Why Businesses Should be Wary of Using Energy Auctions
Energy consumers realize significantly inflated energy supply costs, up to 25%, a function of non-disclosed & hidden markups built into the energy supply prices garnered through “free” on-line natural gas and electricity energy auctions.
There are Hidden Markups Embedded in Energy Auction Prices
Here’s the crux of the problem. Many energy supply auctioneers claim that their services are of ‘no-cost” to consumers. They suggest that their revenues stem from fees “paid’ by bidding energy suppliers. But, this phraseology creates an out-of-context rationale for energy consumers to use energy auctions. No cost, no risk – all at the expense of participating energy suppliers. Because of word gaming, energy consumers are in the dark about how energy auctions generate revenue.
Their revenues don’t originate from suppliers paying for access to the auctions. What the auctioneers mean by “no cost” is that the posting and administration of online auctions are free. Auctioneers don’t explain that the acceptance of offers garnered through auctions cement a pre-negotiated exchange of revenues from energy suppliers to auctioneers.
Most importantly, auctioneers don’t disclose that the source of these revenues stem from hidden upcharges embedded in the energy supply prices procured through the auctions.
Energy suppliers don’t pay to auctioneers to participate in 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.
How Upcharges Flow Through Energy Price Auctions To Consumers
Before the start of the auction, auctioneers indicate to energy suppliers the amount of the “participation fee”. To account for this, suppliers build these fees into the natural gas or electricity supply prices submitted into energy auctions. These “fees” are markups added to energy suppliers’ true (and lower) energy supply costs. Upon consumer acceptance of the energy supply prices offered through energy auctions, auctioneers secure the markups.
This same offer acceptance cements the energy consumer upcharge costs. The flow of money to auctioneers from energy consumers commences when the winning energy suppliers invoice energy consumers. Energy consumers pay the energy supplier invoices, with the billed prices inclusive of the upcharges. Next, energy suppliers bank the revenues associated with their true energy supply prices, pre-upcharge. Then, energy suppliers disburse the remainder of the collected revenues (billed volumes times the upcharge) to the auctioneers.
As such, energy suppliers are the billing agents for these auctioneers. Energy consumers are the revenue source for the auctioneers.
This is how these auctioneers self-justify that they are telling the truth when they claim, “our fees are paid by the suppliers”. 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.
In essence, energy auctioneers are energy brokers in disguise. Energy brokers are middlemen to energy supply transactions. Their strategy is to “buy low / sell high”. Energy suppliers don’t pay commissions to energy aucitoneers, despite auctoineers inferring otherwise.
Energy Auctions Self-Determine The Upcharges
Auctioneers set the fees. In other words, they self-determine how much revenue they will extract from energy consumers that accept the offers. Energy consumers don’t ask about fees because they are unaware of their existence. The result is fee abuse, with upcharges amounting up to 25% of the total energy supply price.
Some auctioneers require auction-winning energy suppliers to front the total term upcharge value upon acceptance of offers. Therefore, energy suppliers have to account for interest expenses and costs of capital employed in their auction offers. But who pays for this? Energy consumers do, because energy suppliers include these expenses into the energy supply prices submitted to the auction.
What You Can Do?
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 receive 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. They act as if they have no idea how the energy suppliers cover the costs tied to energy auctioneer fees. They should know how it works, though. Many of these auctioneers employ people with retail energy supply business backgrounds.
If you are considering using an energy auction, think about what you are willing to pay for the service. You can ask the energy auctioneer things like:
- What is the cost to use their services?
- What is the cost to energy suppliers to participate in the auctions?
- How much is the total cost of the upcharges embedded into the energy prices garnered through the actions?
- Would they be willing to enter into a three-party disclosure agreement (between the energy auction, the consumer, and the supplier) that contractually obligates the parties to a set upcharge?
But, don’t be afraid to create competition between multiple energy auctions. You may be able to flush out better and create competition on the costs associated with energy auctions.
I wrote another post that explores the use of “double-dipping” tactics employed by some auctioneers and energy brokers to extract additional revenue sources from energy consumers.
Learn about Foster LLC’s perspective on electricity procurement. With questions or comments, call (412) 308-6482 or reach out via the Contact page.