The biggest pre-determining factor affecting customer rates is customer density; how many customers a local distribution company (LDC) has per kilometer of line or per square kilometer of territory. On the face of it, this makes sense. The closer customers are together the less infrastructure per person is needed to supply everyone.
A few years ago, NOTL Hydro analyzed the rates of all the local distribution companies in Ontario. Customer density was the only input that had any significant correlation with rates. Other inputs, such as the size of the utility, had no statistical significance.
The graph above shows the average provincial customer density (excluding Hydro One) and that of NOTL Hydro. I have excluded Hydro One as their density is very low so would have distorted the chart. There are a couple of points that can be taken from this chart:
- Customer densities are rising. This makes sense. As more homes and commercial buildings are built in an area the density will rise. This should also be helping to keep rates down. Total costs will rise with more customers in a given area but the cost per customer should fall; all else being equal.
- NOTL Hydro’s customer density is much lower than most other LDCs. This also makes sense. Niagara-on-the-Lake has a surprising amount of farmland and rural area. Visitors are often surprised how long it takes to get to the Old Town once they enter the municipal boundaries.
Based on the lower density, it would be expected that NOTL Hydro’s rates would be higher than average when, in fact, they are quite low. I called customer density a pre-determining factor of LDC rates. There are actions that LDCs can take that will raise or lower rates that can offset the impact of customer density. Three key actions taken by NOTL Hydro are:
- We own our own transformer stations. These increase our operating costs but the offsetting savings in transmission rates more than compensate to create a net decrease in rates.
- Our infrastructure approach and our requirement that customers pay for their own improvements have, over time, kept our rate base and thus rates lower. We still spend significantly each year on our grid to keep it in good shape though.
- We try to be efficient. This was recognized by the OEB this year who rated NOTL Hydro in the second best of five efficiency categories.
Some LDCs, like Hydro One, have recognized the impact of customer density and built it into their rate structure. They have different rates depending on the customer density of the area. This is a sensible approach though, unfortunately, does create the opportunity for gaming rates depending on how the densities of areas are categorized for rate setting purposes. By adjusting the area used to define density you can change the rates charged.
Though Niagara-on-the-Lake has clearly defined rural and urban areas, NOTL Hydro has not gone the route of separate rates. You will pay the same rate in Niagara-on-the-Lake no matter where you live within the municipality.
Customer density is also one reason why LDC mergers have not had much of an impact on rates. A merger does not change the customer density of the areas being served as much of the cost structure cannot be changed. There are efficiencies from mergers though, primarily in back-office services and, as I have discussed previously, it is debatable how long these last given some of the off-setting pressures that increase costs.
Customer density will continue to rise in both Niagara-on-the-Lake and all of Ontario as the population continues to increase. This will provide a little bit of respite from the coming pressure on electricity rates from both inflation (hopefully short-lived) and electrification (likely long-lived).