Energy Procurement in the Hospitality Sector

“Another day, another mug” … Energy Procurement in the Hospitality Sector

Emblazoned across the wall of one energy broker’s telesales floor are the words “Another day, another mug”. The sentiment says it all. Which is why I must admit to being ashamed of the sector in which I work. Ashamed but not apologetic, because for the past 10 years my team at Powerful Allies have worked tirelessly to help clients defend themselves from such predators.

And predators these brokers are, seeking out vulnerable and trusting clients upon which to indulge in a frenzy of deliberately misleading and often fraudulent trade. So, it comes as no surprise that right now top of the list of victims are Hoteliers, who by nature are good folk facing huge pressures to reduce costs.

The daily struggles of a Hotelier present the Perfect Storm for unscrupulous energy brokers.

The cause

In my experience, very few Hoteliers are aware that the UK commercial energy market is effectively unregulated by Ofgem, unlike Microbusinesses and Domestic users who benefit from the usual consumer protection we have all treasured for so long.

Neither is there “self-regulation” or even a simple Code of Practice to protect corporate clients, the category into which Hotels and much of the Hospitality sector fit. Consequently, and inevitably a “Faustian Pact” exists between suppliers and brokers, where brokers are given free rein to charge whatever they can get away with, without recourse to termination and with very little transparency of costs.

It comes as no surprise that in virtually all cases of serious mis-selling, legal action is required.

The symptom

Never before have I seen such a deluge of mis-selling and fraudulent action by brokers struggling to survive as their revenues fall and suppliers demand repayment of pre-paid commission (unscrupulous brokers routinely demand and receive up-front commission based upon estimated consumption, and with COVID 19 shutting down entire sectors of business and education, these brokers are now “in hock” to their paymasters). With over half of all brokers described by Plimsoll as financially “mediocre or in danger”, even before COVID 19, their increasingly shocking behaviour is entirely predictable.

The manifestation

It may come as a shock, but in my opinion, there are only a handful of energy brokers out of almost 2500 nationally which could come close to being described as “trustworthy”. And by that, I mean they are mature, transparent, honest in presentation of data, providing clear and unambiguous contracts, supportive of clients rather than exploitative, applying sensible margins, highly retentive of clients and able to engage with clients as a valued part of their management team.

Just a handful out of 2500. So, what are the other 98% doing for me to label them untrustworthy, or to put it another way, abusive of client trust?

Misleading, mis-selling and fraud

There are degrees of abuse of trust by energy brokers, and I have categorised these as

a) Deliberately misleading
b) Actual mis-selling and
c) Potentially Fraudulent

Deliberately misleading

• For less than £1000, a broker can create an impressive website in which they can and do make absurd and exaggerated claims about their prowess in the sector. We see this every day, a bit like the window cleaner with a sense of humour, on his van proclaiming offices in New York, Tokyo and Paris. Perhaps he has (!), but we are not cleaning windows. Clients are contracting to hugely costly and legally binding energy supply contracts and there is no room for deception at any stage in the process.
• Even a cursory glance at the accounts of energy brokers on Company Check will expose the reality for so many of them. Alarmingly, some of the most self-laudatory brokers in the sector have no cash in the bank and a negative net worth. And the effect of this is to deny them access to key leading suppliers which do, thank goodness, demand a minimum level of financial viability.
• Or what about the broker which claims to charge fees of 50% of industry norm, without ever defining what is normal in an unregulated market? Why not claim 10%, 30% or 75% of “industry norm”, who would know?
• And then there is the broker which recently used the title “Honest” as a strapline and then recommended to a client they break a legally binding contract! “Honest Joe, used cars…”.
• Seriously, at what stage does misleading become mis-selling? The line is very thin indeed.

Actual mis-selling

On a daily basis, my team spend hours helping clients extract themselves from actual mis-sold contracts and the range of “scams”, for that is what they are, is growing daily. Typically, they include;

• Falsification of consumption data, to make proposed cost increases look like savings.
• Presentation of cost increases as negative savings; yes, really!
• Presenting comparisons without detail.
• False tenders where only one supplier (their favoured supplier, with the best commission payment terms) has actually been contacted.
• Claiming to work to a fixed fee, yet still taking hidden commission.
• Adding commission to fixed standing charges; very common since clients tend to look at unit rates assuming all standing charges are the same for all suppliers.
• Enticing clients to enter into new supply contracts on the basis they can block an existing contract. This exposed clients to claims of damages from contracted suppliers, but since the brokers obtain commission on contract sales only, this does not worry them!
• Providing so called “pass through “contracts where a large part of the bill is not fixed and the client is then subject to added costs accounting for up to 65% of the overall cost.
• Brokers claiming to know they can save a client money (either through unsubstantiated “refunds”, reduced charges or whatever) without any knowledge of client contracts, in order to obtain a Letter of Authority.
• Offering to work on a “share of savings”, yet failing to define against what benchmark savings are to be assessed. Given the complexity of energy markets and pricing, this is a highly dangerous contract for clients to sign up to.
• Presenting data in pdf form, thus preventing clients from seeing the underlying calculations and costs.

Again, it is not for me to determine when mis-selling crosses the line to become fraud, but there are some blatant and real examples where fraud is clearly intended, as follows;

Potentially Fraudulent

• Falsification of Letters of Authority.
• Providing new contracts for clients in the full knowledge a client already has a binding contract, without alerting them to the risk of claims for damages.
• Purporting to represent a supplier.
• Claiming to be paid a fixed fee yet taking hidden commission.
• Falsification of data provided by other competitive brokers.
• Forging letters from clients to suppliers.

Avoid the worst, find the best…

Given the significant sums involved in energy contracts for the Hospitality industry, my strongest recommendation must be for Managers to be extra vigilant in appointing an energy partner and, above all, to avoid providing Letters of Authority until a comprehensive process of Due Diligence has taken place.

Due Diligence for the appointment of an energy partner.

• Let’s start with a company search to check out their true financial position. www.companycheck.co.uk is my preferred portal, and a quick look at the “Financials” graph will reveal all.
• In my experience, any energy partner with less than £200k in free cash and less than £500k in Net Assets should be discounted, for the simple reason they do not have the reserves needed to compensate a business in the event of an error. Neither will they have access to all suppliers, since there are financial minima applied by key suppliers.
• Conversely, a broker with very large sums of cash relative to their Net Assets is quite possibly being paid commission in advance by favoured suppliers.
• Request copies of their Professional Indemnity Insurance policy, plus their ISO 9001 Accreditation.
• Ask for a copy of the CV for their Buying Director (if any, since many small brokers use an “Aggregator” or intermediary broker, to place their contracts) and other key personnel.
• For a broker claiming to be an expert in the sector, ask them to send a) a full list of their Hospitality Clients plus b) list of at least 10 well regarded Hotels or restaurants that they work with local to you for references. You do not need to take these up, but the chances are you will know one or two and the request will itself expose any exaggerated claims.
• If a broker features on Trustpilot, have a look at their lower scoring reviews, rather than those written by their own staff and friends!

Key services beyond procurement.

• Any decent energy broker should be able to offer a range of crucial services in addition to energy procurement, and these should be provided from internal resources rather than through sub-contracting. For the most part these should be provided free of charge.
• Basic services which all brokers should offer include energy monitoring, support for meter installations and query resolution.
• In addition, given the importance of consumption and carbon reduction, check to see if they will provide carbon emission, ESOS and SECR reporting.
• And on the subject of emission reduction, identify any charges they may make for providing 100% Renewable energy; there should be none.

Some other simple tips…

• Cold calls and junk email are invariably from large call centres, and such brokers are entirely unsuited to the complex needs of Hospitality businesses. Their World is one of routine mis-selling to SME, far removed from the bespoke solutions appropriate to Hotels, Pubs or Restaurants.
• Never provide a Letter of Authority until you have completed your Due Diligence. The LOA is capable of causing considerable damage in the wrong hands, with some LOAs actually authorising a broker to sign contracts on your behalf. Indeed, LOAs for so-called “flexible” contracts stipulate this.
• Shockingly, some brokers have started to encourage businesses to sign new contracts deliberately to block an existing contract. This is illegal and exposes you to punitive damages for breach of contract. Never sign a contract as a means of disrupting an existing contract; if the existing contract was miss-sold, this is dealt with later.
• Finally, do not be tempted to seek Best Value by using multiple brokers to tender for the same contract. As already described, the sector is rife with mis-selling, and multi broker tenders invariably lead to the broker most willing to fabricate data being appointed. The worst possible outcome. This is a particularly complex issue, and I am happy to expand on the problem at another time!

How to identify mis-selling?

• I have exposed some of the shocking practices in the sector, but it remains extremely difficult to know if a contract has been mis-sold, or even if a contract is simply a poor one. But it is extremely easy for my team to recognise this. This is what we do all day.
• So, my advice is for you to send us some bills and we will carry out our free Virtual “Walk in” Energy Clinic. Within 48 hours you will be given the full picture; supplier choice, broker margin, contract weaknesses if any, good news and bad news.

The above is not intended to be exhaustive, but I hope it will encourage clients to be more demanding in selecting and trusting their energy partner. A good energy broker (and I firmly believe Powerful Allies is one) will protect clients from abuse, provide complete transparency and ensure all contracts are provided and entered into in good faith.

If in doubt, please do not hesitate to contact my team for our free “Walk in” energy clinic, where we can reveal all!