Pennsylvania Consumer Advocate: Variable Rate Contracts Without Specific Formula Violate Law

Variable rate retail electric contracts in Pennsylvania must identify the "actual methodology or formula" that will govern the calculation of the variable rate and the limits of that variability, the Pennsylvania Office of Consumer Advocate claimed yesterday in comments to the PUC.

The OCA was commenting on a tentative order which would prohibit the labeling of products with pass-through clauses as "fixed" rates. The same tentative order also includes some clarifying language to the definition of variable price, and OCA's comments on variable pricing are noteworthy.

For variable products, OCA said that 52 Pa.Code § 54.5(c)(2), "specifically requires that both the conditions and limits of the variability must be disclosed."

OCA quotes Chapter 54 as providing:

(c) The contract's terms of service shall be disclosed, including the following terms and conditions if applicable: ...

(2) The variable pricing statement, if applicable, must include:

(i) Conditions on variability (state on what basis the prices will vary).

(ii) Limits on price variability.

Note that the terms "actual methodology or formula" do not appear.

OCA said that, "[t]he point of this provision is to ensure that customers will actually be able to determine how their rate is calculated and the maximum exposure they face regarding price changes."

"The OCA submits that disclosures that lack specificity, do not state what aspect of the 'wholesale market' might be used to change the customer's price, and do not specify limits cannot be viewed as complying with protections of Chapter 54."

However, this would appear to be OCA's interpretation, rather than having support in the actual text of the code. Specifically, at least from what OCA quotes from Chapter 54, it seems that so long as the supplier explains the conditions under which the product varies, no specific formula or mechanism must be explained. So, for example, if a supplier stated that the variable rate will change "at the supplier's discretion, without limitation" that would appear to meet the requirement to list the "conditions on variability" and "limits on price variability" as written in the code, and what OCA seeks is an expansion of the code's requirements. OCA may have a point that simply stating that the rate varies with the "wholesale market" is not compliant with the code, but only to the extent the rate varies due to factors other than the wholesale market (e.g. the supplier's discretion), but then because the disclosure would not be completely accurate (rather than the fact that it doesn't contain a specific formula).

In any event, the OCA recommends that the PUC make clear that disclosure statements for variable rate contracts must meet disclosure standards at 52 Pa.Code § 54.5, suggesting the following language:

"An EGS using the label or description 'Variable Price' to describe a product must include in its disclosure statement the conditions of and limits on the price that can be charged in accordance with 52 Pa.Code Section 54.5(c)(2). The EGS must also include an [sic] clear explanation -- including any formula, index or adder -- of what method or calculation will be used in calculating the price. This information must be included in the same paragraph or section of the disclosure statement that contains the pricing information. EGSs must, in the 'definitions' section of the disclosure statement, define any terms or acronyms used to calculate its variable rate that are not commonly understood by residential consumers."

Furthermore, the OCA said that the EGS should be required to specify the potential rate impact in their disclosure statements. "By way of example, variable rate contract disclosures could include an example of how the price of their contract would have changed in the past 12- 24 months if the contract had been in place with the methodology included in the supplier's contract. Obviously, there should not be any promise that historical changes in the index or methodology will guarantee future price changes, but at least the customer will understand the nature of the variability to which he or she has agreed and see the range of change in price that has occurred in the recent past. Such a disclosure is required, for example, for variable rate mortgages under the Truth in Lending Act," OCA said.

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