United States District Court, D. Connecticut
GARY W. RICHARDS, Plaintiff,
DIRECT ENERGY SERVICES, LLC, Defendant.
RULING ON DEFENDANT'S MOTION FOR SUMMARY
A. BOLDEN UNITED STATES DISTRICT JUDGE.
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.
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.
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
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.
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
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.
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.
¶ 34 (the “Evergreen Clause”). Every
variable rate contract includes this language. See
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.
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
Direct Energy's Pricing Strategy
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
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
Mr. Richards' Expectations
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.
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.
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 §
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 22.214.171.124. 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.
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,
§ 126.96.36.199. 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 §
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).
Variable Rates and the Wholesale Rate
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
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.
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.
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
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.
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.
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
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.
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 ...