Prepaid Programs: The Answer to Write-Offs, Bad Debts, and Debt Collection

Jeffrey Severs | Sep 10, 2009

Share/Save  
Prepaid programs are taking the utility industry by storm. Once accused of preying on low-income households by forcing them to choose non-traditional billing methods, optional prepaid programs have rapidly grown in popularity in recent years, dispelling many of the myths surrounding their adoption.

It is now abundantly clear that prepaid billing systems present a win-win situation for consumers and utilities. From the consumer's perspective, prepaid billing increases transparency, raises awareness of energy consumption, and simplifies payments and budgeting. From the utility's perspective, prepaid billing streamlines customer service, improves service offerings, and -- most importantly -- reduces or eliminates write-offs, bad debts, and debt collection efforts.

Traditional vs. Prepaid Billing

First, let's take a moment to recall how traditional billing works. In the traditional model, a utility provides a service for a period of time and then calculates the charges and issues a bill. If that bill isn't paid, it becomes aged receivables and collection efforts begin. If the collection efforts fail, the utility disconnects the customer and writes off the loss as bad debt. Every business using the traditional billing model has some amount of write-offs, but for many utilities the total amount is staggering.

In contrast, a prepaid billing model allows the consumer to pay for a service prior to delivery. As the service is provided, the consumer's balance is reduced until the account balance is exhausted. When this occurs, service is disconnected until the credit balance is restored. With prepaid programs, customers pose no credit risk to the utility, and collection efforts are no longer necessary, because there is never a past-due balance.

Benefits to the Consumer

Although this article focuses on the benefits that accrue to utilities, it makes sense to briefly consider the consumer's perspective. The prepaid model gives customers greater insight into their energy usage, demonstrating how their daily energy choices directly affect how much they pay. Industry expert Chartwell, Inc. has documented that prepay customers use 15-20 percent less electricity per month than customers in a traditional billing model, which promotes energy conservation and frees up utilities' resources during peak hours.

More importantly, prepaid services are a saving grace for customers who struggle to pay their bills each month. Voluntary, opt-in prepaid systems give customers greater control over their budgeting practices, making it possible for them to deposit funds when they are paid, rather than paying a bill once a month. Under a prepaid system, customers never have to come up with a large deposit, and they never incur late fees or interest. If they fall behind on their payments, service is disconnected, but it is reconnected almost immediately after they make another deposit.

Benefits to the Utility

Prepaid systems improve customer satisfaction for all the reasons described above. That alone could be enough motivation for utilities to adopt prepaid programs, but utilities also benefit in many other ways. With a prepaid system, customer service representatives no longer have to request high up-front deposits or deal with customers' pleas to waive late payments or reconnection fees. Customer service representatives enjoy being able to offer prepaid services as an affordable alternative to customers who would otherwise struggle to pay the initial deposit. In addition, when a prepaid system is integrated with the utility's customer information system (CIS), existing payment methods remain in place. This gives customers the flexibility to pay at kiosks, with credit/debit cards, over the phone, online, or even through text messaging. The latest prepaid models do not require tokens or charge cards.

However, the greatest benefits of prepaid services, from a utility's perspective, are financial. With prepaid services, utilities have the potential to eliminate their write-offs, bad debts, and collection efforts. Even with only partial adoption of prepaid services, utilities can dramatically reduce those expenses. The early adopters of prepaid services are already reaping the financial benefits, as described below.

The Cost Savings of the Prepaid Billing Model

Central Electric Membership Corporation of North Carolina began offering prepaid services in 2007 and saw a 40 percent reduction in its write-offs in its first full year. Angela Hare, director of information systems, attributes that decrease primarily to Central Electric's new ability to offer prepaid services to at-risk customers. "In the past, a customer might disappear with two or three unpaid bills and, depending on the time of year, that could represent $500 to $600," explains Ms. Hare. "Now that they're paying it forward, they never owe more than just a couple days' [worth of energy] at best."

Another U.S. utility has seen its write-offs drop from 0.47 percent to 0.17 percent of revenues in the four years since it began offering prepaid services. That's a 64 percent decrease, representing about $140,000 in cost savings.

Oklahoma Electric Cooperative began offering prepaid billing in 2006 and reports that even though it is following its policies more strictly than before, it is now disconnecting only 10-20 percent of the accounts that it was disconnecting four years ago. Charles Barton, chief financial officer, states that now, whenever an account is about to be disconnected, Oklahoma Electric offers prepaid services as an alternative. So far, more than 5 percent of the 48,000 accounts have opted for the prepay system, and he anticipates that 20 percent (approximately 10,000) of the accounts will be have opted to use prepaid billing by 2014.

Prepaid billing has greatly reduced the cooperative's write-offs. Oklahoma Electric even had its first "negative charge-off" last month, when the collection agency collected more than was written off. This was unprecedented. "In the past, when accountholders have declared bankruptcy, we've had to write off $200 to $400 for each account," explains Mr. Barton. "But when a bankruptcy came in the other day, there was a zero charge-off." He reports that the only way Oklahoma Electric can lose money on a prepaid account is if someone writes a bad check, and in that case the loss is minimal.

Future Developments

Prepaid models continue to evolve, taking advantage of new technological developments to build on their early successes. As iPhones, BlackBerry devices, and other PDAs become increasingly sophisticated, the utilities that offer prepaid services are beginning to turn to SMS text messaging for customer service, billing, and payment functions. Skeptics question the role of text messaging in business, but the trends speak for themselves. The growing use of cell phones has been accompanied by an exponential increase in text messaging. Global leader i2SMS reports that more than 3.5 billion messages were sent each day in 2008. European and Asian companies are already using text messaging as an integral part of their business model, and American companies will surely follow suit.

A new iPhone application called MyUsage is already leading the way, letting utility customers monitor their usage, view their bills, and send payments through their mobile devices. Developers continue to integrate software-based prepaid services into handheld devices, seeking greater convenience and better customer service. The more these developments meet customers' needs, the more utilities will reap the financial benefits of offering prepaid services to an ever larger percentage of their customers.

Conclusion

Prepaid services give utilities a simple way to improve customer service while improving their bottom line. Rarely does a new technology offer a cost-effective way to benefit both consumers and utilities, yet that is precisely what the prepaid model promises to do. As the financial benefits of software-based prepaid utility services become more widely known, the prepaid model will become increasingly common across the United States and throughout the world.

Related Topics

Comments

Interesting.

I guess I am far out of date. I thought an urban house without electricity or without water service was legally uninhabitable, hence cutting off service required some kind of legal process. Water bills, at least, were essentially uncollectable and some people never paid them. Before there were credit ratings you might be asked to show paid utility bills to a creditor. If you paid your water bill you were probably OK.

To Don - you are realy far out of date. There are very few places sill offering a free lunch. At the Israel Flectric Corp (IEC) we had almost 100,000 disconnections on 2.4 M customers. We have recently deployed 8000 prepaid meters and we dropped to 70,000' and aim at 0.
What I liked about Jeffrey's article, being familiar with the pros and cons, was his vision of the future. We are updating our specification for a second order of some 20,000 meters and we are looking into the option of mandating sms communication. Any information in this specific area will be more than welcome.
As to the expected level of penetration - the UK stands on a steady 10%
Gary Schaffer

Thanks for the information Gary. My comment refered only to the US. A 4% disconnect rate in Isreal strikes me as high enough to require taking some kind of remedy, and it seems you have found it with prepayment.

I wonder if pre-payments might increase theft by hot tapping. For example I am aware of obvious, persistent, and widescale electricity theft in Mexico. At least this saves the cost of meters of any type.

Don,

Hot tapping or bypassing ones meter by tapping into the main feed ahead of the meter is very tricky and dangerous, the vast majority of customers on a grid are incapable of it. It is typically only pot growers who routinely do it since they use huge amounts of electricity.

Besides, with enough smart grid technology applied to utility asset management, in principle a utility company will be able to detect theft from hot tapping when say a local distribution transformer is detected as delivering much more energy than the total being billed to all the customers on that transformer. Isn’t hi-tech just wonderful, it can even help solve crimes!