Inspector General Issues Advisory on Energy Brokers, Warns of Excessive Costs, Long-term Contracts and Lack of Experience

By Liam Sullivan 4 January, 2017

The Massachusetts Office of the Inspector General (IG) issued the “Advisory for Municipalities and Other Public Awarding Authorities Using Energy Broker Services” on October 20, 2016. The result of a two-year review, it offers guidance and best practices in selecting and managing energy professionals. Although written primarily for cities, towns and housing authorities, the recommendations are applicable to a broad range of nonprofit and public entities.

Most critical to the IG was the need for public entities to conduct a competitive procurement, stating that “[a] competitive procurement process, when conducted properly, typically yields the best rates and desired services.” PowerOptions has long known and proven the value of competitive procurements. Every one of our members benefits from energy supply programs borne out of a rigorous RFP (request for proposal) process that ensures competitiveness of price and other important terms. The size of our consortium provides leverage to negotiate extremely favorable supply arrangements, and members save both time and the expense of conducting an individual procurement.

The Advisory outlined important concerns about brokers and the broker relationship, identifying broker experience, cost and duration of agreements as primary areas of risk. In terms of technical training, there are no tests or exams to ensure knowledge and qualifications; brokers must attend a training session and pay a $100 fee—that’s all. And they are paid quite handsomely for that small investment. Entities examined by the IG paid their electricity brokers between $6,000 and $36,000 annually, and one paid nearly $50,000 annually for both electricity and natural gas.

Brokers’ fees are embedded (hidden) in the price and not itemized in any billing. In fact, many of the entities studied had difficulty determining exactly how much they were actually paying their broker. Part of that confusion is because the broker gets paid for the entire duration of any supply agreement they help to negotiate. At PowerOptions, we refer to this as the broker annuity. And institutions can unknowingly trigger an evergreen clause, automatically renewing the broker’s contract. As the IG stated, “[i]t was not unusual to see this scenario play out several times in a row with the same broker.”

The IG also took issue with the amount of service brokers were providing, especially in light of their large, ongoing payments. Many brokers essentially disappear between contract renewals, only to initiate contact again for a new supply arrangement—often for a longer term than is useful for the customer. The advisory states that “[i]t is in a broker’s best financial interest to encourage public awarding authorities to extend supply agreements well into the future (sometimes as far as six years) regardless of whether that is in the public awarding authority’s best interest.”

At PowerOptions, our fee is structured to allow us to advise members objectively. Our suppliers pay an annual fixed payment, regardless of sales. While it is not added onto members’ prices, dividing the consortium’s fee by the total usage results in a number that is only a fraction of brokers’ typical fees. In addressing consortiums the IG noted, “energy-buying consortiums’ annual fees are relatively low.” And further stated, “a consortium uses the diversity of the load profile of its members to solicit favorable aggregated and individualized prices.”

The IG made one thing very clear: It is important for customers to be vigilant. As the Advisory concluded, “with energy prices rising and the energy market becoming increasingly complex, public awarding authorities have become particularly vulnerable when spending money on energy professionals such as energy brokers, and therefore need to do more to protect against waste and abuse.” PowerOptions wholeheartedly agrees.

Click here to read the Inspector General’s entire 31-page Advisory.

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