Business Electricity Consumers: Is Now The Time to Regulate the Automatically Renewing Contract

Automatically renewing contracts, otherwise known as evergreen or rollover contracts originated in the U.S. firstly as a convenience to cut down on the added administration for both parties of creating new contracts annually and, in the case of services such as insurance, to ensure continuous cover. The savings made on administration by the service provider could also be passed onto the customer by offering more competitive rates and invariably the contract would include a direct debit mandate. Both parties were happy the customer had lower rates and less hassle. The provider had a captive customer who, so long as prices continued to be reasonable, would remain loyal. The icing on the cake was the guaranteed regular payment.

Then along came the newly de-regulated utilities who similarly identified real advantages in the evergreen contract both for themselves and for their customers. And whilst prices remained fairly stable both parties remained happy.

However, prices of utilities such as gas and electricity are prone to wide fluctuations depending on a multitude of factors and when this happens the attraction of the evergreen contract for the customer begins to wane.

Previous inertia is replaced by shear panic when the customer suddenly learns that the annual electricity bill is doubling and that the evergreen contract prevents him from switching to a far more reasonable rate from a competitor, thus stifling the competition that de-regulation was supposed to promote.

Not all the blame can be laid at the suppliers door as he is also subject to the irregularities of the wholesale market and can ill afford a mass exodus when ready to negotiate forward the next round of energy deals.

However, the supplier is responsible for drafting the terms and conditions upon which the evergreen contract is based and it is these terms and conditions that will determine just how reasonable the contract is.

Post de-regulation new entrants to the UK market, Enron Direct, a subsidiary of the infamous American energy giant which collapsed in 2001, brought with them evergreen contracts with terms and conditions which later some prominent North American states were to challenge.

Alas, this set the standard for many other suppliers and the U.K. is now littered with contracts where:

- 90 days cancellation notice is required prior to the contract end date to avoid rollover
- cancellation is only accepted by phone which is subsequently unverifiable and may discriminate against the hard of hearing
- customers are not informed of the new rates until it is already too late to avoid the rollover

As if this werent enough, the customer is often further disadvantaged by the way in which notice of a price increase is delivered, if indeed it is delivered at all. Typically, the supplier will not give any indication of the enormity of the price increase but simply give a new figure in pence per unit which can be very confusing for the average small business. Mark Todd of Energy Helpline claims that ...in many cases customers simply accept the price hike through inertia because theyre too busy trying to run their own business. An indication of the percentage increase over the existing contract would be far more informative.

Furthermore, not receiving such a notice cannot be relied upon as an excuse to invalidate the contract. As long as the supplier has proof of posting it will be deemed to have been received.

From what was originally conceived as a new type of contract to make life easier for both parties we are now left with agreements tipped wholly in favour of the supplier.

Electricity4Business Marketing Director Graham Paul argues that truly competitive suppliers are being locked out of a large part of the market despite offering cheaper prices and far more favourable terms. If we can offer some of the cheapest business electricity prices in the market says Paul whilst maintaining the customers choice to move should he so wish then those who are renewing customers at rates twice as much as ours should at least allow the customer to make his own decision.

But there is light at the end of the tunnel since its often said that what happens in the U.S. is mirrored in the U.K. after a short period.

Some U.S. states, amongst them the powerful State of New York, have sought to redress the balance with evergreen contracts by imposing strict controls on their terms and conditions. New York General Obligations Law 5-903 prohibits the automatic renewal of contracts unless the customer is provided with notice by certified mail at least 15 days and not more than 30 days prior to the time specified.

The state of Alberta in Canada protects the customer still further. The first bill you receive after the contract has been renewed must clearly and prominently state that the marketing contract has been renewed and state the price you will be charged for your supply of energy. You have 30 days after receiving this first bill to cancel the renewed contract without cost or penalty.

Energywatch, the U.K. regulator, is now clearly onto the case. Following complaints from many small businesses it wants to ensure that where evergreen contracts are chosen that these commercial arrangements are fair and clear and do not have the effect of preventing consumers from moving supplier at the end of a contract where they choose to do so. We are concerned that this trend is having the effect of further reducing consumer choice.

For this reason Energywatch has sent a full questionnaire to all business suppliers requesting their response to a series of questions relating to this issue along with copies of their full terms and conditions. Responses are required by early November 2006 after which Energywatch will evaluate the responses and propose a set of guidelines for suppliers which will cover supplier processes, consumer communications and contract terms.

Here is a true opportunity for Energywatch to show its teeth. Anything less than the outcomes cited above in the U.S. and Canada will surely be letting the U.K. small business down.

Garham Paul is the Sales & Marketing Director of Electricity4Business Limited. E4B is an independent supplier of business electricity.

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