NOTL Hydro is one of the smaller Local Distribution Companies (LDCs) in Ontario. NOTL Hydro has just over 10,000 customers and I estimate that out of 54 LDCs in Ontario NOTL Hydro is ranked number 40 in terms of size. The average size is around 100,000 customers though this average is skewed by two LDCs, Alectra and Hydro One, that have over 1 million customers each. The median customer size is around 25,000 customers.
Praising smaller LDCs when we are one of them seems self-serving but there are some valid reasons for this.
Every year the Ontario Energy Board evaluates the efficiency of all the LDCs and ranks them in groups from 1-5 with Group 1 being the most efficient and Group 5 the least. The latest report can be found here: https://www.oeb.ca/sites/default/files/PEG-Benchmarking-Report-20230718.pdf . Group 1 is dominated by small LDCs while the top 5 largest LDCs are all in Groups 3-5. NOTL Hydro is in Group 2.
The lowest rates in the Province are from the some of the smallest LDCs. Now, to be fair, so are some of the highest. This is reflected in the chart below which shows that there is no correlation between rates and LDC size. I estimate that NOTL Hydro (the red dot) has the 11th lowest residential delivery rate in the Province and, as we have often said, the lowest in the Niagara Region.
Quality of service is difficult to measure though the Ontario Energy Board tries with its Scorecards https://www.oeb.ca/utility-performance-and-monitoring/scorecard/583/view. Generally speaking, the LDCs at which you can visit the office for personal service, at which you can easily talk to a real person on the phone quickly and which have higher engagement in their community tend to be the smaller LDCs.
Why Smaller may be Better
We have been conditioned to think that bigger is more efficient and with lower prices due to economies of scale, lower capital costs and better access to services and supplies. LDCs are an example of why this is not always the case:
- Economies of scale can be realized on certain services by service providers, rather than the LDCs themselves, who then support multiple LDCs. For instance, NOTL Hydro shares the same billing system installation with multiple other LDCs.
- LDCs are individual monopolies and not competitors so can work together in any number of ways to reduce costs. The Ontario Energy Board actually looks for these collaborations. NOTL Hydro works with a number of other LDCs in a group called CHEC.
- Size also brings diseconomies of scale with more levels of management, higher salaries and less cooperative cultures. The most efficient size can very from industry to industry. Some industries, like pharmaceuticals and technology require very large sizes due to R&D costs and network effects while other industries, like local garages and corner stores, may be better off with smaller sizes. Some manufacturing companies limit the sizes of individual factories due to the diseconomies of size above a certain point. I believe there is a point at which LDCs get too big.
- Due to the LDCs being regulated, access to capital is not a significant issue and being small should not be an impediment to getting good borrowing rates.
- Many of the ongoing challenges of running an LDC tend to be proportional. For instance, the cost of installing smart meters, connecting new EV chargers or new solar installations tends to vary directly with size so being bigger or smaller just means this is a bigger or smaller challenge.
Finally, I believe the biggest differentiator between small and larger LDCs is one of culture. Over my career, I have worked at multi-billion dollar conglomerates and at small businesses. While there is no guarantee and poor management can ruin any business, small companies tend to have a culture that better encourages working together and serving customers.