January 13, 2017

State Utility Commission Lacks Rate-Setting Authority Over Retail Electric Supplier

Holland & Knight Energy and Natural Resources Blog
Stephen J. Humes

The Illinois Supreme Court decided recently that the Illinois Commerce Commission ("ICC"), which regulates public utilities and licenses alternative retail electric suppliers (known in IL as "ARES"), lacks authority to resolve consumer complaints over supplier electricity rates. The decision offers a mixed-bag outcome for the retail electric supplier industry.

In the case of Zahn v. North American Power & Gas, the Illinois Supreme Court last month answered the Seventh Circuit U.S. Court of Appeals’ question of whether the ICC lacks jurisdiction to decide choice customer rate disputes with deregulated retail suppliers. The decision allowed plaintiff Peggy Zahn to proceed in federal court in her class action litigation against North American Power & Gas, LLC ("NAPG"), which had attempted to squelch the federal litigation and have the matter heard by the ICC.

At issue in the case was a dispute over retail electric rates charged by NAPG. According to the case, Zahn originally enrolled with NAPG at a new customer rate of $0.0499 per kilowatt-hour for her first month, after which the ARES terms stated that she would be a month-to-month customer and her rates would be calculated "in response to market price factors” that included “commodity, transportation, balancing fees, storage charges [NAPG] fees, profit, [and] line losses." Zahn alleged she never received the introductory rate and that her initial rate started at $0.0599 per kilowatt-hour, and that from November 2012 through June 2014, her rate charged was always higher than the one she would have been required to pay her local public utility.

Zahn’s claims straddle the season of winter 2013-2014, known in the Northeast as the Polar Vortex, a time many electric suppliers know well for its extreme market price spikes throughout the region. In a relatively short period, prices from Chicago to New England climbed dramatically as natural gas demand for space heating created a confluence of events requiring spot market purchasers of wholesale power to pay extraordinarily high prices. Many state public utility commissions investigated the situation and its whip-saw effect on retail electric suppliers and their customers who had variable priced contracts.

The Illinois Supreme Court reviewed Illinois’s deregulation statute and concluded that while the ICC is authorized to issue ARES licenses, forbid ARESs from discriminating against customers based on race, gender, or income, and impose standards regarding marketing and billing practices, the ICC is not the proper venue for customers to claim they were overcharged.

"ARESs were not part of the traditional regulatory system established to govern public utilities" and are "expressly excluded from the definition of ‘public utility’ under the Public Utilities Act," the Court explained. "They are simply nonutilities licensed to sell retail electricity."

The case is a mixed bag in that NAPG was unable to remove the case from federal court and now faces the litigation expenses and the complexities of defending itself in a federal class action. The case also supports the argument, however, that state public utility commissions in choice-eligible states have no business attempting to regulate retail rates or attempting to evaluate whether retail rates satisfy the traditional "just and reasonable standard."

"The prices they are permitted to charge are not established by the Commerce Commission through the conventional rate-making process and do not have to be submitted to the Commerce Commission for approval under the ‘just and reasonable’ standard. In contrast to public utilities, an ARES’s prices are a matter of contract between the ARES and its customers," the Court concluded.

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