ON MARCH 26, JUST BEFORE IT OPENED THE STATE'S electricity market at midnight on the 31st, the California Public Utilities Commission announced new interim rules to protect consumers, plus this...
Pyramid Schemes A Black Eye for Power Retailing?
ON MARCH 26, JUST BEFORE IT OPENED THE STATE'S electricity market at midnight on the 31st, the California Public Utilities Commission announced new interim rules to protect consumers, plus this warning: "Any entity who is considering doing anything contrary to [state law] regarding electric restructuring, and [this] decision adopting such safeguards, should think twice."
Ostensibly, that advice followed from last year's passage of State S.B. 477, which told the PUC to adopt financial, technical and operational standards for electric service providers, and from reports issued by the PUC's Direct Access Working Group, which raised concerns about consumer protection.
However, it might also have had a bit to do with a certain college dropout, who rose from jewelry salesman to founder of what might have been one of California's largest electric resellers (em until the PUC suspended the business in February for "misrepresenting" services and savings to customers "through dishonesty, fraud and deceit," according to a PUC press release.
The new business, built by the 19-year-old Christopher Mee and his company, Boston-Finney Inc. of Harrisburg, Pa., allegedly sought to build profits by selling distributorships rather than electricity. Boston-Finney's activities, known as "multilevel marketing," also caught the attention of state attorneys general in California and Pennsylvania, who have filed civil complaints.
Nevertheless, Boston-Finney and other similar companies still believe that multilevel marketing has a place in power retailing, given the nature of the new electricity sales business, which promises confusion for customers and extremely tight profit margins on the product itself.
"The business opportunity for the person-to-person process of multilevel marketing works best¼ when there is a lot of confusion in the marketplace," explains Mark Talbott, a senior marketer at Amway. "And there is considerable consumer confusion about electricity."
On the other side, some consumer protection groups aren't so sure. They vow to pay careful attention to the fine line between legitimate multi-marketing and illegal pyramid schemes.
"The argument used to be that [consumer advocates] would go away once rates start to be dictated by markets rather than by regulators," says Charles Acquard, of the National Association of State Utility Consumer Advocates. "I think with Boston-Finney, we're already seeing that we'll be moving from ratepayer advocacy to a more general consumer advocacy involving pyramid schemes, as well as other fraudulent and deceptive marketing practices."
Pennsylvania Attorney General Mike Fisher echoes the need for vigilance. "Electric deregulation was created to bring competition to the energy marketplace and ultimately benefit consumers," he says. "However, it's my job to see that the host of new competing plans are legitimate."
How and Why
Under a multilevel marketing approach, an energy marketing agent earns commissions both for recruiting new distributors and on the sales those distributors bring to the business. More commissions are paid for additional distributors and/or sales in lower levels at the base of the sales "pyramid."
But pyramid schemes are illegal. According to Federal Trade Commission attorney John Singer, if more than 50 percent of the revenue is not generated by the sale of a product or service, the business is a pyramid scheme.