Direct Energy is powering up its Alberta operations.
With an agreement now in place for the acquisition of the retail gas and electricity business of the ATCO Group, Direct Energy Marketing Ltd. will have a beginning operating base of about one million customers in the province.
Once the ATCO transaction is complete, Direct Energy will represent 80 per cent of the province’s natural gas consumers and 14 per cent of electricity consumers, should these clients choose to remain with their new provider in Alberta’s deregulated energy environment.
The sale, which sees ATCO leaving the retail natural gas and electricity markets, will result in Direct Energy’s British parent, Centrica, paying $90 million, or the equivalent of approximately $90 per ATCO customer.
That amount is substantially less than the tentative purchase price of $128.5 million, which was set when the deal was first announced in December 2002. It was lowered due to the impact of subsequent legislative and regulatory changes surrounding deregulation.
“The price reflects a fair commercial value at this time,” said Siegfried Kiefer, vice-president of information technology and chief information officer for the ATCO Group.
“About four years ago, we took a look where ATCO could best perform and provide value to our customers,” said Kiefer, in explaining ATCO’s reasons to divest itself of its retail operations. “After an assessment of our internal capabilities, we decided we were good at building, owning and operating the infrastructure – the pipes and the wires that deliver the energy to consumers.
“We won’t be buying and selling the energy, but we will be delivering it across the system and we will maintain our presence in the communities we serve.”
Direct Energy had hoped to enter fully the Alberta market much earlier – it had a small presence before – but decided to wait for regulatory approval of the ATCO transaction, even though the provincial government had licensed the company to operate in the new sectors. Approval from the Alberta Energy and Utilities Board came in December 2003.
“We have agreed to purchase and will transfer one million ATCO gas and electric customers to Direct Energy Regulated Services, and that began May 4. It will take the month of May to complete the transition,” said Rob Hemstock, vice-president of regulatory affairs for Direct Energy Marketing Ltd.
ATCO will issue its final bills to these customers in May. As of June 1, customers will begin to receive their invoices from Direct Energy.
Direct Energy Regulated Services, a business unit of Direct Energy Marketing, assumes responsibility for supplying the natural gas and electricity used by ATCO Gas and ATCO Electric’s residential, farm and small business customers at the regulated rates.
ATCO Gas and ATCO Electric, however, will still own and operate the natural gas and electricity distribution systems that are used to deliver the energy, and will continue to provide emergency response to more than 500 Alberta communities.
To ensure a smooth transition, Direct Energy Marketing has entered into a 10-year contract with ATCO I-Tek to continue to provide billing and call centre services. That move has resulted in the creation of 180 new jobs.
The deal, however, could face one last hurdle. The City of Calgary is seeking permission to appeal the EUB decision allowing the sale and will appear before the Alberta Court of Appeal on June 8 to make that request.
“Our original concern about the deal is that in our view, it harms the customer,” said Karen Sharp, manager of regulatory affairs for the city. “There is new legislation in place and ATCO contended that the EUB didn’t have to look at whether it hurt the customer. We think it’s a very relevant consideration.”
The appeal, she noted, is about the interpretation of the legislation. “The EUB felt they didn’t have the authority to look at certain parts of the deal, we feel they did.”
She added that Calgary is not opposed to the sale but is concerned about the deal resulting in higher costs for consumers.
The sale has also drawn fire from the provincial Liberals. The Opposition claims Direct Energy now holds a monopoly on the natural gas retail market.
ATCO originally acquired those customers based on the territory it served in a regulated market. That market is now changing and will have a more retail orientation allowing customers to choose their provider, said ATCO.
Direct Energy, for its part, said that when it comes to the ATCO customers, there is a “very clear code of conduct in Alberta governing the use of that information by competitive affiliates of any regulated provider.”
As such, Direct Energy Preferred, which serves residential and small commercial energy customers across Alberta, and Direct Energy Business Services, with a target market of large industrial users, can’t use information from its regulated cousin, Direct Energy Regulated Services, said Hemstock.
“We have to protect, and can’t share that information, with our unregulated affiliates.”
Customers, including the clients Direct Energy has acquired from ATCO, can choose to switch energy providers if they wish.
Direct Energy Preferred Services will be offering one-, three- and five-year contracts, allowing clients the choice of locking in their gas and electricity rates, similar in principle to locking in mortgage rates, if they don’t want to remain in the regulated market and believe they can get a better deal through a fixed-term package.
The regulated market is scheduled to end as of July 1, 2006.
The terms of Direct Energy’s contracts, which will offer single or dual fuel options (natural gas and electricity), were not announced at press time, with the company citing a competitive marketplace as the reason. Residential customers will be eligible for Air Miles Reward Miles, while small business users will be provided with other more appropriate incentives, officials said.
As to concerns relating to Direct Energy’s reputation – it has been fined in other North American jurisdictions for misleading practices, including signing customers up without their knowledge – the company said it has zero tolerance for such behaviour, and changes have been implemented to ensure this will not be repeated.
“We acknowledge there have been issues in other jurisdictions, and we organizationally have taken those issues very seriously and have learned from them. We have put in processes and specific mechanisms to ensure our customers have a high-quality, world-class experience with Direct Energy,” said Lori Topp, senior vice-president for Direct Energy Marketing Ltd.’s western region.
Those mechanisms include bringing its sales force in-house as opposed to having the work contracted out, giving the company a more direct connection with the employees selling its product.
Further, rigorous training and certification programs have been put in place that employees must pass before they have any contact with customers. A third-party independent firm will verify every Direct Energy Preferred Services sales transaction, added Topp.
