Door Knocking is the tip of the iceberg – The seven cardinal sins of electricity retailing

In this blog, we reveal the “seven cardinal sins” of electricity retailing in this country.  Sadly, it wasn’t hard to come up with seven!  Truly a tale of which Dante himself would have been proud.

But it’s not all a tale of woe.  Powershop is also creating the chance for Victorians to profit from the sins of the retailers … instead of being impoverished by them.  In this blog, each of the cardinal sins is paired with a picture of a demon, which in historical literature tempted people by means of the associated sin.  Weird we know but hang in there …

The first 50 people to send an email to binsfield@powershop.com.au correctly naming each of the depicted demons (using the classification that Peter Binsfeld developed in 1589) will receive a $100 credit on their Powershop account.  Every person after the first 10 to submit a correct answer before 30 November 2013 will receive a $25 credit on their Powershop account.

If you’re not a customer, sign up in five minutes at http://www.powershop.com.au/switch-now/ using the promo code BINSFIELD and you will get the credit when you switch.

So what are the cardinal sins?  We provide details below, but roughly speaking they are:

  • Lust in door-knocking – including the old “we’re from the Government” sham.
  • Gluttony in the “binge & purge” phenomenon that pumps up percentage discounts.
  • Sloth by failing to give you a good deal until you want to leave.
  • Wrath – exit penalties are the new slavery.
  • Pride in shielding customers from the truth to try and expand profit margins.
  • Greed in adding salt to the wound when underlying costs were going up.
  • Envy in tricking people out of benefits they might enjoy in future.
 1.         Lust … beware the stranger at the door

Lust

A 2012 ACCC commissioned study into the use of door-knocking by energy retailers to drive sales demonstrated their intense desire for ever increasing profits,  manifested as a lack of self-control in the field worthy of inclusion in Dante’s Inferno.

The lustful acts identified included “agents pretending to have lost their dog before making their sales pitch… slandering the competition … committing identity theft or employing certain language and ambiguous statements to fool or pressure the customer”.  The full report is available at http://www.accc.gov.au/system/files/Research%20into%20the%20door%20to%20door%20sales%20industry%20in%20Australia%20August%202012.pdf.

The doorstep is a poor environment in which to make a decision.  Don’t feel bad in respectfully declining whatever crappy deal they are peddling and remember to reference “the Ombudsman” if they become aggressive.  They won’t be wearing a Powershop badge.

2.        “Gluttony” – binging and purging at the customer’s expense

Gluttony

Deals that are expressed in terms of “X% off” have their heritage in late night TV shopping (think steak knives and ‘but wait there’s more’) but now dominate electricity retailing in Australia.

30% off sounds better than 15% off, right?  Don’t be fooled – discounts are meaningless without all the details …What is the cost prior to the application of the discount? Is the discount applied to all elements of the bill, or just some? Another version of the sin involves emphasising a low usage rate (per kWh) as the basis for comparing deals, while concealing a plump daily charge.

Crucially, this sales approach conceals the degree to which retailers have been gluttonous.  Specifically, those retailers who have become engorged on the fruits of an expensive undiscounted rate can then claim a large percentage discount and still extract attractive margins from the customer.  This also neglects the fact that over 30% of customers with the big three retailers are on undiscounted rates.

To avoid the risk of misrepresentation, Powershop emphasizes an “all in rate” which enables the total cost to be estimated – see http://www.powershop.com.au/how-much-does-it-cost/.

3.       Sloth – loving you only when you leave

Sloth

The average Victorian residential customer stays with their electricity retailer for about 4.5 years.  When a customer wants to leave, the incumbent retailer often makes a “win back” call in which the customer is offered a “new deal”. Where was the special treatment before now?

To protect against the sin of sloth, Powershop’s online store gives customers the opportunity to improve their deal throughout their stay with us, by taking advantage of “specials” or changing the products they buy to suit their needs.  What’s more, there are no lock in contracts and no penalties for leaving.

4.       Wrath – exit penalties and the new slavery

Wrath

Despite some advertising chicanery to the contrary, residential electricity contracts cannot be fixed in their term.  The maximum penalty that can be charged for early termination is $22, plus the pro-rated reimbursement of any sign-up benefits given to the customer (e.g. football membership).

Yet a report in Melbourne’s Herald Sun newspaper (see http://www.heraldsun.com.au/news/victoria/energy-customers-pay-big-bucks-in-exit-fees/story-fni0fit3-1226730271359) recently suggested that some energy customers have been ripped off by hundreds of thousands of dollars in an exit fee penalty “rort” uncovered by the Essential Services Commission.

Whether or not exit fees have been validly charged is a sideshow to the bigger issue of some electricity retailers wrathfully trapping those customers who “dare” to leave their clutches, using trickery and gimmicks baked into complex sign-on rewards and exit fees.

Grocery customers aren’t fined for shopping at a new supermarket … why should it be any different for electricity?

In its efforts to crusade against this modern day form of slavery, Powershop has been reimbursing residential customers the value of any clawbacks or penalties imposed by their current retailer in all but the most extreme circumstances.

5.        Pride – self-interest, complexity and the mushroom strategy

Pride

For over a decade, major retailers have run one of the most successful consumer confusion programmes of all time, which in an ultimate act of pride seeks to distance the consumer from understanding the market that these companies seek to control. An audacious attempt to rewrite the laws of physics and economics in 2013 conveniently concealed retailer self-interest and errors of strategy.

As an example, several independent studies confirm that consumers are economically better off with the Renewable Energy Target compared to a scenario in which it never existed (see http://images.theage.com.au/file/2013/06/25/4518185/SKM.pdf).  Yet the major retailers are campaigning to reduce the RET and thereby effect a transfer of wealth from Australian households and businesses to their own profit line.

One major retailer justifies their position on the basis that the market is “oversupplied”, but conveniently omits the fact that they decided to build a big gas plant when the RET was well and truly underway.

Much to this retailer’s chagrin, Australian customers are not stupid and see through the charade.

It even seems that the sin of pride extends to directly appealing to the market for more profit margins!  In August this year, the Australian Financial Review reported that Origin Energy’s Chief Executive Grant King “says the electricity price war is unsustainable …  signaling the industry would reduce cut-price retail power offers after heavy discounting made a dent in the energy company’s full-year profit.”  Perhaps Mr King should seek sympathy from the many Australian households whose electricity bills have pushed them perilously close to (or under) the poverty line.

6.       Greed – exploiting the market panic

Greeg

Greed

There has been no shortage of (warranted) public outrage over increases in electricity bills in the past few years.  Given the well-publicised increases in electricity network (poles & wires) costs, metering costs and the carbon tax, surely retailers struggled to maintain their profit margins over this period?

Au contraire!  Major retailers  exploited the confusion created by these increases to expand their net margins.  See the report by the Essential Services Commission at http://www.esc.vic.gov.au/getattachment/18cdbfc4-107b-497a-ab59-6cce797957c7/Electricity-Retail-Margins-Discussion-Paper.pdf.  Now that’s greedy.

7.        Envy – extinguishing the light at the end of the tunnel

Envy

After a series of significant increases in network costs, metering costs and environmental costs (e.g. solar rebates) over the last few years, the next few years look to be considerably more modest.  In the next three years, wholesale energy costs are actually declining, while network costs are expected to rise much more modestly.  So consumers should have a much less bumpy ride, right?

Wrong. Many retailers are exploiting the fear experienced by customers over the last few years to sell products that “lock in” prices for under a fixed term contract, priced at a significant premium to other contract options that far outstrips even the most conservative estimate of the probable increase in underlying costs.

Envious of the idea that the customer might actually enjoy a break from bill increases, the big retailers have found a way to prevent that from happening.  In the words of Aquinas, the big retailers are seeking to inflict sorrow on customers for their own enrichment.

As a contrast, Powershop’s seasonal pricing model means that customers get the benefit of cheaper pricing during those months when the underlying cost of energy is cheaper … with the result that we can reduce total prices across the year because they are more reflective of our cost base.

ENOUGH FIRE AND BRIMSTONE … WHAT IF RETAILERS WERE HUMAN?

The sins described above are clearly inconsistent with compassion, which Darwin argued was humankind’s strongest instinct … one that would persist via natural selection … “the most sympathetic members, would flourish best, and rear the greatest number of offspring.”

Yet the sins we have described here are indeed human sins.  Sure, retail companies are not strictly human entities, but they can only act by the decisions of human employees and agents.

So how is it that compassion has been dampened in those “retail people” who allow these sins to occur?

To put it more positively, what would you expect from a retailer who was compassionate?

  • No high pressure sales (e.g. on the doorstep) designed to exploit a customer’s vulnerability or information disadvantage.
  • A simple and transparent approach to pricing that enabled the customer to have a true picture of what the deal would mean for them in terms of overall cost.
  • A continued commitment to improve life for the customer at all times, not just when they wanted to leave.
  • Helping customers to leave if they find a deal that is better for them, without penalty or inconvenience.
  • No exploitation of market uncertainty to expand margins.
  • An honest approach to using information, in a way that enables customers to better understand the market and how it affects them.

It almost sounds human, doesn’t it?

One thought on “Door Knocking is the tip of the iceberg – The seven cardinal sins of electricity retailing

  1. Eva

    EXCELLENT article Ben, keep up the good work!

    I am in the process of switching over to Powershop and am really looking forward to the more
    compassionate and human touch in business, already evidenced in my communications with
    staff at Powershop.

    I also feel this Blog is a very good source of information that is no often hard to find online about
    what is REALLY going on in this way too complex energy industry.

    What I crave and I am sure most other people crave, is SIMPLICITY.

    Reply

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