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Prepaid Metering: Clear Value, Clearer Hurdles.

September 2003 Energy & Utilities

Pre-paid metering for utility services is a win-win-win proposition. Prepaid meter makers such as AMPY (www.ampy.co.uk) and Landis + Gyr (www.landisgyr.com) directly benefit from the sale. Utilities, such as Louisville Gas and Electric (LG&E, www.lgeenergy.com) and Salt River Project (SRP, www.srpnet.com), are able to supply service to the 15% of their customers with a poor history of payment and count on getting paid with the use of prepaid meters. And, for customers in the market segment distinguished by a poor payment history, frequent power shutoffs, and hefty fees for service restoration, prepaid metering is a method to budget their power utilization.

Despite the clear benefits throughout the value chain, adoption of prepaid meter technology and the distribution of its benefits are slow. Prepaid metering is impeded by entrenched advocacy groups that misunderstand the value provided to the poor-payment-history market segment. This impediment can and must be overcome.

In the usual configuration for prepaid metering, purchases of gas and electricity are recorded on a smartcard. This smartcard is then inserted in a display unit mounted within the home. Through the display unit, consumption is recorded and value is removed from the smartcard. Once the smartcard is out of purchased service, the customer can go to the store and purchase more. If they don’t, service is discontinued until the smartcard is reloaded.

Susan Sanchez of LG&E and John Soethe of SRP presented data on the hurdles to deployment and the value from the end-customer perspective of prepaid metering at the recent 2003 AMRA International Symposium. The most significant aspect of their data is its clarification of the misalignment between the concerns of the advocacy groups and the end customer.

First, the customer’s perspective.

At LG&E, prepaid metering is strictly voluntary. Customers can choose between prepaid metering and standard metering. The distinguishing characteristic of customer selecting prepaid metering is their payment history. 95% of the customers electing prepaid meters were in a credit and collections process. For these customers, prepaid metering provides greater value.

Indeed, SRP reports that 84% of the customers using prepaid metering are either very satisfied or somewhat satisfied with the program. 91% of them have a higher or same opinion of SRP after using the prepaid meters. And 91% claim to use electricity more wisely. These are high marks, considering utilities usually struggle to achieve greater than 80% customer satisfaction.

LG&E reports that the number one reason that customers in this segment like prepaid metering is that it puts them in control. Prepaid metering allows customers to control the quantity of power they purchase, the timing of their purchase, and their consumption. As they consume power, a display on the wall indicates their rate of consumption and the amount of power they have left to use. Customers can see that turning off an extra light will save them money and stretch their tight budget.

Given the clear value that a customer places on prepaid metering, we might wonder why it is not more widely used.

Second, the consumer advocates perspective.

Consumer advocates express great concern with programs that can leave those families which are most vulnerable without power. Prepaid metering threatens to do just that. Indeed, the core value of prepaid metering for utilities is the ability to automatically shutoff service if the customer doesn’t pay. Despite the apparent disadvantage in which prepaid metering places customers, the advocacy groups are on the wrong side of the common good in this case.

The chief concerns of advocacy groups over prepaid metering include the distribution of Low Income Home Energy Assistance Program (LIHEAP) funds and the automation of power-shutoffs, specifically during the winter season. Both these concerns and others can be and have been accommodated within a prepaid system. For instance, LIHEAP funds are included on the prepaid smartcard at LG&E. And, at both SRP and LG&E, service shutoff is preceded by a warning display during the summer months and a notification letter ten days in advanced during the winter months. In these regards, the prepaid meter system follows the exact same business rules as does billed service. The customer is at no greater disadvantage with prepaid service than they are with billed service.

Other concerns of the advocacy group vary widely. They claim that people using prepaid meters have a higher churn rate. True, but the market segment that has a history of slow payment typically moves more often than the mass market. Anecdotally, some customers on the prepaid meter system reported that they did not have to move during the winter because they were better able to control their heat. Advocacy groups also demeaningly claim that poor customers using prepaid systems are not able to understand it. Poverty and low-intelligence are not directly correlated and experience has demonstrated that customers with prepaid service are able to manage the system.

Chief Misunderstanding

The chief misunderstanding by these advocacy groups is with respect to market segmentation. They claim that prepaid metering preys upon the vulnerability of the poor. It is likely to be true that many customers with prepaid services are poor, but many poor people routinely pay their utility bill on time and receive standard service. Prepaid metering does not specifically target the poor, rather, it targets customers with a bad payment history.

Advocacy groups greatly misunderstand that market segmentation and product differentiation can lead to the creation of offerings which provide greater value for one segment while remaining distasteful for the mass market. When market segmentation creates luxury products that only the rich would consume, advocacy groups typically remain silent. But, when that same market segmentation tool creates a product that is valued by a disadvantaged group, they cry foul.

Utilities are not alone in garnering the wrath of consumer advocacy groups when creating services designed for bad-credit customers. For instance, Household International (www.household.com) paid $484 million in October 2002 to state governments to settle allegations of predatory mortgage lending. In this case, Household International provided high-interest high-fee loans to customers with sub-prime credit histories. The higher fees were in relation to the higher probability of loan default on behalf of the customers. Despite claims of predatory practices by advocacy groups, many customers of Household International liked their financial products. It provided them with a better credit solution than either high-interest credit card debt or worse, running out of cash with no credit at all.

Providing Clarity

Meeting the concerns of advocacy groups and deploying prepaid utility service is not an insurmountable hurdle. A well designed public relations effort can enable utilities to actually gain the support of local consumer advocacy groups for a prepaid metering solution. This public relations effort should communicate the facts and customer benefits of prepaid service while soliciting and incorporating some of the procedural concerns. Importantly, utilities should plan and initiate the public relations effort prior to filing for regulatory approval for deployment of prepaid service.

Because of the significant value of prepaid metering for the meter makers, utilities, and customers, I doubt it will be long before a PR firm creates a service specifically to meet with advocacy groups and pave the way for prepaid metering. As John Soethe of SRP indicated, “The water’s fine. Jump in.”

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For more information see “Is It Time for Prepaid Gas and Electricity in the States?



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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