Supreme Court of Illinois Says Courts Can Decide ARES Rate Disputes

04 January 2017 Renewable Energy Outlook Blog
Author(s): Thomas McCann Mullooly

Courts – not the ICC – have jurisdiction over rate cases involving an ARES, said the Supreme Court of Illinois.[1] In a unanimous opinion written by Chief Justice Karmeier, the Court in December answered the Seventh Circuit’s certified question whether rate claims against ARESs are under the jurisdiction of the ICC or the courts under the Illinois Public Utilities Act.

The case arose when a residential electricity customer signed up to receive her power from an alternative retail electric supplier (“ARES”) instead of her local public utility. She was attracted to low teaser rates that were to apply during her first month of service. The ARES’ advertisement warned that the “market based variable rate” that was to apply after the first month could be higher than the public utilities’ rates, however the ARES never applied the promotional rate to the first month. Each month the ratepayer paid around three times the rates of her local utility. The ratepayer filed a federal court class-action suit against the ARES in the Northern District of Illinois under diversity jurisdiction, bringing common-law claims as well as claims under the Illinois Consumer Fraud and Deceptive Business Practices Act. The ARES filed a motion to dismiss, claiming that the court did not have jurisdiction to hear the case because rate disputes are in the exclusive jurisdiction of the Illinois Commerce Commission (“ICC”).

In granting the ARES’ motion to dismiss, the court found that the ratepayer’s claim was “‘essentially’ a reparations claim because [the ratepayer’s] injury fundamentally stems from the allegation that [the ARES] charged too much for electricity.”[2] The court also found that independent of the court’s lack of jurisdiction the claims should be dismissed for failure to state claims either under common law or the consumer fraud statute on the basis of the disclosures contained in the ARES contract.

The ratepayer appealed the decision to the Seventh Circuit, arguing that when the Illinois Legislature passed the Electric Service Customer Choice and Rate Relief Law of 1997, which allowed the formation of ARESs, the legislature intentionally omitted any clause explicitly granting the ICC jurisdiction over customer rate disputes with ARESs as part of its aim of deregulating the electricity market. The Seventh Circuit found that the issue was undecided in Illinois and certified the question to the Supreme Court of Illinois:

Does the ICC have exclusive jurisdiction over a reparation claim, as defined by the Illinois Supreme Court in Sheffler v. Commonwealth Edison Company, 2011 IL 110166, 955 N.E.2d 1110, 353 Ill. Dec. 299 (Ill. 2011), brought by a residential consumer against an Alternative Retail Electric Supplier, as defined by 220 ILCS 5/16-102?[3]

The Supreme Court of Illinois found that the ICC did not have exclusive jurisdiction in rate reparation actions brought against ARESs. The Court explained that it found in Sheffler that when a ratepayer brings a claim for rate “reparations” – that is a claim that rates are too high – against a public utility, the ICC has exclusive jurisdiction. The key difference between Sheffler and the case at hand, explained the Court, is that Sheffler involved a public utility while this cases involves an ARES. The Court found that Illinois courts enjoy original jurisdiction over all disputes in the state except where explicitly relegated to a state agency by statute. The Public Utilities Act explicitly grants the ICC exclusive jurisdiction over claims that a public utility has charged “excessive or unjustly discriminatory” rates, but ARESs are excluded from the definition of a public utility under the Act. Therefore, the ICC does not have exclusive jurisdiction over claims of overcharges by ARESs.

The Court further noted that the ICC was established to manage the complex task of regulating the rates of public utilities, but that ARESs were specifically designed to exist outside of the more rigid public-utility framework. They were designed to deregulate, at least in part, the Illinois electricity market: rather than selling electricity at rates found to be “just and reasonable” by the ICC, an ARES’s rates are governed by its contracts with customers.

The implication of the decision is that while ARESs enjoy the ability to set rates outside of the ICC’s regulatory framework, it comes at a price. Namely, when rate disputes arise, ARESs may have to face them in the courts, where plaintiffs will have more flexibility to bring a wider scope of claims – such as claims under the Illinois Consumer Fraud and Deceptive Business Practices Act – which could lead to more potential exposure. By having to formally litigate the actions in the courts, ARESs could also face higher litigation costs.

[1] Zahn v. N. Am. Power & Gas, LLC, 2016 IL 120526 (Ill. 2016).

[2] Zahn v. N. Am. Power & Gas, LLC, No. 14 C 8370, 2015 U.S. Dist. LEXIS 67199 at *8 (N.D. Ill. May 22, 2015). 

[3] Zahn v. N. Am. Power & Gas, LLC, 815 F.3d 1082, 1095 (7th Cir. 2016).

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