Navigant Research Blog

Prepay Opponents Use Outdated Arguments

Marianne Hedin — June 27, 2012

Prepaid electricity services have been around for at least two decades in the United States, but they’re less common than in other parts of the world, such as the United Kingdom, Ireland, Australia, New Zealand, India, China, the Philippines, Brazil, Mexico, Turkey, South Africa, and many other African nations.  In these countries, prepayment for power is considered a very basic and standard form of utility payment.  Now, according to Pike Research’s report, Prepaid Electric Metering, more and more U.S. utilities are starting to offer prepayment options to their customers, especially with the introduction of new smart metering and communication technology to facilitate these types of services.  Pressure to improve customer service to give more choices to consumers is also a major driver.  In this new “demand” economy, offering more choices has become a corporate imperative.

One of the reasons why U.S. utilities have been slow to offer prepaid services is opposition from consumer advocacy groups, such as a recent report from the National Consumer Law Center (NCLC), claiming that these programs discriminate against low- and moderate-income households by creating an inequitable two-tiered customer delivery system.  This opposition is not new – over the years it’s been dredged up repeatedly by various consumer protection groups.  But a close examination of existing and new prepaid programs invariably shows that these objections are now outdated and no longer relevant.  Today, the majority of prepay programs don’t target a specific customer segment, such as “high risk credit” households.  Instead, most U.S. utilities target all of their customers with these programs, regardless of financial or socioeconomic status.  And many consumers – if given a choice – opt for prepayment because it provides them with greater flexibility in managing their finances, as they can choose the amount and frequency of payments.

Also, customers do not have to pay a large upfront deposit or face a credit check when initiating electric services and are able to avoid paying any disconnect and reconnect fees.  These benefits are especially valuable to the lower-income consumers that NCLC is so concerned about.

NCLC also points out that there could be an immediate loss of electricity when a customer’s credit reaches a threshold or zero.  Again, this concern is no longer valid.  Many utilities offer an emergency credit that can be used by consumers after their credit has been depleted, such as during the night, a weekend, or a holiday.  Furthermore, prior to any disconnect, the consumer receives an alert from the utility – via phone, email, and text message – which is sent far enough in advance to allow him/her to replenish the account balance.  And, if electricity has been terminated for whatever reason, the utility is able to turn the power back on relatively quickly (at least within a few hours) upon receipt of payment, thanks to the advanced technology that supports their prepaid programs.

The NCLC report also neglects to mention another important benefit to consumers.  By prepaying, consumers usually gain access to detailed information about their energy consumption, giving them the opportunity to manage their usage in order to save on their electricity bill.   Studies have consistently shown that prepaid programs can achieve a reduction in electricity use of about 12% to 14%.  This has been the experience of Salt River Project’s M-Power prepaid program, the largest and oldest electric prepay program in the United States.

Considering the general success of electric prepaid services as well as the high customer satisfaction levels among program participants, it’s unfortunate that consumer advocacy groups keep raising objections and stirring up fears that are based upon outdated assumptions and are contrary to the experience of most prepay customers.

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