New developments in prepay services
Frequently, electric utilities in the United States have expressed an interest in prepaid metering programs. Generally, utilities view a prepay program as an opportunity to provide a new customer billing option that can: increase revenue, increase cash flow, reduce delinquent payments, and reduce the number of customer disconnects/reconnects. However, despite this interest, there is not a widespread deployment of prepay programs within U.S. utilities. As a matter of perspective, in 2005 it was reported that there were approximately 6 million prepay meters in 40 countries while only 100,000 of those included in this number reflect prepay meters in the United States.
While the benefits that can be realized by both the utility and the customers who partake in these programs can be significant, frequently there can be many obstacles to achieving a level of success and adoption.
Among the greatest barrier many utilities face is opposition from regulators and customer advocacy groups who often take the position that prepaid metering is a service that is discriminatory. Their claim is that prepay metering programs are created to exclusively target high-risk, slow or repeated delinquent customers. Despite this fear, most of programs in the United States offer prepayment as service delivery and payment option, frequently leaving it to the customer to choose to participate in this program.
Another barrier has been the incremental costs that the utility must undertake to offer this program. However as more and more intelligent meters are developed and deployed in utility Advanced Metering Infrastructure (AMI) programs, the incorporation of an under-the-glass service disconnect relay, bi-directional communications network and robust back office systems are becoming the norm rather than the exception from most of the leading suppliers of these elements.
While the changes to opposition and technology are evolving, the present conditions of these obstacles have resulted in a current state where less than 5% of U.S. utilities today offer any type of prepayment programs to its customers.
Although the overall penetration of prepayment in the United States is relatively small, the statistics gathered from these programs show that many of the anticipated benefits, such as customer satisfaction with these programs, and reduced delinquency costs can indeed be realized. However, often many of the substantial benefits can only be realized over time.
The prepay market culture
The prepay market in the Unites States when compared to the programs in other countries looks very different. Other than Salt River Project (SRP), the largest North American prepay meter program installation, only a small number of U.S. utilities have implemented prepay programs and most of these have been with municipal and cooperative utilities.
Whereas, in the UK, there are more than 3 million prepaid electricity meters in use today. ESKOM, who generates 95% of the electricity in South Africa, has installed over 2.6 million key pad type prepaid meters during the past 10 years.
The Office of Gas and Electricity Markets (Ofgem) has the responsibility of market regulator for the electricity and gas markets in the United Kingdom. This group has performed extensive research on prepayment meters and examined the current practices in the UK. Below are some interesting findings from their research.
Prepayment meters should be used to recover electricity debts;
Competition in metering to enable the cost of a prepayment meter to come down;
Most people who have prepayment meters are content with them;
Customer program switching could be blocked if the supplier has not yet recovered costs of meter installation. Approximately 13% of all meters (or 5.9 million meters) are prepayment meters (electric, water, gas);
Approximately 14 % of program customers are repaying debts with their meters; and
There are fewer disconnections in the UK for reasons of debt (only 1,361 in 2003; versus 70,000 in 1990).
Ofgem plays a major role in the prepay program and oversees how it is implemented. The processes in the UK are regulated and Ofgem is charged to protect the customer, as well as the utility. Their best practices assist in helping the utility recover debt or lost revenues, but at the same time, customers do not have to be concerned about losing their electricity (See [1] for those special cases). Like the UK, other country regulators have implemented similar processes and rules to govern their prepay programs.
Contrary to the UK and other countries, the United States prepaid metering programs operate differently. Utilities define their potential prepay programs, outline the program implementation strategy, and then submit a proposal for approval to their respective utility commission. The proposal is reviewed and any opposition (from the community or outside groups) is heard before the proposal for the program is accepted or denied.
Table 1 shows the customer base percentage of prepaid meters* across the world. Three U.S. utilities that have significant prepaid meter programs are listed. Salt River Project is the most widely recognized of all U.S. utilities with its 50,000 prepaid meters. Also listed is data from the South African utility, ESKOM, and from the United Kingdom. At first glance, the magnitude of meters in both South Africa and the United Kingdom appear to be significant in comparison to the U.S. utilities. However, as a percentage of the overall customer base, the utilities in the United States listed above have a larger percentage of its customer base participating in these programs than either Africa or the UK.
While this comparison shows the growing acceptance in the specific markets identified, the overall penetration of prepaid in general in the United States is very low.
Prepay system infrastructure and how it works
Most utilities share common practices when implementing their prepay programs. Customer participation is voluntary and the utility decides whether or not an initiation fee is charged. There are four major components in a prepay system infrastructure:
“Smart” equipment – A prepay meter with an internal disconnect switch (under-the-cover) is installed. Customers are issued “smart” cards, which is uniquely coded to work with an individual customer’s display unit, that are used to purchase electricity for a small transaction fee ($3 or less) per visit.
In-home display - Each residence has a prepay meter and an in-home display installed. The display shows the previous day usage and its cost per kilowatt-hour versus the current day usage. It also compares this usage data to that of the previous month and shows available energy.
Vending stations or kiosks – These are positioned in the service territory to accommodate users. Common locations include grocery stores, convenience stores, and utility offices, which operate from 8:00 am to 5:00 pm Monday through Friday. Many utilities will provide a 24-hour location as well to accommodate their customers during the nights and weekends.
Back-office system - Provides the link between the customer’s card, their prepay meter, and in-home display to make it possible for the customers to purchase electricity in advance.
Prepay Program Benefits
Initially, many utilities only view prepay programs as an opportunity to minimize their financial risk with delinquent customers. However, with many of the programs that are in place, other benefits have been realized.
Utility perspective
The utilities that have implemented prepay programs have experienced key benefits. Below is a list of the benefit areas:
Increased cash flow - utilities receive payments upfront before providing the service.
Reduced residential delinquent power bills – an in-home display shows when a payment is needed or more power is required before running out
Reduced risk in employee accidents – servicemen going to a residence to perform a service disconnect may meet with opposition.
Increased employee morale and enthusiasm for utility customer service personnel – a reduction in utility employee communication with delinquent customers.
Salt River Project (SRP), who has the largest prepay metering program in the United States, reports that their customers are, on average, reducing their annual electricity usage by 12.8%. While reduced sales may not be viewed as a benefit, the lower consumption can be translated into a lower risk exposure for those who want to better manage their budget. Also, 95% of the prepay customers report they have more control over the electricity they consume.
A Wood County EMC (Texas) official testifies that the prepay program is a more efficient collection method and admits they realized an immediate reduction in time spent on collections. This has also been correlated to an increase in employee satisfaction and efficiency. With just a small pilot of approximately 600 meters, the Wood County prepay program has reduced the amount of time that employees spend dealing with people who are delinquent. Less strain is experienced by their employees and less risk for their servicemen who perform disconnects.
Customer perspective
The customers can also share in the benefits of the prepay program. It provides an additional billing option where they have increased power to manage their energy usage. For example, the cash-and-carry families without a checking account can stop by either the grocery store or convenient store to make a payment. Upon their return home, they can see the increased energy on the display as well as the real time consumption information. A prepay program enables customers to better budget their utility expenses.
Other benefits seen by prepay customers include:
Reduced payment amounts – prepay customers can pay more frequently in smaller amounts, instead of larger sums at one time.
Increased satisfaction about the utility and their services – the absence of having to negotiate and/or discuss billing issues makes for a better relationship or perception of the utility.
Summary
The utilities in the United States that have prepaid metering programs have realized benefits such as increase customer satisfaction, reduction in both the frequency and costs of service disconnects, and improved cash flow. Many utilities have developed long-term goals at the beginning of their program implementation and carefully tracked those goals.
Stand-alone prepay metering systems may have a more difficult economic hurdle to overcome. Typically, these programs require specialized equipment including meters, in-home displays and other unique hardware. Amortizing the costs of the entire specific system will have a high dependency on specific customer take rates.
About Automation Insight
Automation Insight is a complimentary monthly publication designed specifically for the utility industry and those serving the utility industry. For comments or suggestions on future article topics, please e-mail automation.insight@kema.com.
To receive Automation Insight by e-mail, please e-mail automation.insight@kema.com with 'subscribe' in the subject line.
Automation Insight is an opt-in subscription. KEMA does not sell or otherwise make public subscriber information and honors all ‘unsubscribe’ requests. To unsubscribe, please e-mail automation.insight@kema.com with 'unsubscribe' in the subject line.