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The Gas Executives Forum: Gas Pains

Commodity price upheavals are energizing gas utilities to evolve their business models.

Fortnightly Magazine - May 2006

Then, of course, the underlying issue is gas supply. As a country we have a desire for cheap energy, but we sometimes are not willing to do what’s necessary to get that energy. These policies come to a head at the LDC level.

There is enough supply in the market if we are willing to develop it, in combination with importing more gas. The Rockies are the one area where gas production is actually increasing. It’s just a matter of developing the fields, drilling the wells and building pipelines to get it to market.

Direct Energy

Direct Energy is an energy retailer owned by former British Gas unit Centrica PLC that is doing business in several U.S. states and Canadian provinces. Direct Energy’s business plan for North American markets has evolved in recent years, driven by regulatory setbacks and fierce competition. Gas-price volatility, too, is further changing Direct Energy’s business. 

Nick Fulford, a senior vice president and director with Direct Energy, says these changes are creating new opportunities for the company.

Fortnightly: How has Direct Energy’s business model evolved? What role have volatile gas prices played in that evolution?

Fulford: When we embarked on our North American strategy six years ago, we saw ourselves as a virtual utility. Our business is built around a thriving commercial customer base. That is where we are expanding. We don’t involve ourselves in the middle part of the delivery chain; our interest lies at the delivery end, and in the physical assets—origination of power generation and upstream gas. 

With the roller-coaster ride in gas prices, many non-fixed price customers have seen huge variations in prices. We’ve noticed increasing interest among customers wanting to control their energy costs, which raises questions about high-efficiency lighting and load shifting that didn’t figure into people’s daily decision making before. 

That’s where we see our competitive edge, with what we’d call energy solutions—a suite of products accompanying a pure commodity play around gas and power. It includes such things as energy efficiency, energy management, and risk management products that fall outside the typical capability of an LDC or utility. We’ve managed the vagaries in natural-gas prices very well for our customers. It is one of our core strengths going forward. 

Fortnightly: How does Direct Energy hedge its exposure to prices?

Fulford: That’s where the physical assets fit in. If you can’t access your own power or gas, the wholesale market can break down and you expose ratepayers to a large amount of risk. 

Typically we like to keep our physical hedging requirements between 25 and 35 percent of our retail requirements. The remainder, 65 to 70 percent, we source from wholesale markets, through counterparties and trading arrangements.

Fortnightly: What are Direct Energy’s plans for growth in North American markets?

Fulford: From a group perspective, North America is a key part of our plans, and will contribute significantly to Centrica’s growth. The best prospects for growth in the next three to five years are in the medium-to-large commercial sector, because the cost drivers support the need to more efficiently control energy consumption