Prepay Plans for Electricity Offer Alternative to the Usual Monthly Power Bill

Proponents see opportunity for conservation, but critics warn of risks for consumers.

During the summer, temperatures in the Dallas suburb of Seagoville often approach triple digits. "If you add 15 degrees to the Dallas high, that's how hot it is," says Cameron Donaldson, a Seagoville resident.

Donaldson is among a growing number of electricity users around the country who are buying power for their homes up front, as they would buy minutes on a phone card, rather than paying monthly for power after they use it.

With electricity prices steadily rising in the United States and utilities adopting new pricing models to take advantage of smart grid technology and faster communications, prepay is one billing option that is gaining ground. Proponents of the new prepay models say they can give customers like Donaldson more control over their energy usage and costs while encouraging conservation.

That's how prepayment has worked out for Chloe Raynes, who runs a pet services business in Tennessee. Last year, she was living in Osceola, Wisconsin, near the St. Croix river, and paying for electricity up front through the Polk-Burnett Electric Cooperative.

"It did make me turn off the lights more. You become much more aware of how much you are consuming when you prepay and your electricity is turned off when you owe 50 cents," she said. "When you budget, say, $50 a week to electricity, you want to stay within that."

But Donaldson found that consequences can be swift when that budgeted amount runs out. He recalls coming home from his job at a flower nursery one sweltering summer day to find the power turned off. "All the food in the fridge is ruined, water [is] all over the floor from the freezer ice melting. Then I get an email saying my balance is low," he said.

Deprivation, or Conservation?

The Distributed Energy Financial Group, a consulting firm, found in a recent study of about 1,400 customers enrolled in prepay electric service in the U.S. Northwest that their energy use dropped by between 5.5 percent and 14 percent. In Arizona, one of the nation's oldest and largest prepay programs, called M-Power, reports energy savings in the high end of that range.

Over the past decade, M-Power customers have reduced energy use on average by 12 percent, according to Michael Mendonca, senior director of revenue cycle services for Salt River Project (SRP), the public utility that runs M-Power. SRP "absolutely" sees the prepay model as an effective way to promote energy conservation, Mendonca said.

"Those on prepay are simply more cognizant of their energy use," Mendonca said. In-home displays show M-Power customers energy use data, such as the sharp uptick that would result from an air conditioner kicking on, in close to real time. SRP reports some 80 percent of customers end up using less electricity on M-Power, and about two-thirds report having more discussions as a family about energy use.

Nearly 20 years after M-Power got its start, proposals for prepaid service in the United States are now on the rise. Yet critics of prepay worry that if these models reduce electricity use, it's for the wrong reasons.

"This is an issue of economic justice," said Jennifer Miller, the Sierra Club's senior campaign representative for energy efficiency. "When they end up saving energy, it's because of how difficult it is to pay. It's deprivation, not conservation."

Carol Biedrzycki, director of the nonprofit Texas Ratepayers' Organization to Save Energy, or Texas ROSE, agrees. "They say people use less electricity. Well, why? Probably because they're running out of money and they can't afford more money on their account, and so they live without electricity for some time period."

In a society where having continuous electricity is essential to daily life, Biedrzycki said, the prepay model creates a "second-class utility customer who doesn't need to have power all the time."

How Much Power for the Price?

Prepaid service has already taken hold in many countries around the world, including the United Kingdom, South Africa, and New Zealand. Globally, the market research firm Navigant Research has projected that the number of installed electricity meters (like M-Power's in-home displays) designed for prepayment in 2017 will number nearly 34 million, up from 20 million in 2011.

But in parts of the developing world where prepaid electricity is more prevalent, the service is often "the only game in town," said John Howat, senior energy analyst with the National Consumer Law Center (NCLC). On Haiti's southern peninsula, for example, prepaid service launched in late 2012 has helped residents move from candles and kerosene to grid electricity.

When people are choosing between prepaid electricity or no electricity, rather than prepaid or monthly billing, the prepaid model offers a clear path to increasing access. "Living without electricity service is not a matter of life and death," Howat said. "It doesn't play the same role in the ability to function in society, generally, that it does in the United States."

While many consumers do not often think of it this way, paying bills at the end of the month affords a kind of short-term credit between the time we use electricity and the time we pay for it. "Most people live paycheck to paycheck, and by having payments due once a month it provides a little bit of leeway," Biedrzycki said.

At the same time, monthly bills can cloud a consumer's ability to link, say, the decision to crank up an air conditioner or add an extra appliance, and a subsequent uptick in spending.

The stakes are huge. Residential energy use is a large enough piece of the U.S. energy equation that significantly slashing demand in our homes could enable cheaper energy—"not just cheaper bills, but cheaper energy," said Miller. "When demand goes down, price goes down." It could also play into new efforts by the Environmental Protection Agency to reduce demand as part of proposed targets for reducing overall emissions from existing power plants.

But prepay programs offer an imperfect solution for this disconnect, in part because the price per kilowatt-hour on many plans can vary from month to month and season to season. "A phone card was never considered to be a great deal, but you bought a card that said you have 20 minutes, 60 minutes, 120 minutes," Biedrzycki said. Because few prepay plans offer a guaranteed rate, it's difficult to make a reliable budget. "You have no idea how much power you're getting for that amount." In this sense, when prepay customers have variable electricity rates, it's like buying a dollar value of gas each week rather than filling the tank.

And the short-term credit built into monthly billing models disappears when customers pay up front.  "If that [prepaid] meter goes out two days before payday and you don't have two dimes to rub together," she said, "you have to go two days without electricity."

M-Power users "typically skew a little lower as far as average income," Mendonca said, noting that "It actually can work well for customers who might be struggling financially. This provides an opportunity to pay at their own intervals instead of waiting for the big bill at the end of the month."

When the Credit Runs Out

For better or worse, shutoff can happen swiftly when funds run low. Advanced meters make it possible to disconnect service remotely, and according to the NCLC, utilities are typically relieved of obligations they would otherwise face to notify customers by mail when shutoff is looming, to maintain service for days or weeks after a bill comes due, or provide payment plans.

Most public assistance programs meant to help low-income customers keep the lights on (not to mention medical equipment, heat, and cooling), have been designed to provide aid in the conventional environment of paying after usage. "A lot of the agencies that provide energy assistance will not provide assistance for prepaid service. If it's prepaid, it's more difficult to track the money and what happens to it," Biedrzycki said.

SRP has taken steps to help M-Power customers avoid involuntary disconnection. Customers cannot be cut off between 6 p.m. and 6 a.m., Mendonca said, "so people don't find themselves running out of power in the middle of the night." When an account runs low, the in-home display has an audible warning. Customers can also activate emergency credit using a code provided by SRP over the phone.

"They can put power on that if for whatever reason they need some last-minute power," he said. According to the M-Power user manual, this stopgap is designed for the "unlikely event of a widespread failure of the SRP PayCenter network that prevents you from buying energy credit." The energy used during this emergency period is then deducted from the customer's next credit purchase.

Nonetheless, "To look realistically at prepaid service, you have to look at it as a credit and collection tool," said Howat. "This is the ultimate way for utilities to not have to deal with customers who have challenges making ends meet and have trouble paying all of their utility bills on time. Your service is just automatically and remotely disconnected."

With traditional service, a host of rules surrounding notification, disconnection, the right to dispute a bill or set up deferred payment, and other aspects of payment have been established to protect U.S. electricity consumers. "Each state has co-developed a set of [regulations] that deal with protecting vulnerable customers from loss of service," Howat said, "but also recognize that electric and natural gas services are truly necessities of life and should be treated differently than other commodities in the marketplace."

Cooperatively and municipally owned U.S. utilities that are subject to less government oversight have been among the earliest to offer prepay service. But more utilities are beginning to show interest in the model. In California, the utility San Diego Gas & Electric proposed piloting a program that would have let residential customers opt into a prepayment model. These customers could sign up without the usual requirements to put down a two-month deposit and pay off prior debts, and they wouldn't face fees for reconnection.

But in the proposed program, electric service would also be disconnected if a customer's balance remained at zero for just four days. "The shorter disconnection period is a necessary trade-off for not requiring a two-month deposit from Prepay customers," the utility explained in testimony to public utility regulators.

In the view of Miller, of the Sierra Club, "Utilities are trying to justify easier billing arrangements for themselves under the guise of energy efficiency and conservation."

But communication between utilities and customers is getting easier, too. In a 2012 report published by the California Public Utilities Commission, the regulators note that "disruptive technologies" like advanced metering, smartphones, and various online tools "require a new look at long-held customer protections." When consumer protection rules were created, the PUC notes, "a customer's meter was read once a month and a customer only knew about their usage from their monthly utility bill. In that context, it made sense to have shut-off warnings mailed weeks in advance."

Even so, California regulators ultimately rejected SDG&E's prepay proposal late last year, citing concerns that customers might not receive text, phone, or email messages warning of disconnection, because the same customers who fall behind on electric bills might also be late on their Internet and phone bills.

At a time when text messaging, email, smartphones, and advanced metering make it easier to send customers more frequent reports on electricity usage, account balance, and disconnection timelines, however, some advocates see potential in the prepay model to provide real benefits for consumers as well as the environment. Ralph Cavanagh, co-director of the Natural Resources Defense Council's energy program, pointed to criteria developed by the National Association of State Utility Consumer Advocates (NASUCA) that he believes can help prevent prepaid service from becoming a "backstop for bill collection."

Cavanagh said, "We do not want what is at least being presented as an energy efficiency approach to be hijacked for that purpose." Among other criteria, NASUCA calls for prepaid programs to market themselves purely as a voluntary service and to offer rates that are lower than those for comparable post-pay service.

Cavanagh sees no problem with using digital technology to give people more and better information about their energy use. "The issue here is using that technology to interrupt their service," he said, especially for customers who may need the most protection. "The consumer advocacy movement is rightly worried constantly about the most vulnerable and least sophisticated customers," he said. In criticism of prepay programs, he said, "part of what you're seeing is a legitimate concern about aspects of the public that aren't fully comfortable about the Internet."

For Come-and-Go Residents, Pay-as-You-Go Benefits

It's not only low-budget energy sippers who are paying in advance. "Customers across all of our usage strata are on the program, from the lowest to the highest usage," Mendonca said.

For a college student who leaves his apartment empty during spring break, or an executive who doesn't need power at home during her frequent business trips, prepay programs make it possible to let electric service come and go as needed, without the hassle and fees associated with traditional connection and disconnection.

The key is that these lapses are voluntary. "The happy medium ought to be to let those who are sophisticated users of the Internet and digital technologies take full advantage of them in how they manage their energy use," Cavanagh said. According to DEFG research, customers enrolled in Oklahoma Electric Cooperative's prepay program reduce energy use by an average of 11 percent, or about $192 per year; that's attributable, the firm says, "to usage reductions while service is connected and is not a consequence of service disruption."

If the goal is to encourage energy conservation, prepay programs could fit into larger, more holistic efforts to help customers do more with less electricity. "I think that if utilities really want to serve low-income customers, they will offer a suite of programs that really serve their needs," Miller said, including free or low-cost weatherization plans and education about energy waste. It's important to "meet customers where they are," in part by helping to demystify energy waste, from "vampire" power to needless heating and cooling of empty homes.

In Osceola, for example, Raynes says she received help with her electricity bills for two months from a county aid program that offered these types of services, though she never took the step of weatherizing her home during the year that she lived there.

Changing habits at large scale can make a difference. The California energy crisis of 2000 and 2001, for example, "was an unintended experiment in how much you can accomplish with short-term behavioral change," Cavanagh said. Consumers were highly motivated to do their part to avoid rolling blackouts.

With enough transparency, paying for electricity up front just might help to boost motivation for good. The challenge is to do it in an equitable way. As electric metering continues to evolve, questions about how to best illuminate the links between energy use and energy costs have palpable implications for households. Cavanagh said, "It has something to do with how ordinary folks interact with the system."

This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

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