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Direct Energy Presentation to the OEB Review of Further Efficiencies in the Electricity Distribution Sector 18 th February 2004.

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Presentation on theme: "Direct Energy Presentation to the OEB Review of Further Efficiencies in the Electricity Distribution Sector 18 th February 2004."— Presentation transcript:

1 Direct Energy Presentation to the OEB Review of Further Efficiencies in the Electricity Distribution Sector 18 th February 2004

2 2 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

3 3 Centrica’s Origins British Gas Corporation British Gas plc Centrica plc Privatization Demerger Competition & diversification 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

4 4 Our Businesses Residential Services Business Services Energy Management E EEMGMGEEMGMG Natural gas production in UK & Alberta 2,600 MW UK gas-fired power generation Renewables Energy procurement & trading Natural Gas Electricity HVAC installation, repair, servicing and insurance Water Heaters Plumbing & drains insurance Natural Gas Electricity HVAC mechanical services & technology Roadside Services Telephony Roadside services Travel services & publishing Insurance & financial services Fixed line Cell phones Broadband UK only

5 5 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

6 6 Direct Energy Locations in North America 1.2 million households taking; 2.8 million energy and services products in Ontario 30,000 gas customers in Manitoba 100 mmcf/day of gas and 0.5 million bbl pa of oil and gas liquids production in Alberta 120,000 electricity customers in Houston and Dallas/Fort Worth 770,000 “PTB” electricity customers in West and South Central Texas 375,000 gas customers in Michigan, Ohio and Pennsylvania 17,000 business service accounts across Canada Main Offices 980,000 ATCO gas and electricity customers being acquired in Alberta

7 7 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.

8 8 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.

9 9 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

10 10 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

11 11 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

12 12 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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