Many commercial consumers of electricity and natural gas turn to brokers to line up supply for their operations. In What To Look For in an Energy Broker we discuss what these brokers do. In this article we address how they are paid.
In rare cases brokers conduct their supply services as part of a larger consulting engagement by their clients. In that case they are paid a retainer (e.g., $10,000 per year) to help a client manage their energy usage, confirm that their billing is accurate and they being billed by the utility as part of the correct rate class, explore potential energy savings solutions, and locate supply. In lieu of a flat monthly retainer they may be paid a fee per hour.
By contrast, most brokers are compensated based on a fee per unit of energy purchased. These fees are negotiated and generally range from 2-10 mils per kilowatt hour (kWh) in the case of electricity and $.02-.10 per hundred cubic feet (ccf) in the case of natural gas.
What do most commercial energy consumers pay for their electricity and natural gas supply? It depends on the amount of work performed by the broker on the client’s behalf. Unlike real estate brokers – who often charge identical fees irrespective of the amount of their efforts – energy brokerage fees reflect a wider range.
Note that brokers may not discuss or collude in setting fees for clients. Such coordination of fees would be a violation of federal and state anti-trust laws. If you ever get wind of discussions among brokers you should complain as such discussions can result in chilling competition among brokers leading to unreasonably high fees.
How are energy brokerage fees paid?
In the more common case of volumetric fees, the broker enters into agreements with suppliers under which the supplier commits to supply the broker with quotations and, if the broker’s client accepts a bid, to pay the broker.
The mechanics of paying brokerage fees are these:
1. The broker obtains competitive offers for the client from two or more energy suppliers.
2. The broker advises the suppliers of its fee. The fee is added to the price that is quoted to the client.
3. The supplier quotes are put in front of the client, often with the broker’s recommendation to buy supply from the lowest price bidder. The client decides which supplier to do business with. A bilateral contract is executed between the client and the supplier.
4. The supplier delivers electricity or natural gas and bills the client monthly for the product of (i) the price, including the broker’s fee, times (ii) the volume consumed by the client.
5. Upon receipt of monthly payments from the commercial client, the supplier pays the broker the product of (i) the fee times (ii) the volume. In some cases (see discussion below) a broker may demand this fee be paid in advance for the all or part of the contract term.
The client should always be told the amount of the fee charged by the broker. This amount should be disclosed in the client’s agreement with the broker (see Entering into an Energy Brokerage Services Agreement).
Commercial clients should beware that there are other ways in which brokers can benefit besides volumetric fees. While volumetric fees are often disclosed, these are benefits may not be. Examples of benefits that are often not disclosed are these:
“I’m excited to announce a Sales Incentive Program for sales occurring July 1 – July 31.
As with advance payments, how can a commercial client trust this broker not to steer business to this supplier because of the added incentives?
Gifts like these were common on Wall Street for many years until the New York Stock Exchange adopted a rule that prohibited stock brokerage firms from receiving gifts in excess of $50 per year. The rule put a chill into gift giving but it protected the brokers’ clients from the obvious conflicts of interest that were created.
How Can Clients Protect Themselves?
Commercial energy consumers who use brokers should insist that their broker receives no incremental benefits besides the fully disclosed volumetric fee (or consulting fees, if applicable). They can request that the broker add such a provision in their brokerage agreement. An example of such a clause can be found in Solomon’s standard Energy Brokerage Services Agreement.
Of course, even written agreements are often ignored. Therefore a client may take a different approach: They can insist on receiving a minimum of three quotations each time they look for supply. It is unlikely that every supplier will be offering the same incentives. Therefore, barring true skullduggery the multiple quotations will help ensure that the commercial energy client is receiving the best price.