• Pros and Cons of Prepaid Utilities
  • August 19, 2014 | Author: Timothy K. Spencer
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Brooklyn Heights Office
  • In the service provider industry, that cellular phone service providers and utility service providers are at least comparable in nature is likely an acceptable comparison. After all, both cell phone service providers and utility service providers bill their respective customers based on what the consumer has already used, a method called, obviously enough, post-paid basis. It should come as no surprise then that the increased popularity of pre-paid services in the cellular phone industry has led many utility service providers to contemplate the same idea as a cost-saving mechanism. The increase in popularity of the prepaid billing method for utility services has given rise to increased scrutiny over the subject, prompting many to weigh the benefits against the costs of such an idea.

    Technology has played a large part in the advent of prepaid utility services. For instance, the increased implementation of advanced metering infrastructure (AMI) enables more and more companies to control, monitor, activate and deactivate customers' electrical meters, making tasks such as meter reading and service suspension not only immediate but cheaper.1 AMIs "deployed in conjunction with newer power grids are easily programmed to enable prepaid billing and remote disconnections."2 These capabilities may generate a number of cost-saving benefits.

    Proponents of the prepaid billing method for utilities tout its money-saving ability as well as its ability to allow the consumer to control their usage by adjusting their behavior in response to real-time data. Financially, each year on average, utility companies send disconnect notices to nearly 10 percent of all residential customers each month; approximately 3 to 5 percent of those services are actually disconnected.3 In one study, "AT&T estimated that a utility with 250,000 customers and a 10 percent penetration rate4 would save between $5 million and $15 million per year [utilizing prepaid services]."5 With prepaid services, once the money credits in a customer's account are depleted, the service is automatically suspended until more credits are added; customers would, theoretically, receive notice when the account was nearly depleted.6 Automatic notices would be sent to customers with low and depleted balances, thus eliminating costs associated with mail notices and balance-collection costs.7 Customers would have access to real-time data to control their usage to avoid low and depleted credit balances.

    Allowing customers to access real-time energy data would enable those customers to appreciate their own usage and how they may curb that usage in order to save money. By providing customers information on their own usage, utility companies position the customers to make cuts in electrical use and avoid excessive usage, ultimately saving the consumer money.8 Customers would have access to energy data such as average daily usage and remaining credits; "this information can be delivered online, though text messages, e-mail or smartphone apps, or via postcard-sized, in-home displays that plug into electrical outlets."9 The enhanced knowledge would increase customer control over their own bills to reduce usage as desired. Customers may also realize some gains in the way of avoiding security deposits when signing up for utility service and foregoing late fees when bills are late.

    Many utility service providers require a security deposit for low-income individuals. With prepaid systems, the need for a deposit would vanish, making utilities presumably more affordable. Additionally, since the prepaid system does not utilize due dates (only automatic suspensions when an account's credits are depleted), no late fees would accrue on an account. Despite these and other benefits, opponents of prepaid services cite concerns over automatic service suspensions and question the purported benefits claimed by supporters.

    Perhaps the most severe concern surrounding the prepaid technology is the ability of the customer's utility service to be shut off automatically. "People who use prepaid services are disconnected a lot more frequently than people on traditional postpaid utility service."10 More concerning is that, without regulations to the contrary, utility service providers would have the ability to automatically disconnect service irrespective of outside temperatures, weather conditions, or other events surrounding the customer's area.11 Customers who are low on credits in a given month may need to decide between disconnection or sacrificing basic amenities such as a comfortable household temperature, running water or electricity. Even those cost-saving mechanisms touted by proponents of prepaid utility service may be somewhat illusory.

    While prepaid services may enable low-income individuals to obtain utility services without the need for a security deposit, the consequential costs associated with prepaid services may off-set that financial benefit. One study on prepaid services found that "prepaid service rates are in all cases in the U.S. equal to or higher than those paid by similarly-situated credit-based customers."12 Moreover, "although proponents of prepayment point to the prospect of foregone security deposits and late payment fees, companies often charge prepaid customers high rates, equipment deposits and a range of new services fees." These fees sometimes even include fees for making multiple payments in a given month, payments often made to avoid service suspension.13 While these obvious pitfalls to prepaid utility services may be curbed or eliminated entirely, their existence may render the idea of prepaid services fruitless. In the end, thorough analysis is necessary to determine the true net benefit of prepaid utility services.

    As prepaid billing begins to pick up speed in the utility world, largely enabled by its popularity in other fields as well as enabling technology, providers must thoroughly evaluate the impact of offering it to its customers. While a provider may realize a reduction in its own cost and an increase in its customers' understanding of their own usage, those gains may be offset by the cost of installing necessary technologies to field prepaid billing services and the burden of complying with regulations likely to develop in response to the increased popularity of prepaid billing services. In addition, utilities offering prepaid services may come under fire for creating a system in which their customers are forced to choose between service disconnection and cutting back on vital services.

    1 David Hatch, Rise of Prepaid Electricity Brings Scrutiny,
    http://www.governing.com/blogs/view/Rise-of-Prepaid-Electricity-Brings-Scrutiny-.html
    (September 5, 2012).
    2 Id.
    3 Hatch, Supra Note 1.
    4 The percentage of the utility company's customer base that utilizes the prepaid system.
    5 Id.
    6 Hatch, Supra Note 1.
    7 Id.
    8 Hatch Supra Note 1.
    9 Id.
    10 JOHN HOWAT, RETHINKING PREPAID UTILITY SERVICE: CUSTOMERS AT RISK, NATIONAL CONSUMER LAW CENTER 16 (2012),
    http://www.nclc.org/images/pdf/energy&under;utility&under;telecom/consumer&under;protection&under;and&under;regulatory&under;issues/report&under;prepaid&under;utility.pdf
    11 Ann Carrns, Prepaid Utility Accounts Gain Popularity, and Scrutiny,
    http://bucks.blogs.nytimes.com/2012/07/11/prepaid-utility-accounts-gain-popularity-and-scrutiny/?&under;php=true&&under;type=blogs&&under;php=true&&under;type=blogs&&under;php=true&&under;type=blogs&&under;php=true&&under;type=blogs&&under;php=true&&under;type=blogs&&under;r=4
    (July 11, 2012).
    12 HOWAT, Supra Note 9.
    13 Id.