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Pyramid Schemes A Black Eye for Power Retailing?

Fortnightly Magazine - May 1 1998

Moreover, the product or service must be tangible to qualify as legitimate.

"Some companies say they sell something, a binder of training materials, for example, but it's just a facade for bringing in new membership," Singer explains. "With electricity, it's presumably going to be a little more clear-cut. If the company doesn't have a contract to resell from a legitimate supplier, or isn't registered with the PUC, it would be hard for a company to prove it has a genuine intention to sell electricity."

An alleged pyramid structure is what got Mee's company booted out of California. In February, the state PUC ordered Boston-Finney to cease operations as an electric service provider (it had been registered as No. 1105). The PUC told Boston-Finney to cease recruiting California residents as retail customers, or as account executives, independent distributors, or marketing agents (I. 98-04-004, Feb. 19, 1998).

Also, Boston-Finney was slapped with two state civil lawsuits seeking more than $1.5 million in penalties. Attorneys general in California and Pennsylvania alleged that Boston-Finney had set up a pyramid scheme involving 8,000 people. According to the allegations, each participant paid about $300 to become "power reps," plus $160 in annual dues. Boston-Finney also fraudulently misrepresented itself as an established utility reseller, the attorneys general claim. Authorities are seeking to force Boston-Finney and Mee to pay restitution to the hapless 8,000. (See, Case No. 717631, Calif. Superior Court, San Diego County; Docket No. 183 MD 1998, Pa. Commonwealth Court.)

Pennsylvania Commonwealth Court Senior Judge Eunice Ross granted an injunction freezing $310,000 in personal and business accounts. Mee's $90,000 Mercedes, bought with corporate funds, was impounded. Boston-Finney was banned from conducting further business. Mee, who once touted the electrifying potential for multilevel marketing during deregulation, declared personal bankruptcy and is seeking to have his assets returned.

All the same, the notion persists that an Amway-style sales force (em selling distributorships along with the product (em is the way to market low-margin commodities to retail customers.

According to Paul Clanon, California PUC energy division director, margins in electric generation will be small, between 5 and 10 percent, which may make it difficult for resellers to compete on price alone.

"I don't look to make more than 50 cents a customer a month, if that, from selling electricity," says Eric Borgos, an inactive Boston-Finney sales rep. "Recruiting other distributors is the only way I'm going to make money."

Kevin Tran of ITT Powercom, a California ESP, points out that multilevel marketing is the least costly way to get customers. "Until we know what the actual supplier charges to us are going to be," Tran complains, "I don't know if we'll be able to make a profit on electricity."

"The problem with telemarketing is that today people are afraid they might be getting slammed," says Tran, referring to the practice in the long-distance phone industry of customers automatically being switched to a new provider. "Advertising is expensive, and you can't be sure of its effectiveness. Multilevel marketing gets people actively involved to sign up new people."

"Who are you more likely