A very bumpy “level playing field”

Extract from an article written by James Robson, Founder of Powerful Allies, with Julian Ingram, Fellow of CIPS (Chartered Institute of Procurement and Supply).

The UK commercial energy supply market is huge, profitable, and uniquely competitive, but by any normal standard, the sale of energy is also an unregulated shambles with virtually no limit to the misleading sales techniques used. This has created many contradictions and risks, exposing clients to an epidemic of deliberately confusing offers. This should come as no real surprise, with a multitude of suppliers seeking to gain advantage over a competitor where their product is identical and price is the only battle ground.

And then we add an equally unregulated broker network, expanding rapidly as little broker clones head off to repeat the behaviour of their “parents”, where an array of deliberately deceptive and extraordinary behaviours, unacceptable in any other sector, have become the norm. Broker begets broker……

So it is perfectly understandable for a client, eager to establish a “level playing field” to seek to eliminate the one important variable which will always distort the review, namely timing.

We all know wholesale energy market rates change daily, and so it seems logical to assign a common presentation date for competitive suppliers or brokers to “provide the best price”. This way we are assured of a genuine “like for like” when comparing prices……surely?

Well, it can work when assessing offers direct from specific suppliers, although the date is often arbitrary and has no relevance to market forces. But it is not an acceptable way to assess which broker to work with, and invariably leads to a worse outcome for the client.

Sorry to burst the bubble, but the sector has some unique and bizarre quirks which effectively guarantee this “shoot out at sunrise” rewards deception, penalises transparency and produces a far more expensive final contract.

Underlying the problem are three simple facts.

• Many excellent suppliers simply will not accept multiple broker tenders and multiple Letters of Authority. They do not wish to waste time dealing with several brokers, none of which has clear authority to negotiate. So they do not negotiate, and provide a standard non negotiated rate. They then rely upon the “first through the door” to pass their rates to all other competitive brokers, unchanged. As if……..!
• For those suppliers which will accept multiple tenders, they always provide the identical rate to all brokers on the same day. There is no negotiation, and in any event why would a broker waste time trying to obtain a “special deal”, in the knowledge the rate will be given to all other competitors? This is particularly problematic with multiple sites, where a client may prefer to remain with the existing supplier but at the lowest competitive rate; the supplier has no idea who is acting for who!
• And of course, the most obvious contradiction lies in the timing. It may take some days for a client to assess the offers from competing brokers, by which time whichever price was lowest will no longer be valid anyway. So why would a broker submit the same price as a competitor?

With the same starting price from a supplier, it should be no surprise to learn that brokers will attempt to manipulate their rates by hiding, miscalculating, distorting or otherwise simply fabricating numbers. By the time clients have discovered this, the broker has run for the hills with a nice contract in their pocket.

So here it comes; 11 ways by which you as a client, may be deceived by multiple broker comparisons.

1. Presenting comparisons in pdf form, with minimal detail and no ability to analyse the underlying calculations. Then just reduce the final sum by say 5%; very difficult to detect.
2. Reduce AQ, Actual Consumption data. More subtle still, transfer day units to night units, which are invariably on a lower tariff. Few comparisons show day and night splits, still fewer clients would challenge this.
3. Even easier, in the knowledge all the competitors have the same start point, reduce the unit rate slightly. By the time the client has appointed the broker, the market has moved up or down and the presented price is irrelevant anyway; very difficult to detect. “Shoot outs” on a Friday are even more susceptible since markets close at midday for the day, and no contracts will be provided by suppliers that day.
4. Present prices excluding commission as a loss leader.
5. Present reduced standing charges. Few clients look at these in detail. A recent review by Powerful Allies identified a common practise of brokers making huge margins on standing charges, despite declaring low commission uplift. For example, a 3% commission on units, becoming 15% overall with standing charge uplifts.
6. Present contracts which are not fixed and inclusive; so-called “Pass through” contracts are a great way to mislead a client, showing only part of the cost to be incurred. Prevalent with gas contracts, they can easily undercut a fixed contract.
7. Omit the Feed in Tariff, Renewable Energy Tariff, or any of the other compulsory charges. Only VAT and CCL are permitted exclusions.
8. Show “Savings” with a minus sign; a unique way to present an increase!
9. Overwhelm the client with data, projections, graphs, jargon, to conceal the underlying numbers.
10. Just lie about commission and fees, safe in the expectation clients will not audit and review tender documents and suppliers will be reticent to divulge hidden arrangements.
11. Finally, the binding service agreement. This is a wonderful device to enable brokers to maximise revenue, and virtually guarantees success in any “shoot out”. Price low to win the day, and recover many times over during the life of a 2 or 3 year service agreement.

The Solution is easy really.

Above all, the objective is to secure the best deal from suppliers, and anything which detracts from this core focus is counterproductive.

If you doubt the honesty of the broker, and even if you do not;

1. Require your broker to warrant exactly how they will earn their living, advise them this will be legally binding, and do not allow them any wriggle room.
2. As part of the agreement, advise them you may contact all suppliers direct to ascertain the margins applied prior to entering into a contract. Ask them to provide contact details at each supplier.
3. Advise the broker you intend to audit original tender documents, and the final tender from the supplier.
4. Demand clarity and detail in all comparisons, insisting on fully inclusive rates, excluding only VAT and CCL. And make sure the rates are indeed fixed, and not just partly so.

Take very good time to assess references. Look at who they are working with, and ask who they have lost as clients.