British Gas Business customer retention and sales strategies fueling competition debate

British Gas Business customer retention and sales strategies fueling competition debate

Datamonitor Plc

11 July 2007

British Gas Business has been accused by its competitors of using 'unfair' sales tactics and an aggressive sales campaign that may prevent small- and medium-sized enterprises from switching energy suppliers. However, this will allow third-party intermediaries, or energy brokers, which are widely seen to be independent bodies that can help to smooth the switching process, to gain new business.
 
British Gas Business's (BGB) attempts to win back small business customers have raised competition concerns from UK energy regulator Ofgem and have outraged BGB's competitors, which have called for action. Indeed, BGB has been accused of exploiting the ambiguous and opaque wording of the existing license conditions and taking a predatory approach to retaining small business customers and winning market share.
 
Customers are entitled to switch away to suppliers that offer cheaper tariffs, but many who have signed new contracts have been subsequently re-approached by BGB and offered lower terms just days before their new contact comes into effect. Ofgem has launched an investigation into whether customers' interests are being served by the practice of using industry data flows to aid sales strategies, as well as into the impact that this may have on delivering competition in the non-domestic market.
 
Rival suppliers have joined forces with the Federation of Small Businesses, industry watchdog Energywatch and the Utilities Intermediaries Association to demand changes to the existing rules that govern supply license conditions and the switching process. They want the conditions to be re-worded in order to enhance transparency and to close the legal loophole that has allowed suppliers in general, and most publicly BGB, to exercise what has been viewed as a block to the customer switching process.

BGB's competitors have argued that the company's practice of re-approaching customers will result in increased acquisition costs through lost contracts. These costs will be passed on to the consumer by raising future contract prices and introducing cancellation fees of up to GBP1,500 for breaking a contract. EDF believes that such practices will impact its business strategy to the point that it becomes more focused on retaining existing customers than it does about acquiring new ones. This would impede both choice and competition.

As a result of the current confusion, the market has become conducive to allowing third-party intermediaries (TPIs) to enter and help ease the switching process, as their independent advice can be seen as a welcome counterpart to the vested interests of suppliers themselves. In the short term, TPIs are likely to exploit the available margin and take the opportunity to gain new business while the rules are still unclear.

Ofgem's decision on the matter will set a precedent for future business practices and regulatory reform in the non-domestic supply sector. The legal implications are not yet certain and, although Ofgem has not ruled out an outright ban from using a customer's decision to change suppliers in order to lure them back, this could lead to changes in data collection, the data exchange process and amendments to tighten supply license conditions.

Given the increasingly complex and risky nature of establishing energy contracts, small businesses may be more inclined to pay an insurance premium, increasing the market presence of TPIs. The rationale behind this would be to use TPIs' expertise and bargaining power to get the best deal in the market and to avoid any unnecessary cancellation penalties, a fine that some suppliers have threatened to impose if Ofgem fails to take action.