Close the Ontario Electricity Distribution Funding Gap
Cheaper Capital Now, Voluntary Scale Later
Ontario’s Quietly Unfolding Electricity Distribution Future – Part IV
In his article in the National Post, Minister Lecce talks about the “financial cliff.” But let’s be clear, Ontario is not alone. Governments and regulators across North America and Australia are openly acknowledging the under-investment in grid infrastructure as a systemic risk, and are deploying grants, concessional debt, and regulatory reforms to close the gap which is exactly the situation Ontario is facing. This isn’t just an Ontario problem, it’s a global challenge, and it’s time we act on solutions that are already available to us. As PULSE completes its analysis, this is the kind of practical toolkit Queen’s Park and its agencies can put on the table right away.
The good news is we don’t need new, uncertain reforms to start closing the gap. We can lower the cost of money immediately, bring in outside capital that doesn’t hit tax bases, and only then invite communities to consider voluntary consolidation with bonuses for early movers.
If politicians and the sector approach this issue together, working with the right incentives and understanding of local challenges, we could potentially succeed where past efforts have floundered. An admonishment to municipalities ‘to just sell your assets’ doesn’t work, because there are numerous legitimate reasons not to sell. Instead, the right incentives can lead to multiple outcomes that reach the Province’s goals, without forcing communities into uncertain decisions. This could include creating larger, regional utilities through mergers, increases to already effective back-office & procurement alliances, or public sector pension fund investments. Equally, it can support communities that want to remain stand-alone but better capitalized, or to build regional shared-service platforms without ever selling a share.
Most LDC CEOs and CFOs will understand the alternatives to follow. However, many in the municipal sector – CAOs, mayors and councillors – might be less familiar with structured financing schemes of the types proposed. Accordingly, leaders in the electricity distribution sector will need to focus on building municipal understanding and support. They will need to show their municipal shareholders the path forward, and demonstrate the benefits of these alternatives in the current economic and fiscal environment.
1) Make the money cheaper—sector-wide, this year
- Stand up a pooled borrowing shelf for LDC distribution portfolios with Infrastructure Ontario / Ontario Financing Authority Sustainable Bonds so we issue at scale, regularly, and at the lowest possible coupons. Where projects qualify (resilience, housing connections), use the Province’s Sustainable Bond Framework to deepen demand and tighten spreads. Impact: every 100 bps saved on $1B is ~$10M/yr interest avoided – cash redirected to steel in the ground. Speed: first draws in 6-12 months if documents run in parallel
- Add Canada Infrastructure Bank clean-power anchor tranches to multi-year distribution bundles (stations, feeders, hosting capacity) to lower the blended cost of capital. Speed: 12–18 months to first close; then annual taps
- Use the new 40-year revenue horizon for residential connections to pull forward future, regulated cash flows (targeted securitizations for large housing areas) Speed: 6–12 months for a first issuance once data is standardized
2) Bring in new investors without changing control
- Indigenous equity backed by loan guarantees (Ontario’s Indigenous Opportunities Financing Program and the Canada Indigenous Loan Guarantee Program) via simple AssetCos for new distribution builds; LDCs operate on availability/lease payments. Guarantees compress yields and unlock affordable equity fast. Speed: 6–18 months to first close using live programs. Financial relationship development of this nature could lead to unique ownership models
- Non-voting preferred into an LDC finance affiliate (pensions/insurers subscribe) to add equity-like capital and expand debt headroom while cities keep control. Speed: 6–12 months with standard docs (benefits from the current “invest at home” pension push)
3) Keep every path voluntary
Offer bonuses for those who choose a merger or sale (along the lines of the ‘asset recycling’ model popularized in Australia).
There is no doubt that consolidation is politically sensitive. Keep it opt-in but make it attractive for a limited time. For LDCs that prefer to remain independent or in looser alliances, the first two levers – cheaper capital and new investors without losing control – are enough to move the needle. Ontario has already extended 0% transfer-tax relief on electricity-asset transfers through Dec 31, 2028. So, why not use this to create a consolidation bonus menu and provide a regulatory fast lane for those who choose to consolidate before that deadline?
What a voluntary consolidation bonus menu could look like (time-limited to the tax-relief window):
- Interest buy-down: Ontario Financing Authority/Infrastructure Ontario buydown (e.g., 50–100 bps for 5–7 years) for merged entities that close before Dec 31, 2028. Gap effect: cheaper debt on day one; savings flow to capex
- Reliability match Grant: one-time provincial match (e.g., up to a fixed % of first-year integration spend) only for hardening/hosting-capacity projects in the merged footprint. Gap effect: reduces near-term equity draw
- Synergy retention “integration dividend”: allow merged LDCs to retain a portion of verified net synergies for a defined period before rebasing (on top of the OEB’s earnings-sharing tools). Gap effect: more internal cash to reinvest, with customer protection on a timetable
- Regulatory fast lane: priority scheduling or the OEB’s approval of mergers, amalgamations and acquisitions (MAADs) and a model MAADs filing package; maintain the OEB’s “no-harm” test but publish clear service and affordability guardrails. Gap effect: faster in-service dates lower soft costs/IDC
- Community protections: no forced mergers, local boards retained, and a published customer bill and reliability pledge
This keeps local choice intact, while rewarding municipalities that opt into scale.
4) Accountability the public can see
Transparency is important. Publish a simple, quarterly dashboard: SAIDI/SAIFI, projects energized, external-capital share, and interest-cost savings realized. This ties consolidation bonuses to delivered outcomes and not just promises, and it ensures that the public sees measurable progress on reliability, affordability, and system improvements.
Why this works
This approach gives PULSE and the Province a concrete playbook to address the core risks of affordability, reliability, and visible progress using tools the Province and its agencies already control, and it doesn’t wait on complex ownership or tax reform; instead, it leverages existing financing mechanisms (OFA, CIB, ILGP, IOFP, and DSC changes) to narrow the gap now.
It keeps consolidation voluntary but within a clear, incentivized timeline, aligning with the OEB’s updated consolidation policy (including deferred rebasing up to 10 years and post-merger monitoring). Crucially, it also works for communities that want to stay fully independent or focus on regional shared services by lowering their cost of capital and expanding their investor base without touching control. This gives early movers the opportunity to prove benefits before broader uptake.
Bottom line:
We need to start with cheaper capital and investor partnerships that we can execute within the next 6–12 months. With a fall 2026 municipal election on the horizon this necessitates immediate study by municipal councils in concert with the acumen of LDC board chairs and CEOs. Having said that, we should offer time-limited consolidation bonuses for communities that opt in—taking advantage of the existing tax-relief window—to lock in durable savings, while making sure those who choose independence or alliances still benefit from cheaper capital and new partners, strengthening municipal, utility, and provincial relationships for the long haul.