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Regulator Refers Two Retail Suppliers' Pass-Throughs Of ISO Charges To Customers To Attorney General For Further Investigation

Regulator Says Rules Governing Allocation Of Capacity Obligations & Prices "Were Known Or Knowable", Could Have Been Reflected In Rates At Time Of Contract

July 19, 2019

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Copyright 2010-19
Reporting by Paul Ring •

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The Connecticut PURA has referred the matter of changes in prices, under what PURA calls "fixed" price contracts, by Spark Energy, LLC (Spark), and Direct Energy Services, LLC (Direct) to the Connecticut Attorney General and Connecticut Department of Consumer Protection for further investigation, if necessary, and enforcement procedures, after PURA said in a letter to the Attorney General and Connecticut Department of Consumer Protection that, "the Authority has reason to believe Direct’s and Spark’s increases to business customers’ fixed-price contracts may violate state law."

Chris Kallaher, Senior Director for Corporate & Regulatory Affairs at Direct Energy, issued the following statement concerning PURA's letter: "At Direct Energy, we are scrupulous in adhering to the contracts we negotiate with our commercial and industrial customers. This case involved contracts entered into between sophisticated parties in a fiercely competitive market where customers have many alternatives to choose among. We see no basis for PURA substituting its judgement for that of the parties who best understand how these contracts and the markets in which they operate work. We are committed to providing the best possible service to all of our customers and, if necessary, we will continue to defend our adherence to our contracts and Connecticut law."

In its letter, PURA stated, "In the closing months of 2018 and beginning of 2019, the Authority received complaints from business customers that suppliers were increasing the price of their fixed-price contracts. The justification for the increase was unclear, as suppliers cited to a nebulous change in capacity calculations. After inquiry, the Authority found that some suppliers intending to increase the rates of fixed-rates contracts abandoned their plans, and only two remained: Spark Energy, LLC (Spark), and Direct Energy Services, LLC (Direct)."

In its letter, PURA stated, "Spark indicated in response to Interrogatories SEU-2 and SEU-15 that it was increasing the customers’ fixed-prices due to 'increases to the scaling factor – not the capacity tag.' Spark explained that, 'Several factors lead to a material increase in the scaling factor in 2018.' See Response to SEU-15. These particular increases 'were so significant that it resulted in large and material increases to Spark’s procurement costs. The magnitude of these changes required Spark to pass through these increased costs to customers.' Id. Spark asserts that its Change in Law provision of its contract allows it to increase the cost of a fixed-price contract due to changes in the market design. See Response to SEU-4."

In a brief, Spark had said that Spark did not alter any of the terms of Spark’s contracts. Spark said that it exercised its rights under the plain terms of its existing contracts, which clearly and conspicuously provides for price changes in the event of a change in law

In a brief, Spark had said, "Spark’s costs to secure capacity on behalf of customers increased dramatically above historical levels in 2018. These increased costs were beyond those typical in the marketplace upon execution of Spark’s contracts and resulted in material increase in the costs to serve customers. These changes to the ISO New England capacity markets in 2018 were approved by the Federal Energy Regulatory Commission -- and therefore qualify as a change in regulation -- and amount to a change in market design, both therefore meet the defined term 'Change in Law' set forth in the MESA [Master Electricity Service Agreement]. The changes at issue clearly impacted Spark’s actual costs to secure capacity."

In its letter, PURA stated, "It is difficult to determine exactly why Direct changed the prices of its fixed-price contracts. Direct did not clearly, concisely, and effectively explain the basis for its price changes in its interrogatory responses. To the contrary, Direct's interrogatory responses raise further doubt about whether or not Direct had a contractually-appropriate basis for changing prices of these fixed-price contracts. First, Direct claimed it did not intend to change customers’ fixed-price contracts based on ISO New England changes, but instead increased the costs due to 'increase in the customers’ capacity tags as reported by the customers’ electric distribution company.' See Response to SEU-3. Direct later clarified that the increase in the capacity tags was provided by ISO New England. See Response to SEU-11. Like Spark, Direct claimed its change of law provision in its contracts allowed it to change the fixed-price due to changes in the capacity tag. Further, Direct stated that it could pass any increased cost to a customer, but 'it only instituted price changes for those customers’ whose capacity tag increased by twenty-five percent (25%) or more.' See Response to SEU-12. Direct did not indicate why a twenty-five percent increase triggered the pass through."

In a brief filed earlier in the proceeding, Direct had said that, "Direct Energy did not 'alter' the terms of any 'fixed-price' contracts," and that "Direct Energy executed contracts with commercial and industrial customers and performed pursuant to the terms of those contracts."

In its brief, Direct Energy had stated that, "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 [Connecticut Unfair Trade Practices Act]."

In a reply brief, Direct had said that, "The Authority has defined the term 'fixed rate' as a price that does not change for four billing cycles. This definition does not describe the terms of the Direct Energy Contracts. In fact, the ultimate contract price for the Direct Energy Contracts may be comprised of multiple price components, some of which are variable. For instance, commodity charges may be set by index and change frequently. The Authority has determined that indexed rates constitute variable rates. Moreover, certain Transaction Confirmations, which are essential parts of Direct Energy Contracts, contain an explicit acknowledgement by the customer -- in all capital letters -- that the commodity component of the contract price, to the extent set by the Day Ahead LMP [Locational Marginal Price] Index, is 'CONSTANTLY FLUCTUATING' and 'WILL VARY.'"

Direct Energy had said in a reply brief that, "Accordingly, referring to the Direct Energy Contracts as 'fixed' is a gross mischaracterization."

In its letter, PURA stated, "Having reviewed both Direct’s and Spark’s interrogatory responses and briefs, the Authority believes the increases in capacity costs assigned to the supplier were the result of an increase in the capacity multiplier, or the ratio of capacity requirement of individual suppliers to sum of peak load contributions, which is used to assign the suppliers’ pro-rata share of these costs. See Response to SEU-15. The market rules governing the Forward Capacity Market (FCM) Net Regional Clearing Price, FCM Cost allocation rules and Effective Charge Rates were known or knowable at the time Direct and Spark entered into the contracts with the business customers, as these rules are effective more than three years in advance of capacity commitment period, for the purpose of administering the Forward Capacity Auction, and subsequent reconfiguration auctions. See Response to SEU-18. As a result, both Direct and Spark could have factored these costs into their customer contracts, and therefore the fixed-price negotiated, before executing them."

In its letter, PURA stated, "Moreover, as the Authority found in Docket No. 14-07-15, PURA Review of Choice Energy, LLC, a contract may not waive the protections of Conn. Gen. Stat. § 16-245o. Conn. Gen. Stat. § 16-245o(h)(8) states that 'An electric supplier shall not make a material change in the term or duration of any contract for the provision of electric generation services by an electric supplier without the express consent of the customer.' The Authority has found that a supplier must obtain express, not implied, consent from the customer to meet the statutory requirement. See Decision, Docket No. 14-07-15, PURA Review of Choice Energy, LLC, p. 8. Neither Direct nor Spark obtained express consent in the present case before increasing the fixed-prices of their customers’ contracts."

In its letter, PURA stated, "Conn. Gen. Stat. § 16-245u(b)(5) applies to investigations into unfair and discrimatory conduct and unfair trade practices, and states, 'At the conclusion of the investigation ... if the authority finds that facts exist that indicate any violation of state or federal law, it shall transmit such written findings along with supporting information gathered in its investigation to appropriate enforcement officials. Such referrals may recommend that further investigations be made or that immediate enforcement procedures be implemented. Such referrals may be made to the office of the Attorney General [and] the Department of Consumer Protection...'"

In its letter, PURA stated, "Based on the results of this investigation, the Authority has reason to believe Direct’s and Spark’s increases to business customers’ fixed-price contracts may violate state law. Therefore, pursuant to Conn. Gen. Stat. § 16-245u(b)(5) the Authority refers this matter to the Attorney General and Department of Consumer Protection for further investigation, if necessary, and enforcement procedures. Because Direct’s and Spark’s actions affected a finite number of customers and the financial impact on these customers is easily ascertainable, the Authority believes the Attorney General and Department of Consumer Protection are better equipped to pursue this action to ensure the customers receive restitution and the suppliers are appropriately penalized."

PURA's proceeding had originally been opened for a "declaratory ruling" regarding the practice of altering prices in fixed-price contracts. However, it appears no such broader declaratory ruling may be issued

In denying a motion from Spark Energy for a hearing in the proceeding, PURA stated, noting the letter to the AG and DCP described above, that, "Further action regarding the issues in this docket will be pursued by the AG and DCP. As a result, Spark’s request for the Authority to conduct a hearing is now moot."

Docket No. 19-02-13

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