Direct Energy Presentation to the OEB Review of Further Efficiencies in the Electricity Distribution...
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Transcript of Direct Energy Presentation to the OEB Review of Further Efficiencies in the Electricity Distribution...
Direct Energy Presentation to the OEBDirect Energy Presentation to the OEB
Review of Further Efficiencies in the Review of Further Efficiencies in the Electricity Distribution SectorElectricity Distribution Sector
1818thth February 2004 February 2004
2
OutlineOutline
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 OriginsCentrica’s Origins
British GasCorporation
British Gas plc
Centrica plc
Centrica plc
Privatization
Demerger
Competition &diversification
1985
1997
1997-2003
BG plc
Key Facts
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+
An international energy& services company
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Our BusinessesOur Businesses
ResidentialServices
BusinessServices
EnergyManagement
EEMMGG
Natural gas production in UK & Alberta2,600 MW UK gas-fired power generationRenewablesEnergy procurement & trading
Natural GasElectricityHVAC installation, repair, servicingand insuranceWater HeatersPlumbing & drains insurance
Natural GasElectricityHVAC mechanical services & technology
RoadsideServices
Telephony
Roadside servicesTravel services & publishingInsurance & financial services
Fixed lineCell phonesBroadband
UK only
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Direct Energy in North AmericaDirect 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 AmericaDirect Energy Locations in North America
1.2 million households taking;2.8 million energy and servicesproducts in Ontario
30,000 gas customersin Manitoba
100 mmcf/day of gasand 0.5 million bbl paof oil and gas liquidsproduction in Alberta
120,000 electricitycustomers in Houstonand Dallas/Fort Worth
770,000 “PTB” electricitycustomers in Westand South Central Texas
375,000 gas customersin Michigan, Ohio and Pennsylvania
17,000 businessservice accountsacross Canada
Main Offices
980,000 ATCO gas andelectricity customersbeing acquired inAlberta
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Efficiencies – Need to Define the Role of LDCsEfficiencies – 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 Consolidation – Efficiencies Based on Scale Economies Can Be AchievedEconomies 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 Performance-Based Regulation Can Promote EfficiencyEfficiency
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 LSEsLSEs – 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 EntitiesLSEs 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/ConclusionsRecommendations/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.