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The Topic: TPIs UTILITY WEEK | 3RD - 9TH JULY 2015 | 11 T hree letter acronyms (TLAs) rarely represent the most accessible of customer experiences and often simply guarantee that customer confusion is imminent. For example, everyone has a DNO and is charged for consuming KWh's on the basis of recovering charges against the Rav of the Rab. Yet I doubt that anybody outside the utility industry has the foggiest notion what any of these things mean. Similarly, middlemen or third party inter- mediaries (TPIs) are intrinsically prone to creating muddled understanding of industry value chains for end users. Part of the challenge in defining what the value of utility TPIs should be – and in ensuring they actually generate this value – lies in the multiplicity of their role and in this, the financial sector's independent financial advisers (IFAs) could provide a useful point of reference: • What do they do and what value do they create? In both cases, they provide a range of services some of which are based on the provision of market-independent techni- cal advice (i.e. energy efficiency or hedging strategies) and some of which are based on market comparisons and/or product advice (this may include access to deals that are not publically available). In the case of the utility TPI, there is also an aggregation and negotiation service for which the IFA has no direct equivalent. In both cases, a failure to clearly differentiate between the independent and non-inde- pendent roles creates the potential for abuse of trust. • How do they make money and do they make too much? In both cases there are a range of business models and revenue models at play, but as with IFAs, utility TPIs oen make much of their money from a small margin that is applied to the customer's fees. Given the implied independence issue above, it is essential that the existence and nature of these charges are transparent to the cus- tomer. Knowing whether the intermediary is being incentivised by any potential suppli- ers, and how, is fundamental. The Competition and Markets Authority highlights the variance in margins between domestic at 3.3 per cent, big businesses and 2.1 per cent and SMEs at 8.6 per cent as grounds for concern that SME's may be suf- fering from a lack of competition. This may just reflect the different amounts of value being added for each segment. Retail Market Reform (RMR – another TLA) aims to make the retail market simpler, clearer and fairer for consumers while intermediaries would claim to save custom- ers money. These two aims are not mutually exclusive and are both worth having. Utilyx reckons that as much as 0.5 per cent to 1 per cent of the average energy bill could be made up of "hidden charges" costing UK businesses as much as £100 million per year. But there is no reason for these costs to be hidden, and if they are offset by a bigger underlying saving then they are entirely justified. This model works well in other complex markets such as life insurance and mortgages, which share many of the same features in how they are sold and in the potential for customers to pay vastly different amounts for essentially the same service. While I would be the last to hold up the financial sector as a model for serving cus- tomer needs, the comparison is informative. One simple principle can ensure that cus- tomers are protected against the potential pitfalls: transparency. This means that: 1. Intermediaries must declare their inde- pendence or otherwise. 2. Intermediaries must state how and how much they get paid and by whom. The financial sector is a particularly bad offender in the TLA world with its APRs, PPIs and IFAs. But in a rare act of unintended philanthropy, the last of these might just provide a very helpful analogy for something that the utility world is unduly struggling to grapple with. Toby Ashong, director and head of infrastructure, Boxwood, recently acquired by KPMG Viewpoint: The rule of Three Letter Acronyms Do TPIs simplify a complex market or exploit customer ignorance? by saying the delay "reduces reg- ulatory uncertainty by clarifying external conditions" and that it doesn't want to "overburden" the industry in the midst of what has been billed as a seminal CMA investigation. Peter Bennell, the chief executive of the UK's fih larg- est business electricity supplier, Haven Power, told a room full of TPIs at its annual conference that he thought Ofgem was using the CMA as an excuse. "I don't think Ofgem knows what to do and I think they have parked it with the CMA who say they will have a little look at it. But I think it will come back. I'm afraid there are too many dis- reputable TPIs who bring the rest into disrepute." Butlin agrees, saying "that felt like an excuse rather than a real answer". While she acknowl- edges part of the challenge with the non-domestic market is that the term TPI "covers a broad church", she doesn't think intro- ducing transparency should be difficult, or take so long. A different approach that would effect a lot of change in the industry would be if sup- pliers took it upon themselves to put commission on bills. But while suppliers seem in favour of more transparency around TPIs and commission, no-one wants to be the first to move. "It's a competitive market," Butlin says, "you can understand [the reluctance]. It would be better if Ofgem just imposed it". The big question le on the table is what will the outcome of the CMA be next week? Butlin does not think it will be anything very radical. However, it will open the door for Ofgem to prove whether or not is "has teeth". Cornwall Energy director Rob- ert Buckley does not believe the end product will be a "code with an Ofgem badge on the front of it". He suggests instead a move towards a framework which is le to others to manage. Whatever happens, the code will not be allowed to fade qui- etly away under the cover of the CMA results. As Butlin says, a "lot of the customers get told that the TPIs are doing it for free and they are absolutely not", and until that changes, every- body will be tarred with the same brush. LD