Most people in Texas buy their power through the unregulated market. This means there are two entities involved in the delivery of your house’s electricity: the retail electric provider (REP) and the Transmission Distribution Service Provider (TDSP). The REP sources the power from the market, either purchasing the power directly from specific generators or by bidding in the open market for the power to be provided by a pool of available generators. They handle your contract trends, your billing based on the usage and all the other stuff related to payments or customer services. The TDSP and utility are responsible for the physical delivery of the power purchased by the REP across the grid through transmission lines and other physical assets shared by the market.
Why Energy Brokers?
For residential customers, the process of choosing a REP can be fairly simple, usually handled by going to a REP’s website and signing up, or using one of the tools available like powertochoose.org. Residential customers power contracts are relatively simple, usually a fixed price per KWh – maybe with a few twists like free nights but overall, residential load is consistent and straightforward. However, for some small businesses and larger commercial and industrial entities, their power usage is not as simple. They may have very particular needs for power management related to issues like large HVAC usage or load related to running large machinery. Because their needs are much more complex, they have more complicated contracts to give the ability to tailor their needs. In these cases, energy brokers come into the picture to help navigate these complexities.
Energy brokers can play many different roles for a customer, ranging from simply finding the best available prices from a variety of REPs to performing in depth consulting and analysis on the load characteristics of the business and translating those needs into an optimized contract for their customer, often negotiating with the REP in a detailed manner.
There are also different types of brokers, such as aggregators. These types of organizations consolidate load by gathering many similar entities, such as residences, together to bring a higher load to a particular REP. As with any business, the more potential revenue in a single transaction a company can bring, the more optimized it’s cost to serve can be, greatly reducing costs like cost to acquire. Aggregators use this to their advantage by creating a position of negotiation for the group and (hopefully) getting a better rate for everyone.
The compensation for the third parties is paid by the REP directly and is calculated as part of the cost to serve. The residential customer rarely sees any impact on their prices, however the larger C&I customers will see an impact on their bill, as the REP will usually pass through or incorporate the cost of the broker commissions into the fixed price portion of the billing statement.
Third parties are compensated using two main types of compensation: the flat fee and residual fees. The flat fee, usually associated with residential and small business contracts, is paid as a fixed amount after the contract is executed. These amounts are usually in the range of $25 to $100. These amounts are paid with the understanding the customer needs to remain a customer until the REP delivers enough power to break even on the costs. If a customer cancels or drops before this can happen, it may result in a “clawback” by the REP, where the commission paid will be returned due to the cancellation, perhaps on a pro-rata basis. The residual fee is paid to the third party as a commission based on the customers actual usage. Designated in a Mill, which is 1/1000 of a cent, the commission rate is paid per KWh of usage. Let’s say a broker is contracted to receive 5 mills ($0.005) per KWh and the customer uses 10,000 KWh in the previous month, the broker would be then due a commission of $50, usually payable to the broker after the invoice is paid to ensure the REP can recoup the commission from the customer.
The Complications for REPs
So far, the scenarios presented have been fairly straight forward and easy to manage. However, there are two other aspects to broker commission management that can make it very hard for REPs to make sure they are paying out the correct commissions: the prepayment and the Cancel-Rebill. Let’s start with the prepayment. When signing up a new customer, the REP will request a usage history from the utility to determine the expected load. At this point, the REP has a good idea for existing customers of how much load to expect over the year and therefore, does have the ability to “prepay” the broker – usually at a discount” – for the value of the contract. Using our previous example of a 5 mill rate and 10,000 KWh per month, the REP and broker can estimate the value of the year’s commissions at $600 (10,000 KWh x 12 months x .005). The REP and broker can negotiate the commission and pay the entire sum at the beginning of the year at a discount, say 80% – meaning the REP will pay the broker $480.
But the prepayment comes with a true-up, meaning at the end of the year, the REP and broker will calculate the actual usage and what the actual commission payment would have been and make each other whole. Continuing on the example, let’s say the customer used double their expected volumes and the end commission payment would have been $1200. The REP would then pay the balance to the broker based on the non-discounted expected fees ($1200 – $600) resulting in a $600 payment to the broker for the true up. But remember, this can also work in reverse – if the customer only used half the expected amount then the broker may have to return some to the REP.
The other main complication with broker payments is the Cancel Rebill. Upon receipt of an invoice, if the customer does not believe the usage is correct, they can request that the utility re-reads the meter and recalculates the bill. In the REP billing system, this could result in multiple retracted invoices or invoice line items for a particular month, and new line items in a later month (after the re-read happens) that correspond to the flow from a previous month based on the new values. These processes take the processing cycles for residuals paid per invoice out of its customary cycle and can result in delayed payments to brokers while waiting for the new meter reads. Combine a Cancel Rebill at the end of the prepayment when a true up is due, and logic can get complicated.
Recommendations for REPs
Because broker related business can represent sometimes more than half of a REPs load, there are a few recommendations for best practices for REPs in handling the broker related business. First, give the brokers a portal to manage their data. Give them an easy way to search for customers data, for invoices and even export the data into spreadsheets for them to incorporate into their own systems for commission tracking. Second, find a standard set of commissions and resist any customization under the pressure of closing the sale. Most brokers are fine with the standard set of flat fees, residuals and prepayments and introducing new compensation models for individual brokers will result into complicate manual operations as the broker’s deals will have to be handled in one-offs. Last, create automated systems to pull contract events and invoicing events directly from the CRM and billing systems, and create commissions through software, not by spreadsheet. Spending development time now will pay dividends for years to come.