Pennsylvania Natural Gas Broker: Six Warnings About Using One

Pennsylvania natural gas brokers reality vs. perception
There are several misconceptions about the benefits of using Pennsylvania natural gas brokers.

Are you trying to find a Pennsylvania natural gas broker, thinking that they get will your business get the best natural gas supply deal?

It’s great that you realize you might need some help getting a better deal. However, your plan may backfire because deals facilitated by natural gas brokers are not even close to the best ones that you can get for your business.

There are many misconceptions about the benefits of using a Pennsylvania natural gas broker. This blog post highlights the biggest ones.

Note: When done reading, take the Pennsylvania Natural Gas Broker Challenge.

Misconception # 1: Natural Gas Brokers Will Get You the Lowest Natural Gas Prices

Businesses engage brokers under the false notion that they will get lower natural gas prices than they could themselves. It’s not their fault. They get a million phone calls from brokers claiming that their prices are too high and that better deals are available. They are also led to believe that they can use brokers to get lower prices for “free.”

The reality is this – your price may end up to 25% or more higher than it could have been. The reason – prices secured through natural gas brokers include hidden markups. Hidden markups are how natural gas brokers make money.

Natural gas brokering services are not free. Many Pennsylvania natural gas brokers employ strategies that cause businesses to believe that they are getting “free” natural gas procurement services. They imply that they receive “commission” payments from natural gas suppliers. But that’s not true. Customers entirely fund natural gas broker compensation. Brokers invisibly embed markups into the natural gas prices they provide to their customers to fund their compensation.

These markups cause the natural gas prices that brokers sell (and their customers pay) to be up to 25% higher than suppliers’ actual prices – which are 25% lower.

If you don’t believe me, ask any natural gas supplier. Natural gas suppliers have a margin built into their natural gas prices. But, they don’t forfeit any of this margin to fund Pennsylvania natural gas broker commission payments.

Misconception # 2: Natural Gas Brokers Are Supplier-Paid Commissioned Consultants

Many natural gas brokers mischaracterize how they get paid.

Brokers are not supplier-paid commissioned consultants. They are consumer-paid middlemen. It works like this. They get natural gas supply prices from suppliers, inflate them (or ask the suppliers to inflate them on their behalf), and then give the marked-up prices to their customers. Upon the customer’s signature of a natural gas supply agreement garnered through a broker, the brokers’ markups are locked in. The consumer foots the bill for the broker’s charges built into the natural gas prices. Suppliers forfeit nothing to compensate brokers.

It is important to recognize the difference between a commission model and the middleman-markup model. The middleman model is this: “Buy low, sell high.” In addition to being markup-paid intermediaries, natural gas brokers maximize the markups when they can. The use of “Authorization of Agents” with “Exclusivity” is part of the markup maximization plan. The higher the markups, the higher the natural gas supply prices. Consequently, the lowest natural gas price objectives of consumers are totally out of phase with the markup-maximization goals of their brokers.

A Word on Natural Gas Broker to Natural Gas Broker Deal Outsourcing

Did you know that some brokers outsource the work associated with getting quotes from natural gas suppliers to other brokers? When this happens, there are two middlemen involved in the natural gas supply transaction. One middleman is the broker of record, and the second is the behind-the-scenes natural gas procurement contractor.

Two middlemen translate into two layers of hidden markups, which also means even more significantly inflated natural gas supply prices. As the layers of broker markups grow, the less likely it is the businesses will have the lowest natural gas prices that they can get.

Misconception # 3- Your Natural Gas Broker Has Greater Access to Better Natural Gas Supply Deals Than You Do

Another reason that businesses wind up paying significantly more for natural gas supply (than they could have) is that their brokers didn’t connect them to the natural gas suppliers with the best deals.

Not wanting their brand associated with unscrupulous brokers or to capture business directly for contract integrity control, many natural gas suppliers have vastly cut back on the number of brokers to whom they will provide offers.

As a result, not all brokers have access to all suppliers. As such, some brokers don’t have access to the best offers. Therefore, consumers that use brokers without access to the best natural gas supply deals don’t have the best deals.

Brokers do not disclose the names of suppliers that won’t give them offers. If they did, they would risk consumers calling these suppliers themselves and doing deals directly, thus eliminating broker middlemen from transactions. How would a consumer know, or even think to ask, if their broker cannot get offers from certain suppliers?

The combination of less-than-optimal offers with exorbitant middleman-broker markups leads to significantly inflated natural gas supply prices for businesses that use natural gas brokers.

Misconception # 4 – Natural Gas Brokers Provide Uncompromised Energy Buying Advice

The number one objective of natural gas brokers is to facilitate natural gas supply transactions. Without deals, brokers cannot make money. Without deals, there’s no vehicle for brokers to embed upcharges into natural gas supply prices. Natural gas brokers are not supplier-paid commissioned procurement consultants. They are consumer-paid middlemen.

Given the broker compensation model, which would be in a broker’s best interest, a short-term natural gas contract, or a longer-term one? The answer – a longer-term one, as a longer-term deal cements the broker’s revenues guaranteed through the duration of the agreement.

In this case, there is a conflict of interest – the customer’s long-term interests vs. the broker’s. There are conditions whereby a short-term natural gas supply deal is in the consumer’s best interest. In other words, there are times where a long-term deal is not in the consumer’s best interest. Many brokers will influence consumers to do long-term deals, presenting biased, incomplete, or slanted justifications for longer-term deals to secure their customer-funded revenues long term.

Additionally, some brokers push consumer-unfriendly products that increase their chances of finalizing transactions or maximize their opportunities to inflate markups – even post-transaction.

For example, some brokers push variable price natural gas arrangements to deter consumers that are considering fixed price deals. For some businesses, the risk associated with variably priced deals does not align with their business objectives. When transaction-focused brokers push consumers toward products that aren’t in their best interests, they are victims of compromised advice.

Misconception # 5 – You Will Be in A Net Win Situation

Businesses that engage natural gas supply brokers are often much worse off than they could have been, from a total value perspective. They think that they are saving money when they are hemorrhaging money.

Consumers that brokers do so under the impression that they will save money because their broker can get them a better deal than they can get on their own. And just as important, they believe that there is no cost to them to get the broker’s help.

However, consumers aren’t saving money. They are losing money because any savings is more-than-offset by hidden markups.

For example, a consumer could capture a savings of $0.300/million British thermal units (MMBtu) by changing to a new natural gas supplier that has a better deal. However, the broker has a hidden markup of $0.500/MMBtu. The broker’s hidden markup more-than-offsets the savings connected to a more cost-effective natural gas supply deal, by $0.200/MMBtu.

When the broker’s upcharge exceeds the savings potential available to consumers, consumers lose, and the broker wins. Sadly, this situation is way more commonplace than most consumers would believe.

Misconception # 6 – Your Natural Gas Broker Will Provide All the Necessary Information to Make Informed Buying Decisions

Businesses are under the false impression that brokers provide a thorough and unbiased review of all of the facts that affect buying decisions. They don’t know that brokers could have a motive to leave out critical pieces of data that could alter consumer’s decisions about how to buy or from whom to buy natural gas.

Because brokers are funded through markups embedded into natural gas supply prices, the only way for brokers to generate revenue is to have transactions happen.

But what if doing a transaction is not in the consumer’s best interest?

Here’s an example of how this could manifest. Consumers are buying natural gas, sourced through a natural gas broker, that is more expensive than the utility’s “default” rate. Their brokers have not informed them that the utility’s rate is lower.

The reason for the missing information – natural gas brokers cannot make money when consumers buy natural gas from the utility. No transaction, no revenue.

Additionally, brokers tend to focus on price. However, there are times when the higher-priced deal of one supplier is a better value to the lower-priced offer on another. Several variables affect the total value of natural gas supplier offers. Many brokers ignore these issues to expedite transactions to get paid.

What’s A Business in Need of Natural Gas Procurement Help to Do?

Identify a consultant that willing to help your business under full fee disclosure. But be careful. Some brokers market themselves and independent advisors or consultants but are broker-middlemen. Consultants don’t generate revenues through upcharges built into natural gas prices. Instead, they render invoices to consumers for services provided. Consultants should be able to make the case about fee reasonableness.

Another heads up. Some “consultants” that are natural gas brokers in disguise will “double-dip,” meaning that they embed hidden markups into natural gas supply prices while simultaneously billing customers for consulting fees.

Pennsylvania Natural Gas Broker: A Summary

There are many misconceptions about working with natural gas brokers, and they are:

  1. You will get the lowest natural gas price.
  2. Natural gas brokers are supplier-paid commissioned consultants.
  3. Your Pennsylvania natural gas broker has greater access to better natural gas supply deals than you do.
  4. Natural gas brokers always provide uncompromised energy buying advice.
  5. You will be in a net-win situation.
  6. Brokers will provide all of the necessary information to make informed buying decisions.

Ideas to help you reach your natural gas price savings objectives:

  • It is imperative to create competition between multiple natural gas suppliers, whether through a consultant or independently, as suppliers’ offers vary greatly on price and value.
  • If you want help, identify a consultant that will work with your business under full fee disclosure.
  • Require that the consulting fee is identified in terms of total annual cost or total term cost (in the event of a contract term that exceeds 12 months), not cost per unit of natural gas consumption.
  • Ask for disclosures from both your consultant and natural gas supplier that markups are not embedded into natural gas supply prices to eliminate “double-dipping.”
  • Get an understanding of the relationship between the value of natural gas procurement consulting services and fees.
  • Ask the consultant to name the suppliers from which they won’t be soliciting or getting offers, and ask why.

For your edification, the Penn State Facilities Engineering Institute issued a consumer-focused warning about brokers building markups to energy rates. This article explores some of the tactics, like those referenced above, that brokers employ, to market “free” energy procurement services.

Additional warnings: