Massachusetts Attorney General comes down on unclear variable rate contract terms

ESCOs/REPs in Massachusetts will have to be much more precise in the the way they sell customers on their managed variable rate contracts after the state Attorney General ruled that vague product descriptions and pricing violate state regulations.

ESCOs/REPs must be clearer in variable rate contract language
Managed variable rate contracts are plans under which a supplier and customer form an agreement on an electricity supply contract for a specific term. But because it's a variable rate, the price of electricity the customer pays can change during the duration of the contract due to changing market conditions. This means that when the contract is signed, the customer doesn't know what he or she could be paying later on because the prices can change based on unforeseen circumstances.

According to Energy Choice Matters, that's where regulators are coming down on providers in the state. The AG explained that variable rate contracts where the price can increase based on "market conditions" or the supplier's "discretion" are not expressed with enough precision in the language of the contract, and constitute a misleading sales approach in violation of regulations at 940 CMR § 19.05.

ESCOs/REPs must ensure that the language they use in selling variable rate contracts is transparent and easy to understand.

How suppliers can avoid noncompliance
Based on that regulation, it is considered unfair and deceptive for an ESCO/REP to initiate service to a consumer or obligate a consumer to pay for anything unless the provider has given him or her complete and accurate pricing information. That includes a clear definition and a complete explanation of each and every charge that the retail seller may bill to a consumer.

To ensure compliance with AG regulations, suppliers can ensure that the variable rate is calculated based on an index (such as one based on the NYMEX pricing), methodology, or formula that customers could use themselves to calculate their rates and other applicable charges based on publicly available information, Energy Choice Matters reported.

Penalties for vague variable rate contract language are steep
The consequences for violating the AG's regulations surrounding variable rate contract language can be devastating. A release from the Massachusetts AG's office earlier this year stated that one retail electricity supplier in the state was hit with a $4 million fine due to "deceptive marketing and sales that promised savings but charged significantly higher rates, entered consumers into agreements without their consent, and charged costly termination fees."

The settlement in the case alleged that sales representatives failed to provide customers with complete and accurate pricing information. Rather, they promised savings and said they could help consumers keep their electricity bills low. In the end, consumers saw their rates increase in excess of the electricity supply rates given by utilities NSTAR and National Grid.

This isn't to say that ESCOs/REPs cannot sell variable rate products, it just means that they will have to take extra precautions to ensure that their pricing and sales materials are transparent enough for customers to know exactly what they're buying.

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