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Has the Time Come for Prepaid Electrical Service?

Marianne Hedin — February 28, 2012

Everyone is familiar with prepayment, especially when it comes to prepaid wireless phone services.  But, in the United States, the concept of prepayment for electric services is not yet well understood. By contrast, electric prepayment is a common practice in many other nations, especially in the United Kingdom, Ireland, South Africa, and many parts of Asia Pacific.  In South Africa, for example, over 50% of the residents use electric prepaid programs that are offered by its major utility, Eskom, the largest producer of electricity in Africa and among the top seven utilities in the world in terms of generation capacity.  With the oldest prepaid program in Europe, the United Kingdom has approximately 14-15% of all households on an electric prepaid plan – usage of which, according to Ofgem, increased by 5% in 2010.  Recognizing that these types of services represent an essential part of the electric metering market, the U.K. authorities have mandated that the nation-wide roll-out of smart meters will include a prepayment functionality.

In the United States. some observers estimate that less than 10% of the 3,200 utilities in the country offer prepaid electric services.  Texas, Arizona, Oklahoma, Vermont, State of Washington and a few states in the Southeast have been frontrunners, especially among cooperatives and municipalities. The large independently-owned utilities (IOUs) have, on the other hand, been reluctant to adopt prepaid plans – in part because they are more constrained than the other utilities to comply with state utility commission rulings.  As a result, the overwhelming majority of prepaid programs in the country are run by smaller utilities, frequently serving rural and low-income communities with many transients like college or university students.

The oldest and best known prepaid program is the Salt River Project (SRP) in Phoenix, Arizona, which initiated its prepaid program – the M-Power Program – in 1993.  In 2011, its program enrollment rose by 16% to a total of 125,000 participants. This is an especially remarkable achievement because SRP does not advertise its prepaid services.  Oklahoma Electric Cooperative (OEC) offers another, albeit younger, example of a prepaid program with somewhat more than 10% of its total customer base currently enrolled as prepaid participants, i.e. about 5,122 customers. Every resident is eligible to become a participant in this program, though it is most popular among its student population.

Barriers to electric prepaid services have primarily stemmed from objections from consumer advocacy groups, public utility commissions (PUCs) and regulatory agencies.  One fear has been the possibility of utilities shutting off power to certain “disadvantaged” customers.  In November 2011, the Iowa Gazette ran an article pointing to the threat of electrical disconnections from prepaid programs for vulnerable residents, such as the elderly, individuals with disabilities or life-threatening medical conditions.  Another objection has been that prepaid programs might encourage low-income customers to disconnect electric service in order to keep money available for other necessities like food and clothing.  In some instances, PUCs have accused utilities of targeting low-income consumers for prepaid programs, fearing that they are stigmatizing these consumers.  Some time ago, these concerns may have had some validity, but they have begun to make less sense today as prepayment is increasingly becoming the preferred payment method among consumers in a wide variety of situations, especially among mobile phone users.

In addition, there is growing evidence that the benefits of electric prepaid programs far outweigh any of these concerns.  Customer surveys have consistently shown high customer satisfaction – around 80-90% of prepay customers are happy or very happy and would recommend the program to others.  Prepay consumers tend to feel that they are in control of their electricity bill and can better manage their budget by being able to choose when, how, and what they pay each month for their electricity. As one prepaid customer put it:  “It is easier to pay $25 every week than $100 at the end of every month.”  Because prepaid programs encourage consumers to pay attention to their use of electricity, many utilities, such as SRP and OEC, have been able to demonstrate improved energy efficiency behavior among their prepay customers.

Utilities also benefit from prepaid programs, through better revenue protection and cash flow.  With a traditional post-pay system, some consumers may owe hundreds or even thousands of dollars before they are disconnected, whereas with prepayment, a much smaller amount of less than $50 is owed before they are disconnected.  For example, at Brunswick Electric Municipal Corporation, reduction in write-offs has averaged between $1,000 and $2,000 per month. Moreover, in a prepaid system utilities can achieve significant administrative cost savings by not having to support resources to track and collect deposits for initiating electricity for customers, to send monthly bills and to collect reconnection fees from consumers that have been disconnected.  In many cases, electric prepaid services are a win-win.

The growing realization of the value proposition of such services, together with the increasing deployment of advanced smart meters that will greatly facilitate prepaid programs, has become a powerful incentive for U.S. utilities to seriously consider adoption of such plans.  And unlike programs in the past, which frequently targeted low-income residents, the prevalent goal today is to make these programs available to every utility customer.  As better customer choice becomes a key strategic focus among utilities, electric prepaid services will eventually become the new norm – even in the United States.

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