REP passing through transmission charges at 140% of actual cost

Vince S from Hartford, CT. Eversource delivery, Direct Energy supply. My client is a medium-size office building paying about $8,500/month total. The supply contract says energy is fixed at $0.069/kWh and transmission and capacity are passed through at cost. When I looked at the actual ISO-NE transmission charges for our zone and compared them to what Direct Energy is billing, the pass-through is about 40% higher than the actual ISO-NE published rate. On this account that is approximately $380/month in excess transmission charges. Over the 2-year contract that is $9,120.

Vince, pass-through verification is critical in deregulated auditing. When a contract says at cost, most customers assume that means the exact amount charged by the ISO or utility. But some REPs add an administrative markup to pass-through charges and bury the markup language in the contract definitions. Check how the contract defines cost — it might say cost including administrative and processing fees or something similar.

Randy, found it. The contract defines pass-through costs as the amounts assessed to Supplier by the ISO or utility, plus reasonable administrative costs. That plus reasonable administrative costs language is doing a lot of work. A 40% markup is not reasonable by any definition. The administrative cost of processing a transmission charge is trivial — it is an automated data feed.

Vince, I deal with this constantly in PJM territory. REPs use the at cost plus admin language to pad margins on pass-through charges. The fix is usually renegotiation rather than dispute. Tell Direct Energy you have identified the markup, show them the actual ISO-NE rates vs what they are billing, and demand a rate adjustment or you will switch suppliers at contract expiration and make sure every business owner in Hartford knows about the hidden markup.

Tony, I like the direct approach. Before I call them, I want to quantify the actual vs billed pass-through for every month of the contract so I have a complete picture. Going to pull the ISO-NE published transmission rates for each billing period.

Completed the analysis. Over 14 months of the contract so far, Direct Energy has billed $11,340 in transmission pass-throughs. Actual ISO-NE transmission charges for our zone totaled $8,090. The markup is $3,250 — a 40.2% administrative fee on a cost that requires zero administrative effort. Calling Direct Energy tomorrow.

Spoke with the Direct Energy account manager. Showed him the analysis. He did not dispute the numbers. His response: the administrative markup is standard industry practice and is disclosed in the contract. I said 40% is not standard and not reasonable, and my client will switch to a competitor who offers true at-cost pass-throughs at contract expiration. He said he would talk to his manager about a rate adjustment.

Direct Energy came back with an offer: reduce the administrative markup to 8% for the remaining 10 months of the contract and refund the excess markup for the first 14 months. Refund amount: $2,400 (they kept some of the markup as the 8% admin fee retroactively applied). Going forward the pass-through premium drops from $380/month to about $52/month. Not perfect but a $2,400 refund plus $328/month savings for 10 months is $5,680 in total value. And at contract renewal we are switching to a REP that does actual at-cost pass-throughs.

Good outcome Vince. The broader lesson: at cost does not always mean at cost in deregulated supply contracts. Auditors working in deregulated markets need to verify every pass-through line against the actual ISO or utility published rates. The markup can be hidden in plain sight.