Energy Auctions May Not Be “Free”
Energy consumers realize 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 natural gas and electricity energy auctions.
Hidden Markups Embedded in Energy Auction Prices
The crux of the problem – claims from some auctioneers that their services are of ‘no-cost” to consumers because their revenues stem from fees “paid’ by bidding energy suppliers. This phraseology creates an out-of-context rationale for energy consumers to use an energy auction – 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 tell energy consumers that their acceptance of the offers garnered through the auctions trigger and finalize a pre-negotiated exchange of revenues from energy suppliers to auctioneers. Most importantly, auctioneers don’t disclose that the source of their revenues comes from hidden upcharges embedded in the energy supply prices procured through the auctions.
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.
How Upcharges Flow Through Energy Price Auctions
Before the start of the auction, auctioneers will indicate to the energy suppliers the amount of the “participation fee.” To account for this, energy suppliers build the fee costs into the natural gas or electricity supply offers they submit into the energy auctions. These “fees” are markups added to energy suppliers’ true (and lower) energy supply costs. As referenced previously, it’s the acceptance of the energy supply prices offered through energy 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 the winning energy suppliers invoice energy consumers. Energy consumers pay the energy supplier invoices, with the billed prices inclusive of the upcharges. Next, the 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 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.” 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.
Energy Auctions Self-Determine The Upcharges
Auctioneers set their fees. To say it differently, they self-determine how much revenue they will extract from energy consumers that accept the offers posted into the auctions. The “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 and 100% of the markup cost burdened to participating energy consumers.
Some auctioneers require auction-winning energy suppliers to front the total term upcharge value (of awarded energy supply contracts) upon acceptance of offers. Therefore, energy suppliers have to account for interest expenses and costs of capital employed in their auction offers, resulting in additional energy price inflation.
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 engaging an energy auction to compare energy prices, think about what you are willing to pay for the service and ask the energy auctioneer things like:
1) What is the cost to use their services?
2) What is the cost to energy suppliers to participate in the auctions?
3) What is the total cost of the upcharges embedded into the energy prices garnered through the actions?
4) 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?
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.