Customer renewal: Who do you deal with and who do you pay?
We have a customer who has a fixed price contract for both gas and electricity. The customer signed the agreement last February for two years, starting in June 2011. It was a good purchase at the time. Last year, he signed the contract directly with the supplier.
Background: The role of the broker. The customer tells the story that back then the customer approached a supplier, AND had been contacted by a broker separately. Brokers typically call several suppliers and get pricing on behalf of customers. Brokers communicate with a single individual at the supply company (also known as ESCO in the New York market, for example). The broker’s company contact gets pricing from the supplier’s pricing desk, and manages the relationship between brokers and the company.
Last year, our customer dealt with both one supplier and a broker for that same supplier until, in frustration, he called the supplier directly and said “just get me your best price”. Back then, according to The Megawatt Hour pricing, he did a good deal– it was in line with market prices. Since the customer signed that contract, market prices have dropped significantly.
How do you know if you’re involving a broker or not? Now that the customer has been working with The Megawatt Hour, he has watched market prices drop over the past 6 months. He has been able to see what his costs would be after the two year contract is up, and what he would be paying if he signed a blend and extend contract now. Recently, he decided to look at blending his current price for the rest of his current contract and extending that contract for another 12, 24 or 36 months so that he could lower his overall price by blending it with lower current market prices.
During the course of discussion with the existing supplier, a broker got involved in the conversation with the customer about the renewal. So, at one point in the process, one customer was talking to a broker (who was working with the same supplier) as well as talking directly with someone else at the same supplier. He was also getting different prices from each player.
Lesson learned: customers–be aware of whom you are talking to (either broker/supplier), and why you are using one party or another. This customer expressed frustration and aggravation about this process–one which he initiated in an effort to reduce his short and long term costs. The supplier with whom he was speaking is a supplier that has been in the market since the start of deregulation. They are not new to this business. If you are renewing or extending your contract with the same supplier, go directly to that supplier. The role of price discovery and negotiating the lowest price can fall on The Megawatt Hour– we get paid by customers and are aligned with customer interests. A broker will add cost.
Understanding who gets what piece of the pie? In an effort to enhance transparency, the customer asked the broker what margin the broker would receive if the customer signed this deal. When the customer asked the broker what his margins on the deal were, the broker responded that they get paid by the supplier. While this is technically accurate, suppliers send checks directly to brokers; it implies that customers don’t actually get charged the broker’s fee. That is just not an accurate representation of how broker costs get charged and paid. It gave the customer the impression that he was not going to have to pay the broker for stepping in to the deal. Supplier margins are very slim ($0.001-$0.003/kWh on a $0.07-$0.08/kWh total price). These days, brokers are typically charging even more than suppliers– some times as much as $0.005-$0.008/kWh. There is no way a supplier is going to pay a broker out of their own margin. Note that when you sign up with a supplier, the supplier is managing the energy procurement for you, from the wholesale market, they are taking risk on components of costs that they cannot buy in the wholesale market (ancillaries, etc.), they are sending you an invoice, they are managing the complex financial issues surrounding the retail purchase.
Despite the complexities of managing this process, all complexities that the supplier must handle, the broker margin can be higher than the supplier margin (see pie charts, below) and can be the 4th or 5th highest cost component of your electricity price. If that is so, be sure you get meaningful value for that cost, because you will pay it every month on every kilowatt hour for the term of your contract.
Lesson learned: customers–if there is anyone else involved in your negotiation, you will end up paying them somehow. Make sure you are comfortable with the players involved in your energy transaction. And, frankly, if a broker is working on a deal, they will get paid by you, ultimately, so make sure they are adding value for you in some way. Whatever the supplier has to pay to get your business, they will pass on to you in the form of additional costs, including broker fees. There are times when a broker’s involvement is helpful– for example, when you are trying to narrow a large field of suppliers to get to a few competitors. There are times when they can get the best pricing for you among a large field of confusing players. No matter what the event or the role, however, they will add to your costs. See the chart, below, for a breakdown of electricity costs, including broker and supplier margins. This information is based on actual cost data.
The outcome. In this case, The Megawatt Hour was able to show the customer the price he should be paying the supplier. The original prices that he had received were 8-10% higher than what we had expected the customer to receive from a supplier. We believe that extra cost was broker margin. When the customer went back to the supplier directly, he negotiated a lower price that was in line with market prices– 9-10% lower than the broker’s quoted price. All’s well that ends well.
The bottom line: If you sign a contract with the involvement of anyone other than your supplier, you will pay for that service. If you choose to pay for their help, make sure you receive meaningful value for it.