Prepay energy can be viewed as simply another voluntary bill pay option. As such, the regulatory issues should be fairly straightforward to address. However, prepay energy is highly segmented, meaning that the offering doesn’t fit neatly into the traditional regulatory paradigm of average-based ratemaking, has a different cost structure to support, and creates significant benefits that can be difficult to apportion.
The expectation is that the number of customers on a prepay account will grow exponentially over the next five years. This trend is possible because many of the early regulatory concerns and questions around prepay energy are being successfully addressed in regulatory proceedings. There is a growing amount of fact-based evidence that prepay energy can benefit both customers and utilities.
Prepay energy can be viewed as simply another voluntary bill pay option. As such, the regulatory issues should be fairly straightforward to address. What is more interesting, however, is that prepay energy is also truly the first customer-facing application for customer benefit enabled by smart grid. It can be challenging to fully get your arms around from a regulatory and/or business case perspective. Prepay energy is highly segmented, meaning that the offering doesn’t fit neatly into the traditional regulatory paradigm of average-based ratemaking, has a different cost structure to support, and creates significant benefits that can be difficult to apportion.
Some consumer advocates have argued that prepay energy is a second-class service that unfairly targets low income customers. The National Consumer Law Center went so far as to state: “Prepaid utility service programs and proposals are expanding rapidly throughout the nation, putting low- and moderate income households’ health and safety at risk, and setting up an inequitable two-tiered customer delivery system.” Utilities requesting permission of their Commission to launch a prepay offering should expect at least a few intervenors to oppose their petition.
As a counterpoint, however, we have argued that prepay energy is a voluntary option available to all customers that provides an alternative means to pay bills, save energy and manage your utility account. The facts on the ground are increasingly pointing to high customer satisfaction, lower bills due to customers more actively managing their energy spend, as well as added convenience to the customer. In short, for those customers who choose prepay energy, they really like the option.
For the past seven years, the Prepay Energy Working Group (PEWG) has brought together utilities, vendors, regulators, advocates and other stakeholders to examine four aspects of prepay energy: including customer issues and impacts, operational and business case, the energy conservation impact of prepay energy, as well as regulatory implications.
On the regulatory front, the working group identified nine policy areas most critical to the future of prepaid energy service. For each, we have extensively researched the various positions and have made recommendations on how to proceed.
1 Prepay offering must be voluntary. All customers are free to choose what works best for them. If they choose to try prepay energy and don’t like it, they can always go back to traditional post-pay billing without penalty.
2 Applicability of weather protections. All moratoriums or other weatherrelated protections will remain in place. What is interesting though is prepay does allow an opportunity for customers to know exactly on a day-by-day basis how much debt they are accruing and provides easy ways to make incremental payments during moratoriums. Historically, knowing that they can’t be disconnected, some customers have not paid their utility bills for months and end up with a debt that causes them serious problems at the end of the moratorium.
3 Concerns for vulnerable populations. If a customer is a “critical care” customer and/or is deemed vulnerable, then those customers should not be allowed to be on a prepay energy offering.
4 Service disconnection. Over 85% of customers that go on a prepay energy offering never get disconnected. For those who do get disconnected, meaning that they let their prepay account go down to zero, they can deposit a minimal amount to get their electricity back almost immediately (less than two hours). There is no fee or penalty to the customer to do so. Consider the past when a customer would get disconnected. There would be a truck roll scheduled which could take up to two days, significant fees and penalties, and a complicated debt arrangement that would need to be in place to get their service restored.
5 Account notifications. Many states have notification rules that were promulgated decades ago – e.g., requiring a visit to someone’s home before disconnection – prior to when the Internet was even in existence. Even the most vociferous opponents of prepay agree that the notification rules should be revisited to reflect better how customers actually communicate and transact. For the purposes of a prepay pilot, we recommend waivers to the account notification rules. Moreover, given that customers now get an account statement on a daily basis through their preferred channel, it stands to reason that prepay customers go “paperless” without the need for a monthly bill to be sent to them through the mail.
6 Arrearage management and deferred payment plans. Through prepay, many customers appreciate the ability to start service without a security deposit; or to keep service on by paying what they can, when they can in lieu of a payment arrangement with the utility if they are trying to manage their family budget. Under the traditional rules, forcing customers to quickly come up with large sums of cash due to “true ups” for budget billing plans, surprises during the expensive heating/cooling seasons, or to make up for nonpayment during moratoriums has been very challenging for customers.
7 Cost of service (includes security deposits, tariff, penalties and fees). On one hand, prepay energy does involve upfront costs to set up the program which must be paid for. On the other hand, prepay energy should result in lower costs to both the customer and utility over time. For now, our rule of thumb is to keep prepay at the same tariff as post pay. There should be no additional fees or penalties for prepay customers that other customers don’t have to bear as well.
8 Payment channels. Utilities will need to increase the number and types of payment channels. However, we would argue that this would benefit the entire customer base and not just the prepay customers. Payment options for those customers paying on a cash basis – e.g., kiosks or over-thecounter transactions – are especially needed. Mobile payment options will also become increasingly important.
9 Availability of and synergies with payment assistance. There may need to be tweaks to processes for payment assistance to meet eligibility requirements; however, as shown in a number of states that have gone through this already, it can be done fairly seamlessly. In fact, many agencies and third-party administrators of payment assistance have noted that prepay energy has been a welcome development. It has resulted in more active awareness and management of utility bills, leading to less need for assistance, and has thereby freed up resources for more applicants.
Following these recommendations and making other common-sense tweaks to traditional regulatory practices and rules, there has been a remarkable track record built up of successfully getting a prepay energy offering approved. To date, prepay energy has been approved in eight states as diverse as Arizona to Michigan, and is pending in a number of others. The regulatory landscape for prepay energy is much more open to the rapid adoption of prepay energy in the years to come. MI
ABOUT THE AUTHOR
Jamie Wimberly is the CEO of DEFG LLC, a management consulting firm focused on the utility sector and all aspects of customer strategy and operations. The Prepay Energy Working Group is managed by DEFG LLC. For more information, please visit www.defgllc.com