temporary tax cuts

Temporary tax cuts to promote utility mergers

Wednesday, April 29, 2015

Efforts to urge more consolidation among Ontario’s 70+ electric utilities will be backed with temporary tax cuts, beginning in January 2016. Last week’s Ontario budget promises a reduction or outright exemption of transfer taxes, including exemption of capital gains, when municipally owned local distribution companies (LDCs) are sold to the private sector or a larger multi-jurisdictional utility.

Currently, vendors of LDCs must pay a transfer tax equivalent to 33 per cent of the market value of their assets, which goes to the Ontario Electricity Financial Corporation and is applied to the provincial stranded debt in the electricity sector. From the provincial government’s perspective, this compensates for the original bestowal of the assets to municipal governments under the 1998 Electricity Act. However, critics argue that the tax is a disproportionate penalty that has been a barrier to forging economies of scale in the sector.

Larger and mid-sized LDCs will now see the transfer tax rate lowered to 22 per cent during the three years from Jan. 1, 2016 to Dec. 31, 2018. LDCs with fewer than 30,000 customers will be entirely exempted from the tax during the same period.

The Ontario budget announcement came one week after a similar recommendation was released in the report of the Premier’s Advisory Council on Government Assets. That report — which may have garnered greater public interest for its proposals related to beer sales and to the sale of the province’s Hydro One distribution assets — maintained that a limited three-year window for the tax break would be an appropriate balance of municipal and provincial interests. The goal is to create system efficiencies that could benefit electricity ratepayers, while also recognizing provincial taxpayers’ collective stake in the ownership of the assets.

“Our consultations revealed that in many situations, even were the tax to be removed, many municipalities, for a variety of reasons, would prefer to continue to own their local distribution companies,” the report states. “However, the Council’s strong view remains that it is not in the long-term interests of ratepayers in these municipalities to have such a large number of small distribution companies.”

Strategies to promote consolidation are in sync with other calls for LDCs to collaborate on the delivery of conservation programs. As the May 1 deadline approaches for LDCs to submit plans outlining how they’ll achieve their share of the 7 billion kilowatt-hour electricity savings goal, joint plans from two or more LDCs have been promised a faster approval process.

The Electricity Distributors Association (EDA), the umbrella organization of Ontario’s LDCs, also supports the thrust for collaboration in its response to the advisory council’s report.

“These could include shared services among utilities, improved access to capital, and expansion of the permitted scope of utility activities,” an April 16 EDA news release states. “It appears that elements of the recommendations, such as the transfer tax change, may be favourable to the sector.”

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