During our research, we contacted some intermediaries to gain their perspective on market developments. We also received some significant comment from both customers and suppliers on them and the role they play in the market. We outlined the role intermediaries can play in the market in Section 4.6 where we note that brokers source offers from a range of suppliers, whilst agents sell the product of a particular supplier on its behalf.
To some extent, comment from suppliers may arise from intermediaries securing better terms for their customers and sharpening competition. However, there was a consistency and scale of comment from both customer and supplier sides and we present a synthesis of this below.
7.3.1. Brokers
Brokers play a very prominent role in the business electricity and gas supply markets. There are no official measures of the scale of this role, but suppliers, customers and intermediaries themselves maintain their own estimates. Several shared these with us. One major supplier told us that brokers control 70% of electricity purchasing decisions. Another informed us that it has dealings with more than 200 brokers in the business sector and “standards vary widely”. In 2003, 30% of its customers (17% of its portfolio by volume) were acquired through third party consultants. It notes that this activity tends to be concentrated in the below 10GWh market (mostly below 3GWh). This view was confirmed by a smaller supplier informing us that, in what it terms “medium business electricity” (accounts spending between £10,000 and £200,000 per year), brokers probably determine 80% to 90% of buyer decisions. It believes they have less influence below, and above, this level as larger customers may have their own energy buyers, and smaller users are more suited to direct sales.
Overall, the perception amongst market participants on demand and supply sides is that there are very many brokers active in the market, with very variable standards of service. Many brokers are true to their customers
but some take advantage of them by securing arrangements which are more advantageous to themselves than their clients.
There is some resentment amongst suppliers at the levels of commission charged by brokers where they feel these are not properly disclosed to
customers. These fees are typically estimated at between £250 and £1,000 per meter point per transaction (i.e. arrangement of a supply contract), although figures can range some way above and below this band. Suppliers claim even typical fees can be at least equivalent to, if not several times, their own
margins from the supply contract itself. There is a variety of ways in which the brokers can collect their fees. Firstly, they can be sourced from either customer or supplier. They can be levied on a fixed fee basis, as an oncost to the energy price, or as a share of the savings the broker believes its actions have achieved for the customer.
The complexity and lack of transparency in broker fees is a cause of
concern. Leading on from this is a questioning of the integrity of operation of at least some brokers. One major supplier commented that “in the domestic market, some internet brokers have demonstrated that their advice is linked to their commission, so they do not always recommend the cheapest contract. [We have] also fallen foul of brokers switching deals for commission rather than looking for the best deal for customers across the domestic and SME markets.” Particular concerns were expressed by another that broker “fee arrangements are generally opaque to customers (in general, fees are added to the final negotiated prices and can be considerable, often being greater than the margin achieved by suppliers).” It told us that it believes 45-50% of customers using brokerage services have arrangements which are funded by commission payments from the winning supplier, and further informed us that some brokers took commission from suppliers and did not disclose this to their customers. Furthermore, some of these brokers promote their services as free to the customer, it claims. Figure 7:2 plots the commissions paid to brokers by a major electricity supplier on its portfolio of contracts.
Figure 7:2: Broker Commissions Paid by a Major Supplier on its Electricity Contracts
Source: a major supplier
Amongst customers and indeed brokers themselves, there is an awareness that broker conduct and service standards can vary very considerably. An organisation representing energy purchasers informed us that it “would support any form of investigation, perhaps leading to the development of a licence or code of practice for such operators. Whilst some customers have complained, many buyers don’t know about supplier commissions or don’t want to admit a mistake.”
Furthermore, it expressed concern about consultants taking “advantage of the lack of knowledge of many buyers in this specialised area.” One drew our attention particularly to its view that fees “should be by free negotiation with customers and should not be hidden from the customers. … This is
particularly so when a consultant is taking a fixed sum from customers and also taking undisclosed commission from suppliers.” Other concerns expressed about some broker conduct included:
• some brokers apparently do not allow suppliers to contact their customers directly and this may be detrimental to customers;
• a lack of written agreements between suppliers and consultants may inhibit the relationship between brokers and their customers;
• some brokers are advising customers to subscribe to financial products to manage their energy prices, which they may not be authorised to do;
• some are not disclosing the extent of their approach to the market and their evaluation methods; and
• there are suspicions that some are arranging contracts for customers based on their own commissions rather than the customer
considerations of price, service and other relevant criteria.
7.3.2. Agents
Whilst brokers operate independently in the market on behalf of end user customers, agents act on behalf of suppliers to sign up new supply contracts. Like brokers, they also earn fees on a transaction basis, typically per signed and registered contract. Their fees are subject to commercial negotiation with suppliers and we have been told that they can range from £50 to £150 per account per year. We were told by suppliers that their use of sales agents is not as widespread as before. Reasons cited for this change include:
• rising prices mean the margins are not as large as they were for a customer to switch from tariff to contract;
• smaller suppliers claim their larger rivals are not looking to acquire new customers as they were previously. They are, however, wanting to sign longer-term contracts (fixed prices, attractive in a rising market) and can afford to pay upfront commission for such deals; and
• the new Master Registration Agreement rules, allowing supplier objection to contract switches in some circumstances, have made switching a more difficult process.
One small supplier commented to us that, as agents’ market conditions have toughened, so their behaviour has worsened even though there are now fewer suppliers seeking to do business with them. It informed us that it has to put more resource in to managing agents than before. It believes regulators including Energywatch should be careful about enforcing measures to improve agent conduct as any heavy-handed action could force them out of the market all together. This would, in its opinion, be a bad thing as agents are an important force for small suppliers, as they bring in new customers and are rewarded on a results basis.