Direct Energy Presentation to the OEB
Review of Further Efficiencies in the
Electricity Distribution Sector
18th February 2004
Outline

Centrica and Direct Energy

Efficiencies – Need to Define the Role of LDCs

Consolidation – Efficiencies Based on Scale Economies Can Be
Achieved

Performance-Based Regulation Can Promote Efficiency

LSEs – LDCs Should Not Play the Role of LSEs

Recommendations/Conclusions
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Centrica’s Origins
British Gas
Corporation
Key Facts
Privatization
1985
British Gas plc
Demerger
1997

Can$33bn annual turnover

Can$18bn market capitalisation

Over 45 million customer relationships

38,000 employees - of which 2,600 in
North America

Stable single A credit rating
BG plc
+
Centrica plc
1997-2003
Competition &
diversification
Centrica plc
An international energy
& services company
3
Our Businesses
Energy
Management
E
M
G
Natural gas production in UK & Alberta
2,600 MW UK gas-fired power generation
Renewables
Energy procurement & trading
Residential
Services
Natural Gas
Electricity
HVAC installation, repair, servicing
and insurance
Water Heaters
Plumbing & drains insurance
Business
Services
Natural Gas
Electricity
HVAC mechanical services & technology
Roadside
Services
Roadside services
Travel services & publishing
Insurance & financial services
Telephony
Fixed line
Cell phones
Broadband
UK
only
4
Direct Energy in North America

Entered North American market in Ontario in August 2000

Has invested Can$2.9 billion in 3 years, of which Can$2.2 billion in Ontario

Can$0.7 billion was recouped by selling down the water heater assets into an Income
Trust; Direct Energy still manages installation, servicing and repair of the heaters

2003 revenues Can$5.6 billion

With acquisition of ATCO’s Alberta retail gas and electricity customers, Direct Energy
will have over 5 million customers

Over 2,500 full time employees; about 2,300 in Ontario (Can$112m payroll)

Strong commitment to:
–
–
–
–
–
Highest ethical standards
Outstanding customer service
Providing our customers with “peace of mind”
Developing our people
Supporting our local communities – direct in the community
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Direct Energy Locations in North America
17,000 business
service accounts
across Canada
30,000 gas customers
in Manitoba
Main Offices
100 mmcf/day of gas
and 0.5 million bbl pa
of oil and gas liquids
production in Alberta
1.2 million households taking;
2.8 million energy and services
products in Ontario
980,000 ATCO gas and
electricity customers
being acquired in
Alberta
770,000 “PTB” electricity
customers in West
and South Central Texas
375,000 gas customers
in Michigan, Ohio and
Pennsylvania
120,000 electricity
customers in Houston
and Dallas/Fort Worth
6
Efficiencies – Need to Define the Role of LDCs

Need to define the role of LDCs in terms of scope and responsibility.

A functional review at the activity level would greatly assist all parties in
identifying further potential efficiencies.

A functional review would recognize that the source of and best remedy for
inefficiencies in one activity (e.g. wires management) are likely different from
those in another activity (e.g. energy procurement, customer care).

These competencies across functional activities (wires management versus
energy procurement, customer care) are different.
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Consolidation – Efficiencies Based on Scale
Economies Can Be Achieved

Direct Energy supports further consolidation of LDCs since it:
– Promotes business standardization
– Facilitates commercial transactions among market participants

Through consolidation, efficiencies based on scale economies may be
achieved, especially in those cases where LDCs’ service territories are
contiguous or proximately located.
BUT:

Functions such as procurement, customer care and IT are not constrained
by geographical boundaries.

Consolidation must be carefully managed such that detrimental impacts to
IT infrastructure and data integrity are minimized.
8
Performance-Based Regulation Can Promote
Efficiency

Direct Energy suggests that creating appropriate regulatory incentives
through Performance-Based Regulation (PBR) can increase efficiency.

PBR can create efficiency incentives without requiring the OEB to manage
specific LDC decisions.

Implementation of PBR mechanisms for the distribution function has
produced significant benefits for customers. For example, in the U.K.:
– Prices paid by customers in the regulated distribution sector dropped by
approximately 30% from 1995 to 2000
– Distributors managed a 3.2% average annual improvement in efficiency
from 1998 to 2002
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LSEs – LDCs Should Not Play the Role of LSEs

The procurement/supply management functions is quantitatively different
from the “wires” function. The separation of these two functions has
advantages:
– Allows the aggregate level of risks faced by LDCs and their municipal
government owners to be sharply reduced
– Levels the playing field between the “standard supply service provider”
and the other retail service providers
– Eliminates potential cross-subsidization between the distribution and
supply functions
– Focuses the responsibility of LDCs on asset management, system
reliability, system safety, and continued non-discriminatory access to
wires
10
LSEs Should be Commercial Entities

Commercial entities, acting under normal commercial incentives, are better
placed than regulated LDCs to assume the role of the LSE.

LSEs should be responsible for customer care and billing as well as energy
procurement functions:
– Significant experience in the wholesale market and direct relationships
with customers are needed to combine demand response (DR) and
energy efficiency measures with pricing and procurement decisions
– Experience in the U.K. and Texas
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Recommendations/Conclusions

The OEB should conduct a functional review at the activity level to assist in
identifying further potential efficiencies.

Consolidation in the distribution sector should be encouraged.

Further efficiencies can be achieved through Performance-Based
Regulation.

The “wires management function” is qualitatively different from the “energy
procurement/retail supply function.”

LDCs should not fulfill the LSE function.

LSEs should be commercial entities.
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