “The private sector,” wrote Robins, “serves 10 percent of customers. A further 2.6 percent of customers are served by 22 municipally owned LDCs. These LDCs are beyond the scope of this study (Figure 1).”

Courtesy, C.D. Howe Institute.

Municipalities in Ontario, along with Edmonton and Calgary, could sell all or part of their equity stakes in LDCs — worth between $15 billion and $20 billion — and invest the proceeds in more critical municipal infrastructure needs. This, Robins found, represents a 58–115 per cent premium over the book values of the assets.

Courtesy, C.D. Howe Institute.

Robins argues that the current tax structure distorts incentives for municipalities, encouraging them to retain ownership. Ontario should eliminate or rebate to cities punitive taxes on electricity company sales. The federal government should remit back to provinces any corporate income tax they receive from newly taxable electricity companies, provided the selling government reinvests the proceeds in new infrastructure. Robins uses Australia’s Asset Recycling Initiative as an example of an effective model, “The Australian government provided a 15 per cent incentive payment to states that sold assets and reinvested the proceeds.” This, wrote Robins, curbs the potential in market abuse in LDC sales.

For the full report, visit C.D. Howe’s website.

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