Going for broke: the bizarre saga of Energy Watch

WHEN Ben Polis finally crashed, it was spectacular - front-page headlines over two days, his uncontrollable personality exposed in black and white, millions of dollars in unpaid liabilities and major damage inflicted on three big sports clubs at the start of a new season.

In April, the Melbourne Football Club, Melbourne Victory and Melbourne Rebels rugby union team all dumped sponsorship contracts just hours after a newspaper printed extracts from Polis' Facebook page. The posts managed to offend Aborigines, Jews, Muslims, Asians, women, fat people and bogans. They were intended as jokes, but came across as thoughtless and petulant. Energy companies immediately suspended relations during the outrage, cutting off Energy Watch's only cash flow. Several resumed contracts within weeks.

The roller-coaster ride that was Energy Watch would have ended sooner if not for energy companies' willingness to pre-pay high commissions for each new customer.

And the story keeps moving - the man touted as Energy Watch's ''white knight'' is already gone. Danny Wallis headed a private consortium that pumped about $750,000 into a new company called Energy Watch International to keep it going in May and claims to have saved about 80 jobs, although it turns out that most are based in New Zealand.

He recently appeared on the final episode of The Block in a T-shirt bearing a new Energy Watch logo. The publicity stunt backfired by dredging up animosity among unpaid staff and consumers. Mr Wallis left the company on Wednesday. But the real mystery is how two 28-year-olds, without any business experience or supervision, set up a company that took more than $20 million from some of Australia's largest companies, employed more than 230 staff across Australia, Fiji and New Zealand, was tied to three major sports clubs and was advertising daily to millions of people.

Ultimately it was Polis' own behaviour that ruined the company. When this was exposed in April, Energy Watch lost the support of its key business partners.

In interviews given to BusinessDay this week, Polis distances himself from all the problems that pushed Energy Watch into liquidation and blames it on incompetent managers, an ''incredibly incompetent'' bookkeeper and lazy staff.

The only regulator to ever step in, the Australian Competition and Consumer Commission, took court action over a misleading advertising campaign. But there were other red flags that should have been picked up by the regulators responsible for wages and superannuation. Yesterday, a Federal Court judge fined Polis $65,000 and Energy Watch $1.95 million for a series of misleading advertisements published last year.

The ACCC is unlikely to ever see that money. Liquidators estimate Energy Watch has $8.6 million of unpaid liabilities including $1 million in employee entitlements and superannuation.

The creditors' report provides a snapshot of why Energy Watch failed - it had unsustainable expenditure and its only source of income was one-off commissions. By late last year Energy Watch was only just surviving week to week. It got so bad that a few days before Christmas staff salaries were delayed while the company waited for TRUenergy to pay commissions.

Polis' modus operandi is revealed in a notorious May 2011 email in which he demands $25 million cash and commissions of $200 per sale, or he would unleash an advertising blitz on Origin's customer base in New South Wales.

''Commissions and product do not determine who gets the customers. I DO! If we have a deal, I will cease advertising to your customers 1st September 2011,'' he wrote.

''If Origin is to come on board, it will need to be a good deal for me to stop targeting your customers. Why? I have spent millions of dollars building a brand in your networks, and that can't be replaced if I pull out!''

He then mentions having to ''get rid of TRUenergy'' in Victoria before he could do a deal with Origin.

This week Polis confirmed the email was real but dismissed it as ''rhetoric'' that was never taken seriously by either side. ''Energy Watch would never ever have worked with Origin for the simple reason that their rates were so terrible,'' he says.

But sources at Origin say the email was taken seriously and it never used Energy Watch as a broker.

The email highlights how powerful this brash and adolescent business had become in the energy industry. By early 2012 it had between 50 and 70 per cent of the switching market and was working exclusively with TRUenergy, AGL, Simply Energy and Momentum Energy.

And it could guarantee customers because it would recommend providers based on promises to companies rather than what was best for consumers.

''The reps must be pushing Simply Energy 'Elect Only' sales in Vic,'' a December 2011 email from a channel manager says.

''It is an exclusive 15 per cent discount and the rates are very competitive ? our commitment to Simply is to submit 100 sales per day (Monday to Friday).''

BEN POLIS dipped his toe into the energy sector selling electricity and gas door to door, but he soon realised there was a better way to find customers - set up a call centre.

His first attempt was called Polis Australia and lasted from November 2007 until July 2009 when administrators wound it up.

Energy Watch was registered in February 2009 by Luke Zombor, Polis' high school friend and business partner. Each owned half the company and Polis was chief executive. But he did not become a director until May 2011.

The broking business model is very simple. Energy Watch advertised a phone number, then waited for calls to come in.

Polis told BusinessDay his call centres had a 50 per cent conversion rate - meaning they convinced one out of every two callers to change providers.

Energy Watch collected at least $150 commission for each successful switch. Polis says it cost $38 in marketing to get someone to call in. So a 50 per cent conversion rate would leave it with revenue of $74.

According to the list of creditors, commissions were spent on more advertising and sales staff, but also on indulgences such as office massages, fitness coaches and catering. (On the day the Facebook scandal broke, staff were enjoying a lamb spit-roast on the office roof when BusinessDay visited. The fatty smell filled the building.)

Annual churn levels - the number of customers who switch companies - is more than 20 per cent in the energy sector so large companies need to replace 20 per cent of their customer base every year just to keep stable numbers. Victoria has some of the highest churn levels in the world.

So when a broker came knocking on providers' doors claiming he was switching up to 4000 customers a week, it was like a never-ending goldmine.

The number of calls to Energy Watch ''exploded'' after it launched an advertising blitz in 2011 including 247 radio ads, 30 newspaper ads and one Women's Day ad, eight different television ads broadcast more than 1200 times, and large pictures of Polis - sometimes in his underpants - on billboards around central Melbourne. According to ACNielsen figures, a campaign of this size would have cost about $2.7 million.

Energy Watch offered $50 Coles/Myer vouchers, free Sherrin footballs, and bulk discounts to community groups. The vouchers and footballs were never sent out.

''I created a brand that was perceived to be big,'' Polis says. ''We had a small office in Lonsdale Street that was very, very cheap. We had ads. I spent money on building advertising [and] it was self-perpetuating. We were doing 4000 sales a week and all this revenue was coming in - it was pouring through the doors.''

At this rate Energy Watch would take in $600,000 a week, or $296,000 once the cost of getting the customer to call was taken into account.

From June 2009 to July 2010 Energy Watch took in $2 million. The next financial year it took in $11.8 million, but spent $13.8 million. From July 2011 to May 2012 it took in $14.3 million but spent $17.8 million.

The problem was that there was no recurring revenue. If marketing was reduced incoming calls would decline. Expenditure was out of control and neither Polis nor Zombor kept track of anything.

Over three years the company never turned a profit, according to the liquidators' report.

Another problem was that electricity companies started ''clawing back'' commissions in early 2010. An industry source says this happens if customers decide to cancel a switch after being referred by the broker or comparison site.

Polis somehow convinced energy providers to prepay large commissions based on an estimated number of referrals, according to the liquidators' report. Without this industry support Energy Watch would not have lasted as long as it did. An industry source who uses brokers said this was highly unusual.

Energy Watch's largest partners, AGL and TRUenergy, refuse to explain why they agreed to prepay commissions.

A spokeswoman for TRU said Energy Watch had ''consistently delivered the services we had contracted it to provide''. But it suspended the contract when the Facebook scandal enveloped Polis.

TRU was the first provider to resume its relationship, possibly because it is keen to bulk up customer numbers before a proposed 49 per cent float of the company later this year.

AGL's only statement is that contractual agreements are confidential. ''AGL continues to offer consumers a range of energy plans to suit their needs, which are marketed through various sales channels,'' a spokeswoman said.

But even with large prepaid commissions, Energy Watch's revenue never caught up with expenditure.

In an attempt to keep wages down, Energy Watch opened a call centre in New Zealand where it didn't have to pay penalty rates on weekends. But this introduced high travel costs. There is still $12,500 owing to a travel agent in the list of creditors.

Back in Melbourne, Energy Watch rented five separate offices plus three floors of a building on King Street. It did manage to consolidate into one building by the end, but when it collapsed it owed tens of thousands of dollars to various agents and landlords in unpaid rent and real estate fees.

Polis' recollection of his involvement in Energy Watch is baffling - he takes credit for setting up and building the business and putting together sponsorship deals, and says he tried to save it in late 2011 when costs were spiralling out of control. He claims it would have started making a profit if not for the Facebook scandal.

He blames all the excessive expenditure, misleading advertising, and low conversion rates on incompetent staff and junior management.

The bigger problem was that the campaign caught the attention of the Australian Energy Regulator, which asked the ACCC to take a closer look.

The ACCC warned Energy Watch on June 17 last year and took legal action on August 26, 2011.

Justice Shane Marshall of the Federal Court in Melbourne found the 2011 advertising campaign was based on false and misleading statements about the amount of money households and businesses would save, how many people Energy Watch had helped and the kind of service it provided.

The ACCC is the only regulator that took action against a company flouting workplace laws and holding the energy industry to ransom.

The ATO refuses to comment on why it took no action on unpaid superannuation liabilities before the company went into liquidation. A spokesman for the Fair Work Ombudsman confirmed it received a complaint from the Australian Services Union in April, but said Energy Watch went into liquidation before it was able to complete the investigation. The ASU first heard about unpaid super and wages in mid-2011.

''We were in negotiations with Energy Watch over a period of some months to get things sorted out. The union did everything that we could to pursue unpaid super,'' said Victorian branch manager Ingrid Stitt.

None of the state-based bodies that look after consumers affairs ever took action, but there were surprisingly few complaints.

Consumer Affairs Victoria received 20 complaints, the New South Wales Office of Fair Trading received a ''few'', and the Queensland Office of Fair Trading just five between 2009 and 2012.

Most complaints to Consumer Affairs related to free Sherrin footballs that were never received. Polis says the ACCC stopped him from sending them because they were stamped with ''$386'' - the figure that Energy Watch falsely claimed consumers could save by using its service. About 5000 footballs are still sitting, deflated, somewhere in Melbourne.