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

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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.