Contracts Between a Licensee and Customer May, 15, 2013Paul J. Roberti, Esq. Commissioner, Rhode Island Public Utilities Commission

Regulation of Contractual Relationships Question Presented: Can the regulator interfere in contract relationships between a licensee and the customer in case they signed a contract as a result of negotiation? Retail Answers: On the retail side, if regulations governing the behavior between a licensee and customer are clear and easy to understand, there should be no need to interfere in a contractual relationship. 2

Question Presented: Can the regulator interfere in contract relationships between a licensee and the customer in case they signed a contract as a result of negotiation? Wholesale Answer: The Federal Energy Regulatory Commission may modify a contract under limited circumstances under a “public interest” exception. 3

Purchase of competitive electric and gas supply In Rhode Island, all customers can obtain their electric supply from competitive suppliers. Most small customers still obtain their power supply through the local distribution company. Many large industrial and business customers enter into contracts with Nonregulated Power Producers. Under Rhode Island law, only the largest gas customers can obtain their supply from competitive suppliers. The local distribution company contracts for gas supply for the rest of its customers. 4

Regulation of Contractual Relationships In Rhode Island the electric licensee is a Nonregulated Power Producer (NPP) NPPs are required to register with the Division of Public Utilities and Carriers (Division) and pay a registration fee – no confidential information is required. Must file a renewal and pay a renewal fee each year Purpose is to maintain records of which entities are authorized to market power in Rhode Island 5

Regulation of Contractual Relationships The electric distribution company does not require a customer taking competitive supply to contract for a minimum term in order to return to supply obtained by the electric distribution company. –Exception is that the transfer of the customer between electric distribution company supply and competitive supply takes place on the customer’s next meter read date. 6

Regulation of Contractual Relationships Each NPP providing the electric power requirements of retail customers shall be responsible for meeting the load requirements of each retail customer it is serving and to provide for the delivery of the associated capacity and energy to a point or points on the integrated transmission system of the electric distribution companies and their affiliates serving Rhode Island pursuant to contract or Federal Energy Regulatory Commission (FERC)-approved open access tariffs, as well as providing any and all necessary installed and operating reserves required to serve each retail customer. 7

Regulation of Contractual Relationships NPPs also must comply with Rhode Island Public Utilities Commission’s Consumer Protection Requirements for NPPs. –Sets forth minimum requirements of contract between an NPP and the retail customer in a uniform manner. 1. Specific pricing information, including all charges 2. Term of service; 3. Rights and limitations of each party to terminate the contract, including notification rules for termination by either signatory. This section of the contract must clearly state that the NPP may not physically cut off electric service to consumers; 4. Present information using the prescribed format. 8

Regulation of Contractual Relationships 4. Amount of any fees or penalties that may be imposed, e.g., for late payments, bad checks, or early contract terminations; 5. Any deposits that may be required (including amount, interest rate, recovery, conditions for forfeiture); 6. Budget plan availability, if any; 7. Dispute resolution process; 8. Customer service contact telephone number; and 9. Any additional service options or additional information. –Price information should include pricing elements, price change formulas, and the potential for price volatility through variable rates or other mechanisms. 9

Regulation of Contractual Relationships Upon adoption by the Commission of a format for such disclosure, NPPs shall use prescribed format. The Rhode Island Regulator receives very few complaints from customers taking competitive supply about the terms of their contracts. We ordinarily do not become involved in a dispute between a customer and its competitive supplier once a contract has been formed unless there appears to be a deceptive practice that would violate our consumer protection or reliability regulations. 10

Regulation of Contractual Relationships Breach of Contract and Billing Disputes. The Commission does not adjudicate disputes between NPPs and customers regarding breach of contract claims or billing matters. Such disputes that cannot be privately resolved may be referred to the Consumer Protection Division of the Department of Attorney General, or may be resolved through appropriate legal action in State court. 11

Regulation of Contractual Relationships Violations of NPP Regulations: Disputes between NPPs, customers, or other aggrieved parties relating to violations of the NPP Regulations are subject to the Commission's jurisdiction. The Commission’s sister agency, the Division of Public Utilities and Carriers, adjudicates certain billing disputes between customers and the NPP or competitive supplier of gas where a dispute arises as a result of activities of the regulated distribution company. 12

Regulation of Contractual Relationships The policy determination was made that as long as a competitive supplier is following the consumer protection rules, there should be no need for the Commission to interfere in those retail contractual relationships because to do so would add another layer of uncertainty to the energy market. The policies are a little different when the contracts are between utilities and wholesale suppliers. 13

Mobile-Sierra Doctrine The Federal Power Act allows the FERC to modify a contract that is “unjust, unreasonable, unduly discriminatory or preferential.” Reviewing the Natural Gas Act, the United States Supreme Court stated, “By preserving the integrity of contracts, it permits the stability of supply arrangements which all agree is essential to the health of the natural gas industry.” United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S.332, (1956) 14

Mobile-Sierra Doctrine, cont. The United States Supreme Court reconciled these two competing policies by creating a “public interest” exception to the prohibition on interfering in bilateral contracts. FERC must presume that the rate set out in a freely negotiated wholesale-energy contract meets the “just and reasonable” requirement imposed by law. 15

Mobile-Sierra Doctrine, cont. In applying the public interest exception, “the sole concern of the [FERC] …[is] whether the rate is so low [that] it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory.” FPC v. Sierra Pacific Power Co., 350 U.S. 348, 355 (1956). 16

Morgan Stanley Capital, Inc. More recently, the Court explained that Sierra was grounded in the commonsense notion that “[i]n wholesale markets, the party charging the rate and the party charged [are] often sophisticated businesses enjoying presumptively equal bargaining power, who could be expected to negotiate a ‘just and reasonable’ rate as between the two of them.” Morgan Stanley Capital, Inc. v. Public Utility District No. 1, 554 U.S. 527, 545 (citation omitted). 17

Morgan Stanley Capital, Inc., cont. Therefore, only when the mutually agreed-upon contract rate seriously harms the consuming public may the Commission declare it not to be just and reasonable. The presumption of reasonableness does not apply if the contract was entered into through fraud, duress, or illegal behavior by one of the contracting parties during contract formation. Parties can include language in the contract to preserve their rights to seek contract changes. United Memphis Light, Gas & Water Division, 358 U.S. 103 (1958). 18

Why Commission Stays Out of Retail Contracts The policy reason for the Rhode Island Commission to refrain from interfering in the contractual relationship on the retail level is that if a customer is provided all of the facts regarding the pricing and terms, they should have all of the tools available to them to make an informed decision. Once customers are subjected to the competitive market, the regulator should step back and simply serve in the role of ensuring a level playing field for suppliers and customers. 19

Unique Situations Rhode Island Public Utilities Commission has jurisdiction to approve a standard contract and set the pricing for certain Distributed Generation Projects. Rhode Island Public Utilities Commission has jurisdiction to approve certain Long-Term Renewable Contracts, including the pricing. Rhode Island Public Utilities Commission has been asked to approve modifications to a previously approved contract. 20

THANK YOU Paul Roberti, Commissioner Rhode Island Public Utilities Commission 89 Jefferson Blvd. Warwick, RI Tel: (401)