How the air came out of Energy Watch

The Melbourne Football Club, Melbourne Victory and the fledgling Melbourne Rebels rugby union team all dumped sponsorship contracts just hours after extracts from Polis's Facebook page were made public.

Polis's posts managed to offend Aboriginals, Jews, Muslims, Asians, women, fat people and bogans. They were intended as jokes, but came across as immature and inappropriate.

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 is still 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 Energy Watch to keep it going in May and claims to have saved about 80 jobs, although most are based in New Zealand.

Wallis appeared recently 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, and a new chief executive, Gary Ebeyan, was announced.

And 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 Australian Competition and Consumer Commission is unlikely to ever see the $1.95 million penalty. 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 where the money was going.

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, and was tied to three big sports clubs.

In interviews with Weekend Business this week, Polis distances himself from all the problems that pushed Energy Watch into liquidation and blames it on incompetent and lazy staff.

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

"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," Polis 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 wrote.

He then mentions having to "get rid of TRUenergy" in Victoria before he could do a deal with Origin. Polis says the email was real but dismisses 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."

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

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

It could guarantee sales 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", an email from a channel manager in December 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)".

Energy Watch was registered in February 2009 by Luke Zombor, Polis's high-school friend and business partner. They were joint owners and Polis was the chief executive.

The broking business model was simple. Energy Watch advertised a phone number and then waited for calls to come in.

Polis says his call centres had a 50 per cent conversion rate. That is, they convinced one out of every two callers to change providers.

Energy Watch collected at least $150 in 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 them with $74 in revenue for each successful switch.

Polis is adamant he pushed electricity prices down for consumers.

"I aggressively negotiated cheaper electricity rates for customers. It was in the interest of Energy Watch to get the cheapest rates we could, because we could get conversion rates."

According to the list of liabilities, commissions were spent on more advertising and sales staff, but also on indulgences such as cars, office massages, fitness coaches and catering.

The annual churn level - the number of customers who switch companies - is more than 20 per cent in the energy sector. Hence, large companies need to replace nearly a quarter of their customer base just to keep stable numbers.

So when the broker claimed it could switch up to 4000 customers a week, it was like a goldmine.

The number of calls to Energy Watch "exploded" after it launched an advertising blitz last year, including 247 radio ads, 30 newspaper ads, one Woman'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 AC Nielsen figures, a campaign of this size would have cost about $2.7 million. Energy Watch also 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 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 raked in $2 million. The next financial year it managed $11.8 million, but spent $13.8 million. From last July to this May, it took in $14.3 million, but spent $17.8 million.

The problem with the business plan was that there was no recurring revenue. If marketing was reduced, there would be an immediate drop in calls. Expenditure was out of control and neither Polis nor Zombor kept track of anything.

Over three years, the company never turned a profit, the liquidator's report says.

Polis somehow convinced the energy providers to pre-pay large commissions based on an estimated number of referrals,the liquidator's report says. Without this industry support, Energy Watch would never have lasted as long as it did.

Its largest partners, AGL and TRUenergy, refuse to explain why they agreed to pre-pay commissions, even though industry sources say the practice is highly unusual.

A spokeswoman for TRUenergy says Energy Watch had "consistently delivered the services we had contracted it to provide".

TRUenergy suspended the contract temporarily when the Facebook scandal erupted, but resumed relations, possibly because it needed to increase customer numbers before a proposed 49 per cent float of the company this year.

AGL's only statement is that contractual agreements are confidential.

But even with the large pre-paid 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 did not 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.

Polis's recollection of his involvement in Energy Watch is baffling - he takes credit for setting up the business and making it grow, and says he tried to save it late last year. It would have started making a profit if not for the Facebook scandal, he argues.

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

The bigger problem was not expenditure but that the advertising campaign caught the attention of the Australian Energy Regulator, which asked the ACCC to take a closer look.

The ACCC sent the company a warning on June 17, 2011, and then took legal action on August 26.

The Tax Office declined to comment on why it did not take action for unpaid superannuation liabilities before the company went into liquidation, despite warnings in 2010. A spokesman for the Fair Work Ombudsman confirms it received a complaint from the Australian Services Union in April, but says Energy Watch went into liquidation before it was able to complete the investigation.

The union says it first heard about the problems in the middle of last year. "We were in negotiations with Energy Watch over a period of some months to get things sorted out," the Victorian branch secretary, Ingrid Stitt, says.

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

Most complaints in Victoria related to free footballs that were never received.

Polis says the ACCC stopped him from sending the footballs because they were stamped with "$386" - the figure Energy Watch falsely claimed consumers could save. About 5000 footballs are still sitting, deflated, somewhere in Melbourne.