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Hydro One’s main business areas, electrical transmission and distribution, are natural monopolies in the province, and thus the stimulation of competition in these sectors is implausible. Instead, the provincial government may be looking at the ownership effect of financially motivated private investors to generate improvements in the business. This, too, seems unlikely under the proposed plan. With the province retaining 85-90% ownership in Hydro One, having the ability to elect board members, steer corporate strategy and retain control of the company, it is unclear why management would have different incentives than under full public ownership.

Discounted Valuation

The province is selling an interest in a business that has historically been used as a policy tool. For example, over the past few years the province has passed resolutions restricting Hydro One’s ability to hire foreign consultants and redeem costs associated with connecting renewable power projects to the grid. These resolutions were consistent with the political objectives at the time, namely job creation and renewable-energy investment. However, an inevitable outcome of Hydro One’s close history with provincial politics will be investor wariness, which will likely manifest itself in a lower valuation of the company.

Further, with only a 10-15% position, minority investors will have no ability to block future resolutions proposed by the province. While this may not prevent the sale of a minority interest it will likely lead to investors applying a “minority discount” to the purchase price.