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Energy consumers are taking on significantly inflated energy supply costs, up to 25%, a function of non-disclosed & hidden upcharges built into the energy supply prices garnered through some “free” on-line energy supply auctions.
The crux of the problem – claims from some auctioneers that their services are of ‘no-cost” to consumers because their revenues are generated from fees “paid’ by bidding energy suppliers. This phraseology creates an out-of-context rationale for energy consumers to move forward these auctioneers – no cost, no risk, and all at the expense of participating energy suppliers. The phraseology is word gaming intentionally designed to keep energy consumers in the dark about how these auctioneers actually generate revenue.
Their revenues are not generated from suppliers paying for access to the auctions. What the auctioneers mean by “no cost” is that the posting and administration of on-line auctions is free for energy consumers. What is not explained is that energy consumer acceptance of the offers garnered through the auctions triggers and finalizes a pre-negotiated exchange of revenues from the energy suppliers to auctioneers. Furthermore, and most importantly, what energy consumers aren’t told is that the source of the revenues comes from hidden upcharges embedded in the energy supply prices procured through the auctions.
Know this. There is no upfront cost to energy suppliers to submit offers into auctions. Think about it. Why would energy suppliers pay to participate in auctions that they might not win? They don’t. If they did, this would mean that they set aside vast amounts of financial resources that they may never recover – just to participate. They don’t do that either. Energy suppliers are not stupid.
So, how does it work?
Prior to the start of the auction, auctioneers will indicate to the energy suppliers what the “participation fee” is. To account for this, energy suppliers build the fee costs into the natural gas or electricity supply offers they submit into the auctions. This means that these “fees” are actually upcharges added to energy suppliers’ true (and lower) energy supply costs. As stated previously, it’s the acceptance of the energy supply prices offered through auctions that secures the fees for the auctioneers.
This same offer acceptance cements the energy consumer upcharge costs. The flow of money to auctioneers from energy consumers commences when energy consumers are invoiced for energy supplies from the winning energy suppliers. Energy consumers pay the energy supplier invoices, with the billed prices inclusive of the upcharges. The energy suppliers bank the revenues associated with their true energy supply prices, pre-upcharge. Energy suppliers then disburse the remainder of the collected revenues (billed volumes x the upcharge) to the auctioneers. In essence, energy suppliers are the billing agents for these auctioneers.
This is how these auctioneers self-justify that they are telling the truth when they claim, “our fees are paid by the suppliers”. But this is word gaming based on half-truths intended to veil the undisclosed transfer of energy consumer money to the auctioneers via energy supplier invoices – the consequence of hidden upcharges.
Auctioneers set their own fees. To say it differently, these auctioneers, in essence, self-determine how much revenue they will extract from energy consumers that accept the offers posted into the auctions. These “fees” are unchecked by energy consumers because they are unaware of their existence. The result – fee abuse, with upcharges amounting up to 25% of the total energy supply price, with 100% of the upcharge cost burdened to energy consumers participating in the auctions.
Some auctioneers require auction-winning energy suppliers to front the total term upcharge value (of awarded energy supply contracts) upon acceptance of offers. This means that energy suppliers have to account for interest expenses and costs of capital employed in their auction offers, leading to even more inflated energy supply prices.
If you don’t believe me, ask energy suppliers that you know to explain how it works. If you ask a supplier that was awarded your energy supply contract through auction, don’t be surprised if you are offered a response like, “how this works is between you and your auctioneer.” Agenda conflict is a possible motivator behind a like-response. As a side, a deflection tactic used by the auctioneers, when questioned about hidden upcharges, is to play dumb, as if they have no idea how the energy suppliers cover the costs tied to energy auctioneer fees. They should know how it works. Many of these auctioneers employ people with retail energy supply business backgrounds.
An upcoming blog will explore the use of “double-dipping” tactics employed by some auctioneers to extract additional revenue sources from energy consumers.
About Brad Foster
Brad is the founder of Foster LLC. He helps executives and business visionaries realize corporate objectives through customized strategies, services, and solutions designed to navigate the challenges of energy and utility cost management.
Mr. Foster has been providing energy expense solutions to U.S. businesses for twenty three years. With a multi-dimensional understanding of a number of energy-related issues, his expertise has been utilized by manufacturers, universities, and hospitals. His know-how and experience spans a wide array of energy issues, including cost risk management, supply procurement, utility rates, demand response, cost reporting, and budgeting.