From Patchwork to Powerhouse: Why Ontario Needs a New Deal for Local Utilities

The electricity sector may soon experience déjà vu, with local distribution company (LDC) reform moving back to the top of the policy agenda. 

Ontario Energy Minister Stephen Lecce has launched the Panel for Utility Leadership and Service Excellence (PULSE) to advise on how the LDC sector can be leveraged to help power what the government calls “the most competitive economy in the G7.” The panel includes industry stalwarts and a former Canadian ambassador to the United States. Its caliber, combined with the short deadline for recommendations, signals that the government is serious about acting and not just studying the issue again. 

This is not the first time Queen’s Park has gone down this road. For more than 25 years, governments of varying political stripes have tried to rationalize a fragmented LDC landscape. The thesis for these efforts has been that greater scale is critical to protecting consumer interests and unlocking the capital needed to meet Ontario’s growing demand for electricity. While the level of consolidation envisioned by past governments has not been achieved, there has been significant voluntary progress achieving scale within the sector. For instance, Hydro One has acquired approximately 90 smaller LDCs, while local and regional mergers have created powerful players in key regions of the province. Where there were more than 300 LDCs in 2000, there are now fewer than 60 today. 

The challenge going forward is that the low hanging fruit has been harvested. Each additional consolidation attempt will involve larger utilities, more customers, and bigger dividend streams at risk for municipal owners. For government, there is no straightforward path to mandatory or forced consolidation. LDCs are municipally owned corporations, and as Associate Chief Justice Marrocco clearly stated in the report on his inquiry into the Collingwood LDC sale, their fates rest with municipal councils. 

Incentives will therefore sit at the heart of any new reform effort. The key question is what kind of LDC system does the province want to build? Will they want Hydro One to act as the consolidator of choice across transmission and distribution, or would it be smarter for them to pursue policies that foster several regional champions with the scale to tackle Ontario’s electrification needs? Still yet, should policy focus instead on new ownership and financing models that unlock innovative solutions? These are the critical questions before the PULSE. 

However, consolidation for consolidation’s sake isn’t the issue. The real issue underlying the talk of consolidation is the next wave of electrification and how it will test not just provincial generation capacity, but also the ability of LDCs to deliver power reliably to electric vehicles, heat pumps, data centres, transit systems, and homes. At the distribution level, the main constraint is capital. The cost of basic equipment has risen sharply. For example, the price of a transformer between 2019 and 2025 has increased by anywhere from 45% to more than 200%, driven by electrification pressures, supply disruptions, and higher material costs. Now multiply these cost impacts across the billions of dollars of renewed and new investment that is required in Ontario’s grid over the coming decade. 

From our perspective, any serious attempt by PULSE to address the capital needs of Ontario’s electricity system will have to adeptly address the following set of known challenges: 

• LDCs are municipal assets: Municipal leaders are responsible for protecting a reliable source of dividend income and ensuring effective stewardship of an essential local service, which creates a natural bias toward cautious, risk averse decisions about structural change. 
• LDC boards and management must safeguard corporate stability and shareholder value: Leadership teams are understandably cautious about pursuing strategies that could disrupt operations, reduce organizational capacity, or create uncertainty for employees and communities. Accordingly, any change to capital or ownership structure needs to demonstrate clear, long-term benefits for the corporation and its owners. 
• Canadian bias to local control: Canadians tend to be cautious about privatizing or centralizing control of core public assets, and often equate local ownership with closer oversight and easier access to decision makers. This creates political and community resistance to transactions that shift control away from public authorities, even when there may be strong arguments about efficiency, scale or long-term investment needs. 
• Pension funds have shown limited interest in smaller Canadian utility assets. Although widely discussed as ideal long-term investors, tax rules and barriers related to control have dampened their appetite. 
• Customer benefits are opaque (at best): Despite multiple waves of consolidation, customers have not seen meaningful reductions in their bills. While some costs may have been avoided compared to a more fragmented system, the grid still faces significant investment needs in renewal and growth, leaving real uncertainty about whether further consolidation will translate into lower costs or better service quality for end users. 

Progress will depend on crafting a framework that encourages acquisitions, mergers, and new capital while respecting local decision making. The current environment may present that greatest opportunity in a generation to reform and strengthen the province’s distribution sector – but only if municipal leaders and local communities can see clear benefits.