by Daniel S. Blynn, Venable LLP
In the 1990s and 2000s, some states enacted laws permitting third-party energy companies to sell electricity and natural gas directly to consumers. These restructured markets foster competition and let consumers choose from whom they purchase energy. Variable rate plans became and remain common in these deregulated energy markets.
Variable rate plans let consumers take advantage of fluctuating costs, which might result in lower bills and savings or rates adjusting upward after an initial fixed period. That happened in late 2013 when severe, unanticipated storms plagued the East Coast, forcing suppliers to increase rates because of increased costs. And in early 2014, polar vortices plus generating facility shutdowns caused unprecedented electricity costs. Demand rose to all-time highs while some generating facilities were shut down for maintenance. This forced seldom-used, high-priced generators to come online to meet demand. Natural gas suppliers raised rates to record highs, causing record electricity costs from generators. The market conditions in first quarter 2014 were unprecedented; even PJM did not predict the impact on consumers’ prices. The Market Monitor for the PJM market reported that some generating facilities might have “inflated their claims” for reim bursement, contributing to the high wholesale prices.
State regulators, public utility commissions and attorneys general received complaints about high energy bills, prompting investigations into suppliers’ variable rate advertising, marketing and telemarketing. Investigations have resulted in million-dollar settlements and administrative litigation, which remains pending. In January 2015, a supplier agreed to pay $4 million to settle Massachusetts attorney general allegations of deceptive marketing and sales based on promises of savings. Another supplier settled similar allegations levied by the New Jersey attorney general and the state Board of Public Utilities and Division of Consumer Affairs for $2.1 million that same month. Several state regulators filed separate administrative suits against a supplier with only hundreds or several thousands of customers (at its peak) in their states.
During the past six months, the private plaintiff’s bar has filed scores of consumer class actions in federal and state courts against energy suppliers; new class actions are being filed almost weekly. The core allegation is that plaintiffs were deceived into switching service from their local utilities based on promises of cost savings, low rates, competitive rates and green energy. Despite such representations, suppliers’ variable rates increased beyond the rates charged by incumbents. The plaintiffs allege fraud, violations of state false advertising and consumer protection statutes, breach of contract and breach of the implied duty of good faith and fair dealing.
Suppliers can make strong arguments in attempt to dismiss the cases. There are a number of decisions holding that generalized cost savings claims and representations of low/lowest prices and competitive rates constitute nonactionable “puffery”: indefinite exaggerations, overstatements and mere sales talk expressed in broad, vague and commendatory language, which cannot support a legal claim of fraud or false advertising. Similarly, although many plaintiffs claim suppliers breached variable rate contracts, they do not identify contractual provisions that were breached.
Two decisions out of the New Jersey federal court provide strong support for dismissal. In Faistl v. Energy Plus Holdings LLC, the plaintiff filed a class action alleging Energy Plus Holdings lured potential customers with exaggerated energy savings when the purported savings were illusory and consumers ended up paying substantially higher rates. Energy Plus advertised that consumers could “save on your bill-Energy Plus customers are currently saving with a competitive rate that is approximately 10% below your local utility company,” and “save up to 10%.” In its advertising and contracts, Energy Plus disclosed the variable nature of its rates: “The Energy Plus rate is variable and therefore subject to change each billing cycle. Current and historical rates should not be taken as a guarantee of future rates . . .” (in advertising), and the “variable price each month will reflect the cost of electricity, including energy, capacity . . . and other market factors . . .” (in contracts). Within a month after enrolling with Energy Plus, the plaintiff began paying as much as 36 percent more for his electric service than he did during his initial fixed-rate period, and his variable rates were significantly more than rates charged by other energy providers.
The Faistl plaintiff asserted claims for violation of the New Jersey consumer protection statute, fraud, breach of contract and breach of the implied covenant of good faith and fair dealing. All claims were dismissed. The court held that Energy Plus disclosed in its advertising materials that its rates may vary each billing cycle. More specifically, with respect to the fraud claim, the court found no misrepresentation about the amount of savings a consumer would realize by enrolling with Energy Plus because the savings claim was not a guarantee of any specific percentage of savings, “particularly when read in conjunction with” the variable rate disclosures in the Energy Plus advertising and contract. The consumer protection act claim failed for largely the same reasons. The court said there was no “unlawful practice worthy of protection” because “the terms of the parties’ Agreement clearly provided for and explained the actions that (Energy Plus) ultimately took-namely the provision of gas and electric services at ‘variable’ monthly rates.” The court dismissed the breach of the implied covenant of good faith and fair dealing claim because no facts supported that Energy Plus exercised in bad faith its discretionary price-setting authority under its variable rate contracts. The contract claim could not lie because the plaintiff failed to identify any specific term of the contract that was breached.
Similarly, in Slack v. Suburban Propane Partners LP, the court dismissed the complaint against a marketer and distributor of propane alleging violations of four states’ consumer protection statutes. The facts in Slack were particularly egregious. The defendant’s customers received propane supply through an automatic delivery system with scheduled deliveries at dates and times set by the defendant. The defendant, however, did not meaningfully disclose how it determined its prices and typically did not disclose the price it charged customers until after it had delivered the propane. The price was not made available to residential customers until after their tanks were filled, even when they asked for the price ahead of time. As a result, customers often were surprised by the prices, “which frequently exceed(ed) competitors’ prices and industry averages by significant amounts.”
Although the defendant advertised consumers would get the “best value” and its prices were “competitive,” the plaintiffs claimed that “(the defendant’s) prices are generally higher than the prevailing market price for propane.” Further, the defendant’s contract did not disclose the method by which it calculated its prices. “Instead, the (contract) contains information limited to (defendant’s) ‘initial’ prices and/or fees and states that such prices and/or fees are ‘subject to future change based upon market fluctuations and other factors’ with no further explanation.”
The plaintiffs said the defendant unlawfully “jacked” its prices for reasons inconsistent with market fluctuations or other legitimate business practices. They also claimed that the defendant’s business practices were fraudulent, deceptive, misleading, unconscionable, and that the defendant unlawfully and knowingly concealed and omitted material terms relating to its prices. The court, however, dismissed the consumer protection act claims. Specifically, these claims failed because the “best value” and “competitive prices” representations were nonactionable puffery, and the defendant explicitly reserved “the right to increase charges and/or fees in any amount (it) deemed fit (based upon ‘market fluctuations and other factors’).”
With the record low temperatures in many states this winter, consumers’ energy usage increased, bringing higher bills and likely more consumer complaints, as was the case in early 2014. Suppliers might find themselves the focus of regulators and class action plaintiffs again. They should evaluate their advertising, marketing and telemarketing practices now; determine whether all variable rate disclosures are clear and conspicuous, and otherwise in accordance with relevant laws and regulations; and consider how best to position themselves to respond to possible regulatory scrutiny, litigation or both.
Daniel Blynn, Esq., is an attorney in the Washington, D.C., office of Venable LLP. He concentrates primarily on false advertising litigation and complex consumer class actions and provides counseling on Federal Trade Commission, general advertising and telemarketing issues. He represents energy suppliers in class actions and administrative litigation challenging their variable rate advertising, marketing and telemarketing. Reach Blynn at 202-344-4619 or firstname.lastname@example.org.