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Bridging the Gaps on Prepaid Utility Service

As the nation’s power grid continues to evolve, investments in smart grid technology, bolstered by federal Recovery Act funding, are giving utilities new ways to operate and new ways to connect with their consumers. Consumers, in turn, now have many more choices about how they purchase and manage their energy use. Prepaid utility service — which allows consumers to pay in advance for their electricity and which has been gaining more attention — is one area where these changes are converging.

Prepay is an alternative payment option in which consumers buy a dollar amount of electricity, and utilities deduct energy usage from that balance as it is used. Consumers receive daily notifications about their balance via phone, email, and/or text message, plus additional alerts when they reach a low or zero balance. They can add money to their account in multiple ways—by paying at a kiosk, online, by phone, or even at a drive-through window at the utility office. A zero balance results in disconnection (which typically occurs the following morning); service is reestablished a few minutes or hours after a payment is received. Many prepay plans offer protections to ensure that disconnections do not occur on weekends, holidays, or days with extreme temperatures. Growth in the deployment of prepay programs around the country is being driven by key technology and consumer shifts, including the rollout of advanced metering infrastructure (AMI) and other smart grid technologies, the emergence of the empowered consumers, rising consumer interest in energy conservation, and the increased use of prepay options such as reloadable debit cards.

The Department of Energy’s Office of Electricity Delivery and Energy Reliability recently released a report – Bridging the Gaps on Prepaid Utility Service – that examines utilities’ and consumers’ experiences with prepay. Some of the projects examined in the Bridging the Gaps on Prepaid Utility Service report were part of the Recovery Act-funded Smart Grid Investment Grant (SGIG) program. Under the SGIG program, DOE and the electricity industry jointly invested $8 billion in 99 cost-shared projects involving more than 200 electric utilities and other organizations. These projects modernized the electric grid, strengthened cybersecurity, improved interoperability, and collected an unprecedented level of performance data on smart grid operations and benefits.

Our report found that many utilities with prepay programs are reporting positive benefits for both their customers and their operations. Consumer benefits include a greater sense of control and management of their budgets and prioritized spending, no surprises on their utility bills, a real-time window into their daily electricity use and spending, and more flexibility to take action to reduce their bills. Prepay programs usually waive any initiation and deposit fees and any reconnection that is necessary can be implemented quickly without charge. On the operational side, with consumers better informed about their electricity usage and spending, utilities are seeing improved relationships with their customers. In addition, since some prepay plans allow consumers with prior balances to maintain their service while paying down their debt, some utilities have been able to recover outstanding debt and reduce write-offs and bad debt risk.

While some report benefits, consumer advocates have concerns about how well prepay serves consumers and whether prepay offers “second-class utility service,” in which consumers lose key protections offered in traditional utility plans. Advocates also highlight larger issues, such as affordability, that prepay alone may not be able to address. Some advocates say that prepay offers diminished consumer protection and utility service, that the value of prepay to consumers’ needs to be demonstrated, and question why the benefits and positive features of prepay are not incorporated into traditional service. Another concern is that with traditional service and without advanced meters, there is a lag between final notification and actual disconnection, which gives consumers additional days or weeks of service. Advocates are also concerned that low-income consumers may be targeted or feel forced into prepay programs because they don’t have the resources to meet traditional utility payment requirements. In addition, they worry that low-income consumers on prepay may go without electricity service — which is considered an essential service, particularly with regard to heating and cooling.

The arguments around prepaid utility service benefits are unresolved. Utilities want to offer new services, and advocates want to ensure consumers are protected. Prepay is a new payment option that uses new approaches and technologies for payment, notification, information collection, and connection and disconnection. Like many other new services and products that are now possible with advanced technologies, prepay will not be a good fit for everyone.

A Need for More Informed Analysis and Debate

As utilities across the country continue to roll out prepay programs, additional research into consumer motivations and behavior under prepay programs and wider discussion of the benefits and limitations would broaden everyone’s understanding and could help ensure that a service that can help consumers isn’t discarded before we understand the full range of its benefits and limitations. For example, collecting and analyzing clearer, credible data on energy use reductions and consumer disconnections would help shed light on how and why prepay leads to a reduction in energy use, determine whether specific features of prepay could be incorporated into traditional payment options to achieve similar usage reductions, and help utilities design services that allow consumers to conserve energy. Demonstrating the value and accessibility of technology solutions used to communicate with consumers and exploring whether prepay has broader appeal would help the industry better evaluate and address benefits and issues around prepay for a broader range of consumer groups.

Using prepay plans as a learning laboratory would help utilities better understand how prepay benefits are achieved (e.g., why consumers are using less electricity) and how they can be extended to traditional service for all consumers —an understanding important for future conservation efforts. This knowledge could also inform future programs and approaches for consumers of all income levels.

In addition, investigating and testing other opportunities that don’t require prepay or that can be incorporated into prepay programs, such as budget billing and special rates for low-income consumers would provide valuable insight into improving affordability.

Assessing the level of consumer protection in current prepaid utility plans to determine whether consumers in prepay are at risk, for example, by creating a consumer protection scorecard or a similar device, would also be helpful to bridging the gaps in the debates. Since the debate around prepay often involves two disparate issues — prepay’s effectiveness as a payment option and its ability to make electricity service more affordable for low-income consumers — conducting the discussion of these two issues separately could help facilitate dialogue that may resolve opposing views on prepay and lead to better program designs for both prepay and traditional services.

A more detailed discussion and analysis can be found in the Bridging the Gaps on Prepaid Utility Service report which is available for downloading at http://www.energy.gov/oe/downloads/bridginggaps- prepaid-utility-service.

Merrill Smith is a Program Manager the U.S. Department of Energy’s Office of Electricity Delivery and Energy Reliability.