Price Manipulation

Loose Script Sinks Ships: The PUC’s pursuit against cryptic contract language.

sub-flood-articleLarge

Over the past couple of years, we have seen electric suppliers’ fixed rate offerings devolve into agreements that are less and less fixed. The Public Utility Commission of Ohio recognized the broken “fixed” rate situation, and this past November mandated guidelines for electric contracts being marketed as fixed.
We initially reported this development in our last newsletter, but what about the underlying issues that led us here, and what should customers expect going forward?

The Roots of Pass-Through Charges in Fixed Rate Contracts

Occurrences over the past few years, such as the 2014 Polar Vortex and the 2015 PJM capacity performance reform, have encouraged suppliers to adopt clauses within their agreements to protect them from the financial risks of events outside of their control. These clauses allowed suppliers to pass-through additional costs to fixed rate customers based on certain events, potentially making the rate not so fixed. Regulatory change clauses have become common among the majority of supplier contracts, as it protects and allows them to pass through cost increases based upon unforeseen governmental or regulation changes.

The devolution from supplier protection to price manipulation

In a free market, businesses must often adapt or die, and this has been true of the deregulated electric market. Suppliers who have become less competitive, have had to make business decisions into finding ways to lower their rates to appear in line with their competitors. Until this past November, there was little regulation to these pass through clauses within fixed price agreements. This created opportunities for noncompetitive suppliers to further broaden language within their fixed price agreements. In doing so, these suppliers were able to move risk to the customer and shave costs off of their quotes, making their rates seem more appealing. Material adverse change clauses allow rates to be adjusted or costs to be passed through based on component costs that are not yet realized, or even ones that are likely to change. Examples of such would be changes in initial contracted amounts of usage and/or capacity obligation (PLC’s).

Is the fixed price issue fixed?

The PUC’s new “fixed means fixed” guidelines are now active as of January 1st, 2016. While the commission attempted to make buying electricity less cryptic and deceptive for customers, the only real change we expect to see is the title of supplier offerings, formally known as “fixed”. For the most part these programs are suppliers’ standard offers, and whether they are now named Fixed Introductory, All Inclusive, Fully Bundled, Full Requirements, what have you, nothing has really changed, and the nature of power buying will still be as confusing for customers as before.

 

What’s important to take away from all of this is the same issues of evaluating; what’s included in a supplier’s rate, what’s missing, what could be passed through, all are expected to continue. A trained monkey can give you a piece of paper and point you to the lowest rate, but now more than ever it’s imperative for customers to understand the lowest rate may not be the lowest cost option.

 

Fixed Means Fixed

newsletterarticlefixedmeansfixedheader

 

In March 2014, the Public Utility Commission of Ohio (PUCO) became aware that electric suppliers have been including pass-through clauses in their supply agreements. Such clauses allow the supplier to pass through to the customer cost changes for certain events. A prime example was FirstEnergy’s RTO charges that were passed-through, even on fixed price contracts.
As a result, there were concerns that permitting pass-through clauses in a fixed rate contract confuses customers. This contract language made it difficult for consumers to compare other fixed rate offers that didn’t contain such clauses.
As we have advised customers forever, lowest price should not be your sole deciding factor. One needs to know what the contract language is telling you.
Remember the BIG print giveth and the SMALL print taketh.

After hearing all the supporting arguments to include or exclude pass-through language, the PUCO has come to the conclusion that all electric supplier contracts, whether residential, commercial or industrial, “fixed” should mean “fixed”. As such, supplier contracts going forward, may not include a pass-through clause in a contract labeled as “FIXED RATE”.

This does not eliminate suppliers from continuing to offer products that contain pass-through provisions, it just means they must alter the contract label to “variable or introductory rates”

The PUCO recognizes that regulatory out clauses are included in supplier contracts as a means to pass-through charges that they have no control over. The PUCO believes these clauses should be available in very limited circumstances and clearly spelled out in plain language.

Moving forward under the new fixed means fixed guidelines, if the supplier wants to revise its pricing, they must inform the customer by proposing a new contract price. If the customer agrees to the revised pricing, the contract remains in place under the current contracted terms.

However, if the customer would “reject” the revised agreement, the customer would be permitted to pursue default service or other supply offerings without being subject to penalties.

These changes are intended for any new contracts and the PUCO noted that this order makes no ruling with respect to existing contracts.

 

The implementation for the PUCO finding, suppliers shall have until January 1, 2016 to bring all contracts into compliance with the “fixed means fixed” guidelines.