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Consumer Counsel: Retail Suppliers' Exercise Of Contractual "Change In Law" Clauses "Unenforceable", Do No Supersede Statutory Requirement For Affirmative Customer Consent To Material Changes (Applicable To Commercial Contracts)

AG: Retail Suppliers May Not Use Sales Agreements To "Contract Around" Statutory Safeguards

Retail Supplier: PURA Has No Jurisdiction Over State's Unfair Trade Practices Act


June 28, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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In a brief before the Connecticut PURA, the Connecticut Office of Consumer Counsel said that retail electric suppliers' exercise of "change in law" clauses can not supersede the statutory obligation to obtain customer consent

As exclusively first reported by EnergyChoiceMatters.com, PURA is investigating the issue of fixed price contract pass-throughs, prompted by several suppliers passing-through to customers various ISO-NE charges

In its brief, OCC said, "OCC submits that the practice of suppliers altering contract terms without the express consent of the customers bound under such contracts constitutes a violation of the laws of the state, including but not limited to, Conn. Gen. Stat. §§ 16-245o(h)(8), 16-245o(j), and 42-110b."

"The practice of third-party suppliers unilaterally altering the material terms of their customers’ contracts falls plainly within the province of General Statutes § 16-245o(h)(8), which provides, in pertinent part, that '[a]n electric supplier shall not make a material change in the terms or duration of any contract for the provision of electric generation services by an electric supplier without the express consent of the customer.' Put differently, a third-party supplier may seek to enforce a change in the terms of a contract but only if the customer expressly consents to the change in question. This section applies equally to both residential and commercial customers. Accordingly, General Statutes § 16-245o(j) establishes that any contract 'in material violation of the provisions of this section shall be void and unenforceable' and '[a]ny waiver of the provisions of this section by a customer of electric generation services shall be deemed void and unenforceable by the electric supplier,'" OCC said

OCC said that the general issue that prompted the instant investigation, "is one that the Authority has already examined at length in the context of third-party supplier contracts with residential customers."

OCC said that, "In Docket No. 14-07-15, PURA Review of Choice Energy, LLC, the Authority determined that Choice Energy, LLC’s ('Choice') unilateral cancellation of a price savings guarantee clause in its residential contracts without the express consent of its customers was a violation of General Statutes § 16-245o(h)(8). Final Decision, Docket No. 14-07-15. In that docket, Choice argued that sending notice to its customers and allowing them the opportunity to respond to such notice was sufficient conduct to satisfy the 'express consent' requirement of § 16-245o(h)(8). The Authority rejected Choice’s approach, concluding that 'express consent' in the statute means that 'the customer’s consent must be clearly and directly stated' and that 'the customer must take an affirmative action to state or show that consent has been given.'"

"Furthermore, in the same docket the Authority reaffirmed the prohibition in § 16-245o(j) on supplier contracts that seek to waive the protections set forth in § 16-245o generally," OCC said

OCC said of the prior PURA finding, "Choice posited that because its customer contracts contained a clause that purported to allow Choice to change the terms of any contract upon 30 day notice to the customer, its termination of the savings guarantee clause was permissible under the contract itself. Again, the Authority rejected this argument, determining that 'a customer may not waive the express consent requirement in Section 16-245o(h)(8).'"

"The Authority’s decision in Docket No. 14-07-15 is illustrative as the conduct addressed in that proceeding is reminiscent in ways of the alleged actions of third-party suppliers in the present proceeding. Here, the aspect of the contract that was altered was the price, which would constitute a material term of the agreement," OCC said

"This is especially so in the present instance, given that the contracts in question are fixed-price contracts, where customers presumably expected to be held to a particular price for the duration of the contract period. Like Choice in Docket No. 14-07-15, Direct and Spark transmitted written notice to their customers that the price under their respective contracts would be higher moving forward. Yet in the instance of both companies, the written notices provided consumers with no opportunity to offer express consent or reject the price alteration—they stated instead that the price changes would be taking effect on upcoming bills," OCC said

"The law, however, is explicitly clear -- any material change to a contract term requires the express consent of the consumer. To the extent that any third-party supplier attempts to supersede this legal requirement via contract provisions that permit the unilateral alteration of price terms, such provisions are void and unenforceable under Connecticut law. Conn. Gen. Stat. § 16-245o(j)," OCC said

"Price is often an important, if not the most important, factor that a consumer considers when deciding whether or not to enter into a contract. If the price term stands to materially change, customers must have the opportunity to evaluate the impact of that change and decide whether to continue with the contract or exercise any rights to terminate the contract and seek a better price elsewhere," OCC said

"In sum, OCC submits that the Authority’s reasoning in Docket No. 14-07-15 as relates to § 16-245o(h)(8) is of equal applicability in the present situation and the Authority should affirm that third-party suppliers may not alter price terms in their contracts without the express consent of the customer," OCC said

Even with the inclusion of "change in law" in customer contracts to which customers consent, OCC said that such "change in law" provisions, "nonetheless still require a third-party supplier to obtain the customer’s express consent to institute any prices alterations that may result from the various changes in law and circumstance ..."

Such "change in law" provisions may not validly be construed as a waiver of this requirement, "which is purely inviolable pursuant to General Statutes § 16-245o(j)," OCC said

"Casting an increase in price—regardless of the origin—as a 'pass-through' does not change the fact that such an increase is a material alteration to an essential term of the contract which therefore requires the customer’s express agreement thereto. A private commercial contract cannot supersede a statute, especially a statute that governs the content of the exact type of contracts at issue," OCC said

OCC further said that, "The contention that a third-party supplier may unilaterally alter the price in an ostensible 'fixed-price' contract calls into question whether these contracts should rightly be considered fixed-price contracts at all and whether those customers who entered into them on that basis have rightfully received the benefit of their bargain."

Even with the requirement for affirmative consent, OCC said that suppliers should be required to provide more initial disclosures concerning "change in law" clauses

"[I]t is OCC’s position that consumers should be made reasonably aware -- in advance and in the contract itself or a schedule thereto -- of those precise circumstances that may be claimed as justification for a price increase in an otherwise fixed-price contract and the criteria that the supplier would use to impose such an increase. Armed with that knowledge during the negotiation process, a consumer will then be equipped to determine whether the contract’s terms are consistent with the consumer’s needs," OCC said.

The Connecticut Attorney General filed a brief generally supporting the same position as OCC. Noting the requirement of Conn. Gen. Stat. § 16-245o(h)(8) for suppliers to obtain affirmative consent for any material change, the AG said that "It is axiomatic that a change in price is a 'material change' in the terms of a contract."

Retail suppliers, "may not use its sales agreement to contract around plain statutory requirements of Conn. Gen. Stat. § 16-245o," the AG said

In a brief, Spark Energy, LLC alleged that, "Spark observes the unusual nature of this proceeding in that this docket appears to be a coordinated effort between the Authority and the Connecticut Office of the Attorney General ('AG') to enable civil litigation under the Connecticut Unfair Trade Practices Act ('CUTPA'), found in Connecticut General Statutes § 42-110b. The silver lining intended with this playbook is obvious."

In its brief, Spark Energy alleged, "The Authority has initiated this proceeding, on its own motion, to reach a predetermined outcome via declaratory ruling that certain terms in contracts in use by electric suppliers, which the Authority accepted in electric supplier licensing dockets since the commencement of retail choice following the enactment of Public Act 98-28, constitute 'unfair trade practices.' The AG and the plaintiffs’ bar will then take this declaratory ruling to court purportedly as prima facie evidence of a CUTPA violation, thereby ensnaring electric suppliers in expensive and protracted litigation for years. The apparent goal in this playbook?—to accomplish administratively and judicially what the General Assembly has declined to do repeatedly over more than a decade of lobbying from the Office of Consumer Counsel ('OCC'), AARP and other anti-consumer choice advocates—outlaw retail choice and competition."

In its brief, Spark Energy stated, "While the Connecticut Attorney General is well within its rights to pursue such CUTPA claims in the Connecticut courts if it has a legal and factual basis for asserting such claims -- and the AG certainly knows how to do so -- the AG is out of bounds in attempting to tilt the scales of justice in its favor by using the Authority to do its bidding on a topic with which PURA has no jurisdiction, authority or expertise -- alleged unfair trade practices."

In its brief, Spark Energy stated, "[T]he reason this strategic playbook is so out of bounds, is because under clear and unambiguous Connecticut law, PURA has no jurisdiction over CUTPA. CUTPA is found not in Title 16 of the Connecticut General Statutes—the set of statutes the legislature has authorized PURA to administer -- but in Title 42. Title 42 of the Connecticut General Statutes, rather, is administered by the Connecticut Department of Consumer Protection—not PURA. The Authority’s legal interpretations under CUTPA, therefore, are no more appropriate or reasonable than were the Authority to opine on labor and employment laws, environmental protection provisions or any number of Connecticut General Statutes not under the Authority’s jurisdiction. In opening this proceeding, PURA has drifted off its field of play and onto another field."

In its brief, Spark Energy stated, "What’s more, with respect to the significant wholesale market changes that the Federal Energy Regulatory Commission approved and ISO New England Inc. ('ISO-NE') implemented in 2018, the Authority has already determined that these 2018 market changes constituted material modifications to the wholesale markets that justify alterations to existing power contracts. Just last year, the Authority issued a final decision in Docket No. 08-01-01RE05, DPUC Review of Peaking Generation Projects – Market Rule Changes (the 'Market Rule Change Docket') finding that significant changes to the wholesale markets in 2018 demanded that existing fixed-rate power contracts be altered. Put simply, the Authority’s own precedent established that it was not an unfair trade practice for wholesale market participants to alter contracts and pass these same costs resulting from the market rule changes on to Connecticut customers."

Spark further said in its brief that, "While in the Market Rule Change Docket, PURA expressly authorized the 'altering' of wholesale contracts between peaking generation facilities and a Connecticut electric distribution company because of the new Pay for Performance rule implementation, there is no factual record in this docket to support the claim that any electric supplier altered any contracts and Spark denies strongly any such allegation."

In its brief, Spark Energy stated, "Connecticut General Statutes § 16-245o(f)(2) permits electric suppliers to include in customer contracts 'circumstances under which the rates may change.' As is common in the industry, Spark’s standard form Master Electricity Service Agreement ('MESA') used for larger commercial customers (but not mass market residential customers) includes a provision which contemplates the pass-through of certain costs associated with a change in law. Section 4 of Spark’s MESA defines a 'change in law' to include changes in 'market design.' Section 4 also states that 'in the event that Seller determines that any index price or other component necessary for a Contract Price is not available or there is a change in the formula for or the method of determining such index, then Seller may either adjust the Contract Price for each affected period or use another index.' One component of the Contract Price includes capacity costs determined by ISO New England. As a result of the 2018 changes in market design, the change in law provision contained in Section 4 of the MESA was triggered, thereby permitting Spark to pass through to commercial and industrial customers the costs associated with the Pay for Performance market rule change. It’s important to restate that in applying Section 4 of the MESA, Spark was not altering any terms of its contract; rather, Spark was simply applying the terms of the existing contract. Nevertheless, on account of these unusual changes to the ISO New England market and increase to the Contract Price, Spark as a courtesy has not charged any early termination fees for customers electing to terminate on account of these pricing changes."

In its brief, Spark Energy stated, "For many years, Spark never acted on this provision, as stability in the wholesale market structure did not warrant a price change under the contract language. But in 2018, as the Authority itself has concluded, ISO New England implemented significant market rule changes that had a major impact on power pricing. On account of this significant and material change Spark, for the first time, exercised its rights pursuant to the clear language in its customer contracts to adjust pricing based on these material changes. Spark never altered its contracts with customers and there is no evidence here to suggest otherwise. Although not required, given the rarity of such an event, Spark declined to apply early termination fees for customers that no longer wished to continue under the revised pricing."

In a brief, Direct Energy Business, LLC also said that PURA is not charged with implementing the Connecticut General Statutes section 42-110b (CUTPA), and statutory provision's prohibition on unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce

In a brief, Direct Energy Business, LLC said, "PURA is not charged with implementing this statutory provision. The Connecticut Supreme Court has ruled that PURA may not issue a declaratory ruling as to the applicability of a statute it is not charged with implementing. As a creature of statute, PURA can act only within the parameters established by law. No law provides PURA with the authority to implement or interpret CUTPA. In fact, CUTPA explicitly empowers the Commissioner of Consumer Protection with such authority."

In a brief, Direct Energy Business, LLC further said that, "PURA lacks jurisdiction to issue a declaratory ruling to resolve an issue involving the interpretation of a private contract."

In a brief, Direct Energy Business, LLC, "While PURA’s Request and Notices attempt to frame the declaratory ruling as a determination of whether certain actions constitute unfair and deceptive trade practices, a declaratory ruling in this proceeding would necessarily require PURA to first interpret the language in a supplier’s private contract with its customer to determine whether or not the contract permits the supplier to take specific actions under the contract. The Court in Kleen held that declaratory rulings must involve the agency 'interpret[ing] certain specific statutory provisions that it was charged with implementing' and not involve resolving 'the meaning and application of [a] contract [provision],' especially one that 'was not dictated by any specific statutory provision . . . .'

In a brief, Direct Energy Business, LLC alleged that, "PURA's lack of fundamental fairness in this proceeding prejudices the parties," alleging that, though a 'Second Revised Notice', "the last minute expansion of the scope of this proceeding has deprived PURA and the parties of valuable information relevant to this proceeding, thereby possibly impeding the full and true disclosure of facts."

In a brief, Direct Energy Business, LLC said, "PURA issued the Second Revised Notice over four months after opening this proceeding. The Revised Notice included substantial changes to the scope of this proceeding. Revising the scope of this proceeding at such a late date is contrary to the principles of fundamental fairness, because it deprives parties of the possibility of intelligent preparation for participation."

In a brief, Direct Energy Business, LLC said, "The Revised Notice was issued: (i) after PURA issued twenty-three interrogatories; (ii) after PURA received responses to these interrogatories from numerous suppliers; (iii) after the deadline for filing a motion for Intervenor status passed, and (iv) on the same day PURA requested briefs. Evidence entered at this stage in the proceeding also deprives parties of the opportunity for full and fair disclosure of the facts. The last minute change to the scope of this proceeding has deprived the parties of the ability to intelligently prepare for participation in this proceeding, including but not limited to the drafting and submitting of briefs based on an expanded scope made known with very limited notice, the ability to timely challenge such notice, and the ability to appropriately draft interrogatory responses in the context of the expanded scope."

In a brief, Direct Energy Business, LLC said that none of the statutory provisions cited by PURA provide PURA with the authority to establish a declaratory ruling proceeding or issue a declaratory ruling

In a brief, Direct Energy Business, LLC noted that one of the cited provisions specifically instructs PURA to conduct an 'investigation' if it receives a complaint regarding such behavior or it finds cause to investigate on its own motion, but Direct Energy Business, LLC said that, "This section does not authorize PURA to initiate a declaratory ruling proceeding or issue a declaratory ruling. An investigation is a very different creature from a declaratory ruling proceeding. Typically, PURA has treated investigations as contested cases, which involve substantial procedural requirements and protections under the Connecticut Uniform Administrative Procedures Act ('UAPA'). Whereas, the UAPA explicitly states that a declaratory ruling proceeding is not a contested case."

In a brief, Direct Energy Business, LLC said that it did 'alter' the terms of any 'fixed-price' contracts

In a brief, Direct Energy Business, LLC said, "It is also unclear what PURA means by 'fixed-price contract' in the context of this proceeding. This is especially true with respect to the commercial and industrial customers with whom Direct Energy entered into contracts. Direct Energy followed the plain-language of its Commodity Master Agreement and Transaction Confirmations, which were produced in response to discovery requests in this case. These documents contain terms that describe the price to be paid by the customer in some detail. After-the-fact characterization of these terms as constituting a 'fixed-price' or some other type of contract are immaterial; the contract terms speak for themselves and Direct Energy performed its obligations pursuant to those terms. Again, performance of one’s obligations under a contract negotiated at arm’s length with a willing buyer, which is exactly what happened with respect to Direct Energy’s contracts with these commercial and industrial customers, does not constitute a violation of CUTPA."

In a brief, Direct Energy Business, LLC said, "There is no evidence that Direct Energy acted in contravention of its contractual rights nor have any additional aggravating circumstances been alleged or shown. As noted above, the contracts at issue in this proceeding contain terms that describe the price to be paid by the customer in some detail, and Direct Energy performed pursuant to those terms. The record contains no evidence or even allegations to the contrary, much less evidence of aggravating circumstances that would somehow allow a breach of contract to rise to the level of an unfair and deceptive trade practice in violation of CUTPA."

Constellation NewEnergy, Inc. submitted a letter in lieu of a brief, stating that, "The Connecticut Unfair Trade Practices Act prohibits unfair competition and unfair and deceptive acts and practices in trade and commerce. In the case of the pass-through of cost increases under a change in law or regulatory change provision, there is no unfairness or deception."

Constellation NewEnergy said that prohibiting such clauses would harm customers by requiring suppliers to include excessive risk premiums in rates, or by not offering long-term contracts desired by customers

"Given the frequency of changes in law and market rules in Connecticut and in New England’s wholesale energy markets, suppliers that wish to continue operating in this market are faced with (i) limiting contract terms because of future market price uncertainty; (ii) pricing the risk of potential future law changes into every longer term contract; or (iii) including a change in law provision in contracts to allow the pass-through of increased costs resulting from such changes. Many customers want the option of entering into longer term contracts, but do not want the change in law risk priced into those contracts up front, given the uncertainty regarding whether such changes will happen or, if they do, what the actual costs associated with such changes will be. By entering into a fixed price contract with a change in law provision, a customer can benefit from a long term contract at a fixed price that is not increased to reflect future regulatory uncertainty. And, if and when an ISO-NE market rule, regulatory or statutory change results in increased costs, that customer’s price may be adjusted pursuant to the change in law provision to reflect that increased cost," Constellation said

"The value and necessity of this approach can be demonstrated by two recent examples: (i) state legislation revising renewable portfolio standard ('RPS') requirements, and (ii) new ISO-NE market projects to target specific regional policy objectives or to mitigate risks ISO-NE has identified. In both cases, the law, rule, or policy implementation could not have been foreseen at the time the contract was entered into," Constellation said

"In conclusion, CNE respectfully requests that the Authority continue to allow competitive suppliers to pass through costs to customers so long as the contractual language allows this to occur. Preventing this will require suppliers either to price regulatory risk into contracts at the outset or to stop offering long term contract options. Either choice would be detrimental to customers and the Connecticut competitive retail market," Constellation said

Docket 19-02-13

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