On average in Ontario, 23% of your hydro bill is kept by the Local Distribution Company (LDC). This percentage will vary based on factors like the customer mix of the LDC and their distribution rates. At NOTL Hydro, the average retention is 17%.
This is not a margin like in many businesses. LDCs do not buy power from the grid and then mark up the price for resale. LDCs sell power and all other services (transmission, regulatory charges) with zero mark-up. Instead, LDCs have their own separate rates that are approved by the Ontario Energy Board (OEB) and these are added to the bill that goes to the customers’ monthly. I recognize that for most customers this distinction is irrelevant as they look at the entire bill as one amount.
One of the responsibilities of the LDCs is to collect this full amount of their bills from their customers. If these are not collected, it is the LDC that absorbs the full loss. The LDC cannot reduce their payment for the generation, transmission and other services.
Built into the LDC rates is a provision for uncollectible accounts. This provision is based on historical results and is negotiated with the OEB as part of the rate setting process. Any losses above this provision is a reduction in the net income of the LDC. LDCs therefore have two incentives to keep the loss from uncollectible accounts low. The first is to protect against negative impacts to their own net income. The second is to keep their rates low as the lower the provision then the lower the rates.
LDCs have three tools to assist in their collection efforts: security deposits, disconnects and support programs.
Security Deposits
LDCs have the right to request a deposit from any new or existing customer to protect against non-payment until the customer has established a good payment history. The OEB has a number of strict rules around the use of security deposits. These include:
- Deposits are calculated using your recent electricity bills. The maximum deposit amount an electricity provider can ask for is 2.5 times your average monthly bill.
- The security deposit must be returned once a good payment history has been established. The good payment history is 1 year for residential customers, 3 years for small commercial customers and 7 years for large industrial customers.
- The good payment history at another LDC, either an electricity or natural gas utility in Canada, is recognized through a reference letter from that LDC.
- There are certain alternatives to a security deposit that apply in some cases such as participating in a pre-authorized payment plan, an equal payment plan, providing a credit check with a satisfactory credit rating or providing a letter of credit from a bank.
- Missed payments, short payments or other payment deficiencies can result in the extension of the security deposit requirement.
Security deposits are a risk mitigation tool. An LDC will want to have a security deposit for customers that are most at risk of non-payment. The two types of customers with the most risk are renters and small commercial customers. Renters can leave their property at any time and it can be expensive to try to track them down. Small commercial businesses are also often renters and have a higher failure rate. Residential customers that own their own homes have proven to be low risk. Like many LDCs, NOTL Hydro no longer requires a security deposit from residential customers unless they establish a poor payment record.
The other type of customer that require special consideration are very large customers. Though the risk of non-payment may be low, the financial ramifications from any non-payment could be high. LDCs must determine how to manage this risk on a case-by-case basis.
Disconnects
LDCs take a number of steps to try to collect on bills once they have been issued. These include overdue notices, disconnection notices, and phone calls to the customer before disconnection takes place.
The actual disconnection is the ultimate act by an LDC. A disconnection is designed to do two things. It caps the loss should the customer not pay and it puts pressure on the customer to pay as they no longer have access to this essential service. It should be noted that disconnections also benefit all customers, not just the LDC, as they limit future rate increases from higher potential losses. In most industries, the equivalent of a disconnection, no longer selling to a customer, is a non-issue and standard practice. The fact that electricity is an essential service makes disconnections a more significant step.
It is this significance that has lead the OEB to create regulations around the whole disconnection process with a particular emphasis on timing and giving the customer the opportunity to pay prior to disconnection. Most LDCs have also created their own internal processes to ensure disconnections are being made for the right reasons and in the right way. At NOTL Hydro, the list of customers up for disconnection is approved by the President. Despite this, there have been some disconnections that created media attention for the wrong reasons, including one that became a topic on the floor of Queen’s Park (never a good thing), that perpetuate the stereotype of the uncaring big utility.
The reality is that most LDCs are dealing with the same set of customers over and over again. At NOTL Hydro, we are fortunate in that due to the nature of our customer demographics, our number of disconnections is quite low. Even so, the customers usually involved in disconnections are known to NOTL Hydro staff due to their continuous behaviour. The fact that these customers are usually reconnected within a few days is evidence that this is due to behavioural rather than financial circumstances. The costs of reconnecting after a disconnection also outweigh any benefits from the delayed payments.
A number of years ago, Ontario instituted a ban on residential disconnections in the winter. I am of two minds on this one. In principle, I think the winter disconnect ban is wrong. It rewards bad behaviour and it drives up costs and, therefore, rates. The ad behaviour being rewarded is not paying the electricity bill. We see customers who deliberately do not pay their bill in winter because of the disconnection ban. This makes it more difficult for them when the bigger bill must be paid in the spring. The higher costs come from the bigger collection efforts that are now required and from higher write-offs. However, I also recognize the political element to the winter disconnection ban. Shutting off an essential service like electricity during a Canadian winter does not look good and there were some abuses of this process. At NOTL Hydro, we were always very careful with winter disconnections though that does not mean there weren’t some.
Customer Support
For customers who are not in a position to pay there are some ways we can provide support. These include:
- Payment arrangements can be made with the customer. These allow the customer to pay the amount in arrears over a period rather than all at once. While this can be helpful if a large bill has accrued, the customer is still responsible for meeting both the payment arrangement and all future invoices. Failure to do so can lead to disconnection in the future.
- All electric utilities in Ontario make a payment to a LEAP (Low-income Energy Assistance Program ) provider. In Niagara-on-the-Lake the provider is Reach Out Niagara. This is run by volunteers and they can provide financial assistance based on the criteria of the regulations. One of the key steps in getting assistance is customers need to provide proof of their financial condition. This only goes to the LEAP agency. As a utility, we never want to have this information.
- The Government of Ontario offers a centralized customer support program called Ontario Electricity Support Program (OESP) to which anyone can apply. The support provided, if any, is based on income and household size.
- There are other not-for-profit organizations who can help customers in financial distress.
If we think a customer will qualify for this assistance and benefit from it, we will direct them to these organizations. We will not disconnect a customer while they are going through this process but it is still the customer’s responsibility to get the bill paid eventually.
Conclusion
Like any business, NOTL Hydro and all the electricity industry must collect on its bills in order for the business to operate. NOTL Hydro collects recognizing this is an essential service and trying to be as fair to all customers as possible, but we must collect.