Federal Appeals Court: Wholesale Electric Price, Utility Price Not Proper Comparison For Determining If Retail Supplier's Rate Met "Prevailing Market Price" Standard In Contract

July 29, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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The United States Court of Appeals for the Seventh Circuit has denied an appeal of a lower court ruling which had dismissed a putative class action suit against Direct Energy Services, LLC, as the Seventh Circuit found that neither the wholesale electric price nor the utility price to compare is an appropriate standard for determining whether Direct Energy charged customers a "prevailing market price" as set forth under its contract

The complainant (Sevugan) had been a fixed priced customer of Direct Energy who rolled over to a variable rate at the end of the fixed term. The contract provided that, in such instance, "Direct Energy will charge you at a variable price per kWh based upon generally prevailing market prices for electricity in the PJM market at the Electric Utility load zone for the applicable period, plus an adder, determined solely by Direct Energy in its discretion."

The Seventh Circuit said that the parties agree the Renewal Clause establishes two parts to the contract price: (1) a "generally prevailing market price for electricity in the PJM market," plus (2) "an adder"; the sum of these two parts is the retail price.

Sevugan contests how Direct Energy exercised its discretion in setting electricity rates

Sevugan alleged that the term "generally prevailing market price" means that Direct Energy was required to set its variable rates lower than the PJM wholesale price, as well as below ComEd’s prices (the applicable local utility). Sevugan alleged that Direct Energy’s rates were consistently higher than ComEd’s, although both prices fluctuated in comparison to the wholesale price.

A lower, district court dismissed the complaint, as the district court had concluded that Sevugan did not allege facts showing Direct Energy’s rates were not 'based on generally prevailing market prices,' as the complaint pleaded only the prices of ComEd and the PJM market. The complaint was silent on rates charged by other Illinois alternative retail energy suppliers, which the district court considered Direct Energy’s competition. The court further ruled that the contract did not promise to charge rates lower than ComEd, so a breach of contract had not been alleged.

Sevugan appealed the district court's opinion.

The Seventh Circuit affirmed the district court's dismissal, and found that neither PJM nor the utility rate is an appropriate comparison for the prevailing market price

The Seventh Circuit said, "Sevugan’s complaint lacks a critical feature of comparison: it does not contain a valid comparator against which to measure 'generally prevailing market prices.' The complaint contains allegations concerning the PJM wholesale price. But that is the price to the energy companies, not the consumer. Individual customers like Sevugan could not go out and purchase electricity at the PJM rate, no matter their electricity supplier. So, the PJM wholesale price is not a proper comparator price."

"Sevugan’s latest complaint includes a different chart that illustrates why the PJM wholesale price is not a sound comparator. That graphic shows that in early 2014, Direct Energy and ComEd each charged consumers prices below the wholesale rate, and that between 2013 and 2016 ComEd’s price per kWh was consistently higher than the PJM wholesale price," the Seventh Circuit said

"Sevugan’s second proposed comparator, ComEd, is also not valid for assessing the 'generally prevailing market price for electricity.' The Illinois Commerce Commission sets ComEd’s rates, excluding them from market forces," the Seventh Circuit said

The Seventh Circuit noted that the Second Circuit recently considered whether a public utility is a proper comparator, with the Second Circuit finding that, "If we were to hold private electricity suppliers liable for departing from the Standard Service Rates [the Illinois Commerce Commission equivalent], we would in effect make those [] rates binding on private electricity suppliers on Direct Energy. Yet the entire point of electricity deregulation was to allow the market, rather than the [state regulator], to determine rates." [Richards v. Direct Energy Serv., LLC, 915 F.3d 88, 99 (2d Cir. 2019)]

"The entire point of Illinois’s rate relief law was to permit the rates of alternative retail energy suppliers to diverge from ComEd’s rates, allowing them to fluctuate according to market conditions. In contrast, ComEd’s regulated rates change only according to the directives of the Illinois Commerce Commission," the Seventh Circuit said

Sevugan claimed that the Seventh Circuit, in Zahn v. North American Power & Gas, LLC, had provided that ComEd's rate suffices as a comparator

However, the Seventh Circuit distinguished the instant case from Zahn, noting Zahn dealt with teaser rates and bait-and-switch claims. "[B]y contrast, Sevugan does not contest that he received the fixed rates for which he contracted for the first two years of his contract," the Seventh Circuit said

"This court’s opinion in Zahn said nothing about Sevugan’s theory that ComEd’s prices are a valid method to determine the 'generally prevailing market price for electricity,'" the Seventh Circuit said

"ComEd’s price is not a market price at all; it is a regulated price. Neither PJM nor ComEd participate in the general market for electricity, and thus they are not proper comparators with Direct Energy to gauge market price. The only other actors in the electricity market engaging in price competition are the other alternative retail energy suppliers in Illinois -- the companies most similarly situated to Direct Energy. But none of Sevugan’s complaints offered allegations about those suppliers’ rates in comparison with Direct Energy’s," the Seventh Circuit said

"The closest Sevugan got to pleading such information was in his second amended complaint, in which he alleged Direct Energy’s 'prices are substantially higher than not only ComEd’s prices but also other ARES’s [alternative retail energy supplier’s] prices.' But without additional supporting factual allegations, this conclusory claim is not sufficient to allow a reasonable inference that Direct Energy breached the Renewal Clause. Further, Sevugan admits he has not pleaded any facts about what an alternative retail energy supplier would charge; he argues he does not need them. With nothing pleaded about the prices of Direct Energy’s competitors, Sevugan’s complaint does not contain sufficient facts to allow a reasonable inference Direct Energy breached the Renewal Clause," the Seventh Circuit said

"At bottom, Sevugan’s claim that Direct Energy did not charge rates commensurate with ComEd, or with the wholesale price of PJM, fails to allege a breach. The parties’ contract does not require Direct Energy to charge such rates. Without any information about valid market comparators, such as other alternative retail energy suppliers, Sevugan’s breach of contract claim is speculative and implausible," the Seventh Circuit said

The Seventh Circuit said also denied Sevugan’s claim that the level of the adder was unreasonable under the contract

"[T]he Renewal Clause in the parties’ contract grants Direct Energy price-setting discretion. The complaint fails to allege how Direct Energy unreasonably exercised its discretion in setting the adder amount (other than its claim that the prices were greater than ComEd and the PJM wholesale price, found wanting above). Sevugan has offered no new arguments for how the adder in the price is unreasonable. He admits he does not know how the adder charge is established, or how Direct Energy formulated its prices. Nor does Sevugan allege Direct Energy’s adder was greater than that charged by other market participants. Sevugan has not plausibly alleged Direct Energy charged him unreasonably for this component of the price," the Seventh Circuit said

The Seventh Circuit also said that a statement in the contract ("terms clause") providing that, "Electric generation service prices of electric suppliers, such as Direct Energy, are set competitively and are not regulated by the Commission...," did not establish that Direct's rates would be "competitive" as alleged by Sevugan

"The Terms Clause read plainly does not promise Direct Energy’s rates will be similar to ComEd’s; in fact, it warns customers they may be significantly different. 'Competitively' explains that Direct Energy’s rates are unregulated by a public rate commission, unlike ComEd’s rates set by the Illinois Commerce Commission," the Seventh Circuit said

No. 18-3082

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