Electricity and gas supply contracts are very complex and difficult to understand, so it is very important that your company, as an end user, have a complete understanding of the risks associated with the contract and the different components thereof. Many large users underestimate the impact of the supply agreement and that could be a huge financial mistake. On numerous occasions, we have also witnessed businesses and their legal teams fail to monitor their contract throughout the life of the transaction, only to realize their business has been exposed to significant risks.
Some of these risks are:
- Ambiguous, incomplete or unilateral contract language that may be open to interpretation and/or favor the supplier. For example, a contract recently reviewed by Acclaim prior to signing did not mention when or how any credits due to the end user as a result of billing errors or corrections would be paid
- We also discovered for another client that the invoices would not reflect the economic conditions of the transaction which could result in incorrect invoices and, in most cases, overpayments to the supplier. For example, a recent audit performed by Acclaim showed overpayments in excess on USD700,000 for 2019 alone. This shows how critical it is to have both your legal team and energy expert’s review and approve contract terms
Do you know your present risk or what you are eligible to recover from your current or proposed contract? How about your organizations ability to mitigate the contract and execution risks in an electricity or gas supply contract?
The first step is doing a proper assessment and vetting of the supply contract prior to signing. This means that the internal legal counsel of an end user must review the contract language thoroughly to identify areas of concern and to eliminate ambiguous or unilateral language in the contract. It is often recommended to seek expert external counsel to deal with energy supply contracts in order to facilitate the legal revisions of the supply contract due to their complexities and nuances. Based on our experience, the contract review and vetting process of energy supply contracts accelerates and improves when expert external legal counsel in energy matters is involved.
The second step is to do periodic audits on the contract execution. The intent behind a contract auditing process is to ensure that the quality of services delivered to the end user was correct (e.g. invoices sent on time and with the right information) and the end user was billed the appropriate amount. It is important to note that all supply contracts should afford the possibility to perform an audit for the end user or business. The audit rights in the contract can be explicitly mentioned in a specific clause or indirectly through the end user’s rights to understand the invoices and dispute the amounts therein.
Like a regular financial audit, energy contract audits must be done periodically (e.g. annually) with a well-defined scope and timeline, so the end user can still reclaim any overpayments. This will help the business to do the audit on a more cost-effective basis. In this context, getting an expert on energy matters will benefit the contract audit, because the expert can offer insight and share expertise on how the contract audit should be carried out. In addition, the external expert acts as another set of eyes to review the contract and ensure compliance.
A very important thing to consider is that contract audits must be done under a friendly collaboration environment between the end user and the supplier. In this context, it is vital to have a strong working relationship with the supplier and make sure that the supplier is part of the audit process in order to avoid the supplier becoming defensive or hostile and or delay your refunds. After all, the audit is not a finger-pointing exercise, but to gain a better understanding and visibility on how the contract is being executed by both parties fairly and efficiently—this ensures long sustainable business relationships.
For more than 15 years Acclaim has developed ample experience in auditing electricity and gas contract across North America, which has brought significant benefits to our customers, as well as to the suppliers. Acclaim’s customers have managed to recover significant amounts of overpayments made and their suppliers have managed to identify areas of improvement in their processes which has also benefited our customers and others to receive a better quality of service.
