The Ontario government is closing in on a deal to merge Hydro One Brampton with three other utilities, a move that could give the province a windfall of close to $500-million while creating Canada's largest municipally-owned electricity distributor and kickstart the selloff of provincial electricity assets.

Sources familiar with negotiations say that Enersource Corp., PowerStream Inc. and Horizon Utilities Corp. are in talks with a provincial panel led by former banker Ed Clark to merge with Hydro One Brampton, a division of the province's Hydro One transmission and distribution giant. The combined entity would serve roughly 960,000 customers in many of the communities to the north and west of Toronto, including Mississauga, Hamilton, Brampton and Vaughan. Enersource is 90-per-cent owned by the City of Mississauga with the rest owned by the Ontario Municipal Employees Retirement System, while Powerstream and Horizon are each jointly owned by several Greater Toronto Area municipalities. All three were born from mergers between municipal hydro companies in the past 15 years.

The merger would be the first step in the partial sale of Hydro One, which the province is banking on to deliver billions of dollars needed to fund Premier Kathleen Wynne's plan to build new transit lines. The government is also looking to float shares in the Crown corporation, starting with an initial public offering of 10 to 15 per cent and followed by subsequent sales that could reduce its stake to less than 50 per cent.

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The Brampton business is believed to be worth as much as $500-million.

The terms of the combination are not clear, but sources indicate the government would end up divesting its stake in exchange for cash to be used for the infrastructure spending plan, rather than a stake in the merged entity.

Also unclear is how the merged business would be structured, where it would be based or who would run the company; PowerStream is by far the largest of the potential partners, with 370,000 customers. But combining four operating units would bring "cost savings that will ultimately benefit the ratepayers," one industry source familiar with the talks said.

The proposed merger is subject to approval from the utilities' municipal shareholders and Ms. Wynne's cabinet, which is expected to be given the option as early as next week.

A four-way merger would deliver on a goal of Mr. Clark's panel, which last fall proposed hiving off Hydro One Brampton and merging it with other players to kick-start consolidation many have long said is needed to drive down operating costs and pass on savings to ratepayers. Ontario's electricity distribution industry is a patchwork consisting of some 70 mostly municipally owned distribution companies as well as Hydro One's distribution business that serves 1.4 million mostly rural customers and a handful of other interests. The system is racked with inefficiencies and Energy Minister Bob Chiarelli has described it as a "balkanized grid of utilities that … just doesn't make sense."

Hydro One Brampton, with 150,000 customers, has long seemed like an oddity within the Hydro One empire, as it has more in common with nearby local distribution companies that have been consolidating around it.

"There are logical partners that [Hydro One Brampton] should merge with, and those partners have made themselves known to everyone," Mr. Clark told The Globe last fall, adding the combined entity should then raise private capital from outside investors. "Brampton should merge with the local distributors, create an entity big enough that's capable of being quite efficient, take that company public and bring in the capital."

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Spokespeople for the three municipal-owned utilities either declined comment or didn't return calls, but they have hinted they are interested in participating in consolidation. "Distribution companies need to gain scale through consolidation in order to lower expected costs for consumers and have greater access to capital to allow to adapt to and invest in the emerging electricity marketplace and its new technologies," said Maurizio Bevilacqua, PowerStream chairman and Vaughan mayor, last fall.

The Ontario government is also considering removing barriers that have prevented widespread consolidation and private investment in the province's electricity distribution business, Mr. Chiarelli said recently.

With files from Jane Taber