12/20/2012 17:14 EST | Updated 02/19/2013 05:12 EST

Water heater companies fined by competition watchdog

Canada's Competition Bureau is seeking $25 million in penalties from two water-heater rental companies that the watchdog alleges gouge customers by making it next to impossible to return water heaters and get out of contracts without exorbitant fees.

The competition watchdog said it is taking action against Direct Energy Marketing and Reliance Comfort.

Both companies offer water-heater rental services to Ontario homeowners. For a monthly fee, the customer gets a modern and more efficient water heater , and the promise of speedy repair service should it ever break down in future.

High fees

But critics allege the industry is largely a scam because the fees charged are almost high enough to cover the cost of owning the tank outright within a few years. And the penalties for exiting a contract are often exorbitant, sometimes comparable to the cost of buying a new heater.

The bureau says that whenever Direct Energy or Reliance customers want to switch to another provider, they have to contend with a series of practices designed to frustrate the consumer, including:

- A requirement to call to obtain authorization to return a rented water heater.

- Aggressive retention tactics during these calls.

- Restrictions on when and where water heaters can be returned.

- Unwarranted fees and charges.

"Many customers have been forced to continue their rental agreements with either Direct Energy or Reliance, even if they want to switch to another provider, because of the anti-competitive practices we found in our investigation," the bureau's interim commissioner John Pecman said.

"These tactics are denying consumers the benefits of competition."

The bureau filed two applications Thursday under the "abuse of dominance" provision of the Competition Act seeking $15 million from Direct Energy and $10 million from Reliance Comfort.

The companies say they'll oppose the allegations before the Competition Tribunal, the federal agency that hears cases brought by the bureau.

This isn't the first time Direct Energy has run afoul of the bureau for similar practices. "In 2002, following a bureau investigation, the Competition Tribunal prohibited similar conduct by Enbridge Services Inc., now Direct Energy, under a 10-year consent order," the bureau said in a release.

"The bureau's investigation determined that Direct Energy re-engaged in similar conduct after the consent order expired in February 2012."

Reliance Comfort said it was disappointed by the bureau's action, saying it had been in "co-operative discussions" about its return policies.

It also insisted that its return procedures are designed to protect consumers from aggressive sales tactics by its rivals, who want home owners to change suppliers.

"Reliance intends to vigorously defend its current practices that it firmly believes are in best interests of its customers," said Roger Rossi, president and CEO of Reliance Comfort.

"The action taken against us today will not clean up the well-documented problem of misleading sales tactics used by competitors' door-to-door salespeople. We believe that taking action against these unlawful practices should be the priority of the Competition Bureau."

Direct Energy denied the allegations in a statement Thursday, saying that its practices do not inhibit competition.

Len Diplock, general manager of rental water heater services, said, "Direct Energy supports a competitive marketplace and the benefits it brings to consumers, such as greater consumer choice, stronger customer service and competitive pricing."