Direct Energy Presentation to the OEB Review of Further Efficiencies in the Electricity Distribution

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Direct Energy Presentation to the OEBReview of
Further Efficiencies in the Electricity
Distribution Sector18th February 2004
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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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Centricas Origins
British Gas Corporation

• Key Facts
• Can33bn annual turnover
• Can18bn market capitalisation
• Over 45 million customer relationships
• 38,000 employees - of which 2,600 in North
  America
• Stable single A credit rating

Privatization
1985
British Gas plc
Demerger
1997
BG plc

Centrica plc
Competition diversification
1997-2003
An international energy services company
Centrica plc
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Our Businesses
Natural gas production in UK Alberta 2,600 MW
UK gas-fired power generationRenewablesEnergy
procurement trading
E MG
EnergyManagement
Natural Gas Electricity HVAC installation,
repair, servicingand insuranceWater
Heaters Plumbing drains insurance
ResidentialServices
Natural Gas Electricity HVAC mechanical services
technology
BusinessServices
Roadside servicesTravel services
publishing Insurance financial services
RoadsideServices
UK only
Fixed line Cell phones Broadband
Telephony
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Direct Energy in North America

• Entered North American market in Ontario in
  August 2000
• Has invested Can2.9 billion in 3 years, of which
  Can2.2 billion in Ontario
• Can0.7 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 Can5.6 billion
• With acquisition of ATCOs 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 (Can112m 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
30,000 gas customersin Manitoba
17,000 businessservice accountsacross Canada
Main Offices
100 mmcf/day of gasand 0.5 million bbl paof oil
and gas liquidsproduction in Alberta
1.2 million households taking2.8 million energy
and servicesproducts in Ontario
980,000 ATCO gas and electricity customersbeing
acquired in Alberta
375,000 gas customersin Michigan, Ohio and
Pennsylvania
770,000 PTB electricitycustomers in West and
South Central Texas
120,000 electricitycustomers in Houstonand
Dallas/Fort Worth
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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.

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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

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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.