Problems in Ken Paxton’s Lawsuit Against Griddy
To great fanfare, Texas Attorney General Ken Paxton announced on March 1, 2021 that his office filed a lawsuit against electricty-retailer Griddy. The lawsuit came about in the aftermath of the Februray 2021 ice storm, which left millions of Texans without power and Griddy customers with astronomical electricity bills.
I understand the public outrage that ensued when pensioners received $5,000 electric bills for a few days worth of power. Few people can withstand that kind of unexpected financial blow.
I’m certainly not here to defend Griddy’s business practices, but when the government invokes its awesome power to punish a business such as Griddy, they should do so on the basis of established law and well-reasoned arguments.
Unfortunately, even read in the most favorable light to government, many arguments in the Attorney’s General lawsuit are poorly reasoned, to the point of being misleading.
What Was Griddy?
On the same day that the Attorney General filed suit against Griddy, Texas’ energy regulators shut down the company. While it operated, Griddy was an electricity retailer operating in Texas. While other electricity retailers in Texas generally sell plans to their customers based on paying a fixed price per kilowatt (kW) for electricty, Griddy sold its customers electricity at the spot price in Texas’ wholesale electricity market for a $9.99 monthly membership fee.
Texas has a deregulated energy market, which means that electricity sells on a wholesale market that changes all the time. The idea behind this set-up is that it uses price to bring supply online during times of high demand, while encouraging producers to cut back when generators produce too much electricity for the state’s needs.
Most of the time, the price for electricity in the wholesale market is significantly less that what most retailers charge their customers. However, during periods of peak demand, the price skyrockets. Griddy’s pitch to customers was that over the long term, paying less 96% of the time saves their customers money.
What Does the Attorney General Allege that Griddy Did Wrong?
At its simplest, the Attorney’s General lawsuit against Griddy alleges that the company violated Texas’ law against Deceptive Trade Practices. Specifically, the Office of the Attorney General alleges that Griddy’s advertising misleads consumers by downplaying the potential risks of purchasing electricity at wholesale prices.
According to the lawsuit, as many as 29,000 Texans signed up for Griddy to reap the promised savings of paying the wholesale spot price for electricity, but instead received crippling electrical bills during the ice storm. To prove that Griddy mislead customers, the Attorney General’s office alleges that Griddy violated advertising standards by saying that it sold electricity at wholesale prices, as well as listed numerous instances where Griddy advertisements downplayed the potential risks of paying spot prices for electricity.
Unfortunately, factual and logical errors exist throughout these allegations.
Did Griddy’s Ads Mislead the Public with the Term “Wholesale?”
Texas’ lawsuit against Griddy alleges that the company misled costumers with the use of the term “wholesale” regarding the prices that customers paid. This allegation has two parts.
- “There is no officially indexed wholesale price of electricity in Texas.”
- And that “The Better Business Bureau issued a consumer alert in 2019 about Griddy’s advertising claims, writing that this usage of “wholesale” should not be used unless a business “actually owns and operates or directly and completely controls a wholesale or distribution facility which primarily sells products to retailers for resale,” which is not the case here.”
Does Texas Have Wholesale Energy Prices?
The best way to think about the first allegation is that if Texas doesn’t have a wholesale market, then any electricity provider that claims to charge wholesale prices misleads its customers. While I am in no position to determine whether or not as a matter of law a wholesale market exists in Texas, a visit to the Electric Reliability Council of Texas (ERCOT) website certainly makes it clear that a wholesale price does exist for electricity in Texas.
ERCOT is the entity that manages Texas’ power grid. If, as the Attorney General’s Office alleges that there is no wholesale price of electricity in Texas, why does the state’s chosen grid manager list one on its homepage? Further, why would the Public Utility Commission of Texas, who oversees ERCOT release a report in the aftermath of the storm that investigates the “Effect of High Wholesale Prices on Residential Customers?”
Is the issue that the Attorney General’s Office doesn’t know that Texas has “wholesale prices” for electricity or that the regulators and manager of Texas’ energy market are not aware that what they call “wholesale prices” aren’t technically “wholesale prices?”
If Texas has “wholesale prices,” then it seems the the BBB advertising rules may not apply in this situation, because Griddy simply used the term used by energy regulators to describe they product on offer.
Did Griddy Mislead by Not Following Better Business Bureau (BBB) Advertising Standards?
This allegation is a bit trickier to untangle than the first, because it concerns Griddy’s precise advertising language and the lawsuit employs confusingly imprecise allegation.
First, reading through the BBB investigation of Griddy, it is clear that in order to use words such as “factory to you,” “direct from maker,” “wholesaler,” etc. a business must meet precise conditions. The problem for anyone trying to make sense of the lawsuit, is that the Attorney General’s Office alleges misuse of the term “wholesale,” which doesn’t appear on the BBB’s list.
This leads us left to infer that the Attorney General’s Office argues that Griddy advertised their business as a “wholesaler.” I can find one instance in the BBB report where this may in fact be the case.
- “We are the only wholesale electric provider in Texas. Get access to wholesale electricity for $9.99 a month.”
In that instance, it is pretty clear that a reasonable person would read that as a claim that Griddy is a “wholesaler.” If the lawsuit where to use “wholesaler,” then that point would be quite clear.
However, by using “wholesale,” a person could also include, based upon every other Griddy ad besides that one, that they sell electricity at the “wholesale price.” Then the applicable advertising rule isn’t the one cited in the lawsuit, but this one:
- “The terms ‘wholesale price,’ ‘at cost’ and the like can be used where they are the current prices which retailers usually and customarily pay when they buy such products for resale.”
Under that definition, there is nothing misleading about Griddy’s ads. They charge their customers the price that every other Texas retailer pays at a given moment.
What Better Business Bureau Information Did the Griddy Lawsuit Leave Out?
Looking elsewhere on the BBB website, one can find perhaps the most damning evidence, which could potentially hurt either the State’s argument or Griddy’s. First, a bit of background. The February ice storm wasn’t the first time that Griddy ticked off their customers, because the wholesale price of power skyrocketed to the maximum price allowed by law. In August 2019, a heat wave triggered a similar, but less severe spike and people complained.
Griddy claims that the the Customer Protection Division of the Public Utility Commission of Texas reviewed those complaints and found that Griddy met all necessary disclosure requirements under the law. Griddy even went so far as to post those findings in response to complaints to the BBB.
This means that either energy regulators in Texas looked into Griddy’s business model in 2019 and determined that complied with the rules, or that Griddy lied about a government stamp of approval. If it’s the former, then either the Attorney General’s Office missed this information, or chose to ignore it. It’s certainly inconvenient for their argument that the same government who now sues Griddy signed off on their disclosure policies barely 18 months ago.
However, if the finding doesn’t exist and Griddy is lying, that sounds like the best proof imaginable of the government’s allegations, which leads me to wonder why isn’t it in the lawsuit?
Did Griddy’s Advertising Downplay the Risk of Severe Price Spikes?
The lawsuit against Griddy also alleges that the company downplayed the risk of power spikes. The lawsuit includes this chart from a Griddy advertisement:
While the Attorney General’s Office doesn’t dispute that the accuracy of the chart, they take issue with the fact that Griddy lists the highest price as “above $1.” According to the lawsuit, this doesn’t accurately convey the full exposure of $9/kW hour, which is the maximum allowed by state law.
If the lawsuit ended the argument there, then I would be inclined to think that they had a credible point. However, immediately after raising that issue, the lawsuit continues:
- “When Griddy did mention the Texas Administrative Code cap, it was not in its advertising materials and was misleadingly dismissed as an extreme unlikelihood: one FAQ page dismissed it as an event “that happens 0.005% of the time.” Instead, Griddy’s advertising and marketing materials emphasized low pricing, fluctuating between pennies per kWh.”
The problem is that I don’t think most people find it misleading or dismissive to fail to focus on something that happens 0.005% of the time. That’s half a percent, most of us focus on the 99.5%.
Rather than take either side’s word for how infrequently energy prices rise to the state mandated maximum, I went ahead and calculated how often electricity prices hit the state maximum price since the beginning of 2019. Even accounting for the heat wave in August of 2019 and the four days in February 2021, wholesale electricity rates peaked at the highest rate allowed by state law 0.0511% of the time.
What does this mean? Even the lawsuit acknowledges that Griddy disclosed, in some form, the potential for much higher rates and that they accurately documented how often those rates occurred. However, in the eyes of the Attorney General’s Office, they failed to emphasize just how frequently an event that that happens half a percent of the time really is.
If the AG’s Office applied that standard to all advertising in Texas, shouldn’t something like ad do more to emphasize a low-probability event?:
For the most recent week, the same site advertises 47,277 winners. Of course, only one of those winners won more than $100, or 0.000212 % of the “winners.”
I realize that you can’t defend your own wrong-doing by pointing to someone else’s, but when looking for a generally applicable principle of what constitutes deception and what doesn’t, Griddy’s disclosure was far more above board than anything I’ve seen from the State’s own lottery.
The Griddy Lawsuit Makes Questionable Assertions About Ads Using Graphs
I understand that the lawsuit attempts to illustrate the ways that Griddy failed to adequately warn customers of the dangers of price spikes. However, the inclusion of some advertising graphics baffles me. The underlying assumption in many of these allegations is that if Griddy didn’t warn its customers about potential risk in every single ad, then they were misleading the public, even when the advertisement describes actually results over an entire calendar year.
For example, the lawsuit includes a screen capture of the ad above. The ad clearly, and by all accounts, accurately portrays the cost of wholesale electricity in a given year, 2020. By Texas’ standards, 2020 was a mild year weather-wise. As a result, there were no price spikes in wholesale prices that approached the state maximum energy rate.
According to the Attorney General’s Office, the failure to mention the potential for energy spikes in the ad misleads consumers. I think that most reasonable people would agree that energy spikes are irrelevant to the ad, since there weren’t any in 2020. It’s akin to saying that every Budweiser ad must prominently focus on liver damage, as opposed to good-looking people having fun by a pool.
Whether this next ad misleads is certainly more debatable. The graph depicts average prices paid by Griddy customers compared to the average price of a competitor’s plan. The AG’s Office takes issue with the depiction of the average price for August 2019, when the wholesale price of electricity briefly spike to the state maximum price of $9.00/kW hour. According to the the lawsuit, the ad misleads customers because the average monthly price of $0.24/kw hour in isn’t even in the same ballpark as the price at its peak.
However, the higher price in August includes the price spike, which was very short in duration. There’s also a case to be made that a longer term, averaged picture makes a better case for that risks that a potential customer takes on when they choose to by electricity at the wholesale price. That it’s a more flattering portrayal for Griddy is beyond doubt, but I have yet to see the advertising campaign for any business that doesn’t present the business in the best light possible without lying, which this ad doesn’t.
The Attorney General’s Office Lawsuit Deserves Greater Scrutiny
One thing to remember about lawsuits, is that they lay out a set of allegations and present arguments for why their side’s view is the correct one. Practically speaking, Attorney General Paxton’s lawsuit is his version of events. He gets to make his case without interruption or rebuttal. It’s rare to read a lawsuit and not believe that the accused did something wrong. Well, I read this lawsuit and the arguments haven’t convinced me.
It also struck me that in all the reporting on this lawsuit, I have yet to see a single reporter do more than parrot Attorney General Paxton’s press release or snippets from the lawsuit. The few reporters who it appears took the time to look through the lawsuit did so without challenging any of the assertions. As best I can tell, the press and the public looked at the astronomical bills and assumed that Griddy broke the law. Of course, the Attorney General’s Office has a more sacred duty. They have to put aside that pressure and faithfully apply the law when they take action.
I understand that shocking electric bills upended many people’s finances. People lost all of their savings, because of a freak event, and a risk that they didn’t fully understand. However, and I know no one wants to hear this right now, fairness demands that we only punish companies when they do something that is against the law.
As a matter of public policy, Texas law attempts to balance the interest that businesses have in promoting their products with the public’s right to make informed purchases. That’s what makes this lawsuit alarming. If we were apply the standard that the government wishes to apply to Griddy to every business in Texas, then the only permissible advertisements in Texas will be those that focus on a product’s risks to a degree that satisfies the Texas Attorney General’s Office. In the long run, that will hurt far more people than Griddy ever did.