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Richards v. Direct Energy Services LLC

United States District Court, D. Connecticut

March 31, 2017

GARY W. RICHARDS, Plaintiff,
v.
DIRECT ENERGY SERVICES, LLC, Defendant.

          RULING ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

          VICTOR A. BOLDEN UNITED STATES DISTRICT JUDGE.

         Plaintiff, Gary Richards, brings this putative class action against Direct Energy Services, LLC (“Direct Energy”), asserting claims that arise out of Direct Energy's business of supplying electricity to residential customers. Compl. ¶¶ 2-3, ECF No. 1. In his Complaint, Mr. Richards alleged that Direct Energy engaged in unfair and deceptive trade practices, in violation of the state unfair trade practices laws of Connecticut, the Connecticut Unfair Trade Practices Act (“CUTPA”), Conn. Gen. Stat. §42-110a, et seq., and Massachusetts, the Massachusetts Regulation of Business Practices for Consumers Protection Act, Mass. Gen. Laws Ann. ch. 93A, §1, et seq. Compl. ¶ 54, ECF No. 1. He also made claims of unjust enrichment and breach of the covenant of good faith and fair dealing. Id. ¶¶ 57-63, 65-70.

         In August 2015, the Court denied Direct Energy's motion to dismiss Mr. Richards's claims under CUTPA and the implied covenant of good faith and fair dealing. See Order, ECF No. 63. Now, Direct Energy has moved for summary judgment on the remaining claims. For the reasons that follow, the motion is GRANTED.

         I. Factual Background

         This case concerns a relationship between a consumer, Mr. Richards, and Direct Energy, the company that sold him electricity 2014 and 2015. Like many states, Connecticut restructured its electricity market almost 20 years ago. See Report of Adamson and Macan of Charles River Associates, Decl. of Seth Klein, Ex. A, ECF No. 137-1 (“CRA Report”); Report of Neil Fisher, Def.'s Mem., Ex. B, at II(A), ECF No. 119-2 (“Fisher Report”). This created “markets for wholesale and retail power where previously almost all decisions and prices had been closely regulated.” CRA Report, 2.1.2. Connecticut's electric suppliers would, subject to limited oversight by the Public Utilities Regulatory Authority (“PURA”), offer electric service to customers at market rates. Id . Electricity customers in this deregulated landscape could select their supplier and enter into contracts for electricity service. Id.

         Suppliers, like Direct Energy, sell power rather than generate it. The electricity that powers Connecticut's households is generated at high-voltage power plants and then pooled by the Independent System Operator (“ISO”) New England. See Hay Dep., Decl. of Seth Klein, Ex. D, ECF No. 137-4, 11: 3-23; CRA Report, 1.5. This energy is distributed to local utilities and then to energy suppliers, who pass it on to consumers. Hay Dep., 13: 4-8. In other words, Direct Energy is a “middleman” in the state's electricity market: it purchases energy from suppliers or wholesalers and contracts with consumers to sell it to them at a certain price. Id.

         All of Direct Energy's Connecticut consumers are charged one of two rates-the “fixed rate” or the “variable rate.” This case concerns how Direct Energy sets its variable rates.

         Initially, Direct Energy offers Connecticut customers “fixed rate” contracts, where the rate that the customer pays for energy is fixed for a certain term, usually between twelve and thirty-six months. Hay Dep., 37-38. At the end of the initial term, if the customer does not sign up for a new fixed rate contract, the customer's rate becomes “variable, ” meaning that it can change monthly. Id. According to James Hay, General Manager of U.S. Energy for Direct Energy, for fixed rate contracts, Direct Energy purchases power up to twelve months in advance. Id. at 15. For variable rate contracts, however, Direct Energy purchases power several months in advance. Id. at 16-19.

         In early 2012, Mr. Richards signed up for a one-year fixed-rate electricity plan with Direct Energy. Def.'s L. R. 56(a) Stmt. ¶ 9. Under this plan, Mr. Richards would pay a fixed price for a year and then switch to the variable rate. The resulting contract stated that:

After the Initial Term and during the Renewal Period, the rate for electricity will be variable each month at Direct Energy's discretion. The rate may be higher or lower each month based on business and market conditions.

         Compl. ¶ 34 (the “Evergreen Clause”). Every variable rate contract includes this language. See id.

         When Mr. Richards signed up for this plan, he knew about the application of the variable rate after the fixed rate expired. See Richards Dep., Def.'s Mot., Ex. A, ECF No. 118-4, at 46:7-48:6 (“All the energy suppliers that supplied third-party energy have a fixed and variable rate, so it was my assumption that Direct Energy was the same”). In April 2013, Mr. Richards's fixed rate expired and Direct Energy raised his electricity charges. Compl. ¶ 34. Mr. Richards paid the variable rate for three billing cycles and then switched to a different electricity service provider in August 2013. Def.'s L. R. 56(a) Stmt. ¶ 19.

         Mr. Richards selected Direct Energy because of the “fixed rate price” and the fact that Direct Energy charged “no termination fee.” See Richards Dep. 48:22-49:8 (“Q. When you decided to sign up with Direct Energy, what were the factors that you considered? A. Price. Q. Fixed rate price? A. Fixed rate price, no termination fee. Q. Anything else? A. No.”). When asked if Direct Energy had made a misrepresentation to him, Mr. Richards replied that “I'm not sure what anybody represented to me or said to me that was wrong or misleading.” Id. at 18:3-23 (“Q. Tell me, if you would, everything that you believe Direct Energy represented to you that was misleading. A. At the time that I signed up, my expectation was that I would shop for another provider at the end of the initial period or their fixed rate period, so to answer your question, I'm not sure what anybody represented to me or said to me that was wrong or misleading.”)

         A. Direct Energy's Pricing Strategy

         This lawsuit concerns the prices that Direct Energy charges to fixed and variable rate customers and the margin of profit it makes from each. The company considers a variety of factors when setting the prices it charges to consumers. Mr. Hay, the General Manager, said that Direct Energy set an internal target gross margin for fixed rate customers, although he noted that the target varies by the length of the term of the customer's fixed rate contract. Hay Dep., 49: 23-25; 51:6-52:2. When it set that target, Hay testified, part of Direct Energy's goal was to “churn less, ” or to encourage customers to continue using Direct Energy's services. Id. at 53:23-25; see also Id . at 56:1-8 (agreeing to question: “for your fixed price contracts, do you - in Connecticut for example, do you offer lower priced fixed price arrangements in order to capture new customers?”).

         For variable price customers, the target margin was much higher. According to Mr. Hay, Direct Energy expected to earn nearly three times as much per megawatt hour from customers with these contracts. Id. at 73:5-6. Direct Energy determined the specific target margin based on the projected “customer churn, ” the cost of energy on the wholesale market, and other incidentals. Id. at 73:9-13. Mr. Hay also testified that Direct Energy would sometimes increase the target margin on the variable rate to make up for lost profits from other variable rate customers at other points, but not to make up for losses from the “fixed book.” Id. at 80: 13-25. Mr. Hay also agreed, however, that “if [Direct Energy] lost money … on the megawatt hour margin when people rolled over from the fixed book to the variable book and the margin moved [up, it was] able to recoup some of the prior losses [from customers] when they were on the fixed price book.” See Hay Dep., 102: 1-5. Generally, Direct Energy's variable rates often changed, and were always higher than the standard service rate. Fisher Dep., Klein Decl., Ex. H, at 90:20-92:17 (agreeing that “in every month from June of 2013 to August of 2015 Direct Energy's variable price was higher than CL&P's standard rate.”).

         B. Mr. Richards' Expectations

         Mr. Richards alleges that Direct Energy was wrong to seek more profit from variable rate customers than it did from fixed rate customers. He argues that the difference in Direct Energy's target profit margins for the two types of customers reflected a desire to let the variable rate customers “subsidize” the fixed rate customers, who were charged a “teaser” rate that would lure them into business with Direct Energy. Pl.'s Mem., 31.

         Mr. Richards claims that, by employing this pricing strategy, Direct Energy abused the discretion that it was given in the Evergreen Clause, which allowed it to vary rates according to “business and market conditions.” Mr. Richards testified that, in his expectation, “market conditions” would “have to do with the wholesale rate and competitor's pricing” and business conditions “shouldn't be … variable.” Richards Dep., 71: 19-25; 72:2. Mr. Richards expected that “the variable rate would be based on business practices and market conditions, ” and that Direct Energy would be “looking out for [his] best interests” by changing the variable rate in accordance with the company's costs. Richards Dep., Ex. F, 99: 4-11 (“So I would have to say that, yeah, if their costs go down, [the variable rate would] reflect the savings. If their costs go up, you don't necessarily have to increase at the same rate, and you certainly don't have to increase at a higher rate.”). Generally, Mr. Richards expected “that the variable rate shouldn't be an exorbitant rate above and beyond what the standard rate is.” Id. at 10:10-12.

         Mr. Richards submitted a report from expert witnesses to supplement his theory about why Direct Energy's rates were unfair. Seabron Adamson and Edo Macan of Charles River Associates (“CRA”), who have decades of experience consulting with energy companies, wrote the report on his behalf. CRA Report at § 1.1. These experts argue that, for a “middleman” like Direct Energy, a rate consistent with business and market conditions would include “the costs of procuring power on the wholesale market, plus an appropriate margin to cover the legitimate costs and risks of supplying variable rate customers, ” including overhead costs, like marketing and personnel charges, which are generally fixed. Id. at § 3.3.

         Plaintiff's experts compare Direct Energy's the expected profit margin from the fixed rate customers to the margins that the company made from variable rate customers. CRA Report, § 3.4. They conclude that Direct Energy enjoyed a greater profit margin from variable rate customers for most of the approximately two-year period that they studied, except during the winters of 2013-14 and 2014-15, when energy prices grew more than the variable rate did. Id . These experts reviewed the risks associated with providing energy to variable rate and fixed rate customers, including “customer churn, ” changes in weather, overhead, and changes in energy costs. They concluded that Direct Energy faced most of the same risks in serving its fixed rate and variable rate customers. Id. at 3.5.1.4. They concluded, therefore, that the “very large gap” between the company's profit margin on variable rate customers and its profit margin on fixed rate customers was not “explainable by apparent increased risks for serving variable rate customers.” Id.

         Instead, they argue, Direct Energy looked to make very high profit margins from its variable rate customers and, with limited modifications to prevent churn during cold winter months, set prices accordingly. Their goal was to “extract[] rents” from variable rate customers that they did not extract from customers on the fixed rate book. CRA Report, § 3.5.1.4. The experts concluded that this is not a “business or market condition” that Direct Energy should have considered when setting prices. Plaintiff's experts then calculated damages by assessing the amount that Direct Energy should have charged its variable rate customers, using the company's target margin for fixed-rate customers as a benchmark. Id. at § 4.2.

         Direct Energy disagrees with the premise of Mr. Richards's argument as well as his calculation of damages. Direct Energy submitted a report from an expert, Mr. Neil Fisher, who is Principal of the NorthBridge Group, Inc., a consulting firm that specializes in electric and gas companies. See Fisher Report, p. 2. Mr. Fisher concluded that the variable rates were consistent with business and market conditions and fluctuated with changing prices of competitors. Id. at III.A. Mr. Fisher argued that Mr. Richards improperly used Direct Energy's target margin for its fixed rate customers as a standard for the appropriate or acceptable target margin for the variable rate book of business. Id. at II.C(1) (“In effect, the CRA Report proposes a new standard that asks the court to determine Direct Energy's legitimate business costs, however defined, for each product that Direct Energy provides and then have the court regulate Direct Energy's pricing by establishing an ‘acceptable' or ‘appropriate' gross margin for each product.”). Mr. Fisher eventually concluded that “business and market conditions” would include a company's desire to set different profit margins for each of its products. Id. Furthermore, Mr. Fisher emphasized that Direct Energy's variable rate customers were free to “return to Standard Service Rates at any time, ” and suggested that Mr. Richards “could have easily avoided” the harm he alleges if he renewed or terminated his agreement when the fixed price expired. Fisher Rept., A(7).

         C. Variable Rates and the Wholesale Rate

         Mr. Richards argues that “Direct Energy's variable rate goes up as its wholesale cost of power increases, but then remains elevated regardless of dramatic changes in business and market conditions.” Pl.'s Opp. Mem., 1 (citing CRA Report §§ 3.4, 3.5; Rebuttal Report § 2.4). To support this contention, he cites the report of his experts, who made certain conclusions about Direct Energy's variable rates. In their first report, the experts concluded that Direct Energy's “gross margins on variable rate customers were much higher than the … benchmark” that the company set for fixed rate customers. CRA Report, § 3.4. They also reviewed the company's profit margins on variable rate customers and how they changed over time, noting that profit margins on variable rate customers fell during the “polar vortex” in early 2014, but after the vortex, “as market prices fell, [Direct Energy]'s total profits on variable rate customers rose again sharply.” Id. at § 3.4. The experts concluded, when challenging Mr. Fisher's contention that Direct Energy's variable prices were more stable than the cost of the company's supplies, that: (1) “beginning in February 2014, Direct Energy's variable price became ‘stable' at a price that was approximately 50% more than it was in the summer of 2013; and (2) the variable rate charged did not reflect the rapid decrease in wholesale prices and Direct Energy's supply costs after the winter of 2013/14.” CRA Rebuttal Report, Klein Decl., Ex. B, ECF No. 137-2, at § 2.4 (“CRA Rebuttal Report”).

         The parties also dispute the relationship between Direct Energy's variable rates and those of other companies. Mr. Fisher compared Direct Energy's variable price with “other competitive supplier prices, ” concluding that “during this 27 month period, there was an 83% correlation between Direct Energy's variable prices and the average of other competitive supplier prices.” Fisher Report, III.B. Mr. Richards seeks to preclude this part of Mr. Fisher's report because Mr. Fisher did not provide information in his report the accompanying initial disclosures about the statistical significance of his conclusions. See Motion to Exclude Portions of Testimony of Defendant's Expert, ECF No. 156.[1] In a rebuttal report, Plaintiff's experts challenged Mr. Fisher's comparison between Direct Energy and its competitors. They argued that Mr. Fisher's conclusions are “virtually meaningless” because he relied on the average high and low prices each competitor offered without factoring in how many customers pay each price. See CRA Rebuttal Report, § 2.2.

         Mr. Richards's experts also re-assessed Mr. Fisher's data to show the difference in average prices (using the disputed data on price averages), rather than the indexed scale that Mr. Fisher used, which reflected only differences in how the prices changed over time. The experts concluded that Direct Energy “generally charged higher rates than its competitors, ” but also noted that “competitors' retail prices … do not seem germane to the contract matter at dispute here.” Id. (“We also did not, and do not feel, that this comparison was relevant to the contractual dispute in this case.”).

         D. Procedural Background

         Mr. Richards filed his Complaint in November 2014. In his Complaint, Mr. Richards claimed that he “reasonably interpreted [the Evergreen Clause] to mean that Direct Energy's variable rates track the underlying wholesale power rates” on ISO New England's wholesale market. Compl. ¶ 36. He further alleged that “a reasonable consumer” would interpret the Evergreen Clause to mean that the plan's rates would rise and fall with the wholesale market rates. Id. ¶ 26. Instead, Mr. Richards alleged, Direct Energy charged variable rate customers artificially high rates for their electricity. Id. at ¶¶ 27-28. More importantly, these prices did not decrease when wholesale prices fell. Id. In his Complaint, Mr. Richards indicated that he would seek to certify a class consisting of “[a]ll persons enrolled in a [Direct Energy] variable rate electric plan in connection with a property located within Connecticut and Massachusetts.” Id. ¶ 38.

         In his Complaint, Mr. Richards alleged that Direct Energy's pricing scheme violated CUTPA and the Massachusetts Regulation of Business Practices for Consumers Protection Act, Mass. Gen. Laws Ann. 93A, §1, et seq. See Compl. ¶ 54, ECF No. 1. He also made claims of unjust enrichment and breach of the covenant of good faith and fair dealing. Id. ¶¶ 57-63, 65-70. On January 11, 2015, Direct Energy moved to dismiss the Complaint.

         On August 4, 2015, the Court granted Direct Energy's motion to dismiss two of Mr. Richards's four claims. See Order, ECF No. 63. The Court held that Mr. Richards did not have standing to bring his claim for a violation of Massachusetts's consumer protection law because he had not been injured in Massachusetts, and dismissed that claim for lack of jurisdiction. Id. at 1. The Court also dismissed Mr. Richards's unjust enrichment claim. Id. The Court denied Direct Energy's motion to dismiss Mr. Richards's claims under CUTPA and the implied covenant of good faith and fair dealing. Id.

         When considering Mr. Richards's CUTPA claim, the court noted that the “the question [wa]s a close one, ” but held that Mr. Richards had stated a claim for a violation of CUTPA. He had alleged that “one possible and reasonable understanding of [Direct Energy]'s contract, and in particular the term ‘business and market conditions, ' was that [Direct Energy]'s energy prices would reflect the wholesale market rates to some unknown extent.” Order, 16. Mr. Richards had also alleged that variable rates “were significantly higher than the wholesale market rates and did not always increase or decrease when the wholesale market rates did.” Id. at 17. The combination of these allegations, the Court concluded, were sufficient to state a claim for a violation of CUTPA. Id.

         The Court also found that these allegations also stated a claim for the breach of the implied covenant of good faith and fair dealing. Id. at 25 (“Mr. Richards plausibly alleges that consumers reasonably understood that DES's variable-rate plan prices would reflect the wholesale market price in some way [while] failing to actually do that in practice.”). The Court noted that “while the contract left the price open to be set at DES's discretion, the covenant of good faith ...


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