There are two alternatives for securing payment for electricity consumption. (For the purpose of this paper, electricity consumption is deemed to include network, line or other supply charges).
1. Prepayment, where the consumer is required to make payment ahead of receiving supply. When this credit expires, he is denied further supply until another up-front payment is made.
2. Billed payment, where the consumer is allowed to receive supply ahead of making payments, placing the consumer in debt to the retailer.
Prepayment technologies have been around since the inception of reticulated power systems. Although they appear simple to administer and offer guarantee of payment, they also have a significant number of drawbacks.
Security – Early ‘coin in the slot’ meters were prone to theft of the cash or insertion of counterfeit coins. The personal risk to collectors was also a problem. Furthermore, the cash held in the meters was ‘dead’ money until it had been collected, and thus still exposed the electricity retailer to cash flow issues.
Modern electronic systems avoid most of these issues, although they can still be defrauded. There is also a significant (although declining) cost differential between a basic and a prepay meter.
Pricing – Prepayment meters need to know the ‘pricing rules’ in order to deduct the correct monetary value from the prepaid amount. This implies the need to have either a very simple set of tariffs, or a complex processing (and tariff update) capability within the meter. This adds further cost differential to the meter, and requires verification processes to ensure that the rules are being applied correctly.
The pricing issue becomes more complex in markets where the customer is free to choose between retailers offering differing pricing schemes. Who ‘owns’ the meter? Who ensures the meter has the correct pricing algorithms, and so on?
Market Settlement – Unless there is feedback from the meter, actual consumption patterns are unknown. All that can be established is the value of prepayments made and the amount of electricity supplied to the network. There will always be an amount of unused prepayments – for example, lost prepaid cards. If there are multiple retailers operating in a network, allocation of the cost of actual consumption to each retailer is impossible without feedback from the meters.
Customer Acceptance – Supply is terminated when the prepayment credit expires. As the meter is unable to make a situational judgement, the disconnection could result in extreme consequences for consumers. This is particularly the case if modern vending methods such as the ability to buy credit over the Internet, or by sending a text (SMS) message, are not available.
Hidden Costs – Studies in the European Union have shown that prepayment users pay extra ‘hidden’ costs associated with their payment method. The Australia National Audit Office reported that in one region prepayment metering tariffs were 20% more expensive than other payment methods. Consumer advocacy groups in the UK and Australia believe that prepayment systems disadvantage the poor. They contend that they incur higher and less flexible tariffs, and impose summary disconnections.
BILLED PAYMENT SYSTEMS
Billed payment systems overcome the vast majority of the issues with prepayment meters. However, the downside to the retailers is the increased credit risk they face due to two factors.
1. Cash flow exposure – Retailers (and generators) are typically required to pay their costs within a short period after the electricity has been generated. They will not receive payment, though, until they have produced a bill and the customer has had time to pay it.
2. Bad debt exposure – There will be customers who either cannot or will not pay the bill.
CASH FLOW MANAGEMENT
Bonds / Deposits
Asking customers for a bond or deposit is one of the options to deal with both the cash flow and bad debt risks. In competitive markets, however, it may not be feasible forretailers to make such payments because of competitive pressures.
The costs associated with periodic manual meter readings dictate that many utilities read their customers’ meters less frequently than they’d wish. Quarterly reading cycles, giving rise to quarterly bills, implicitly allow customers 90 days’ credit. For a utility with 100,000 customers, this implies unbilled debt of $21 million at an annual interest cost of around $1 million. If interim estimated readings are used to issue monthly bills, the cash position is improved by $14 million with an interest reduction of $700,000 (see Table 1).
One additional side effect of interim estimated billing is that customers receive smaller and more frequent bills, which are easier to plan for and pay. One utility reported a 22% reduction in its aged debt position, and a 15% reduction in its costs of managing bad and overdue debt, after having introduced interim estimated billing.
Budget Billing (Bill Smoothing)
With budget billing (also known as bill or payment smoothing) the anticipated annual consumption is divided into equal (typically) monthly instalments. At the end of the year, the customer can be given the option of making (or receiving) a ‘wash-up’ payment, or of adjusting the following year’s smoothed payments by the difference.
Figures 1 and 2 illustrate a smoothed billing sequence.
Figure 1 – The monthly payment and actual consumption pattern
Figure 2 – The cumulative effect of the monthly figures
The advantages of budget billing accrue to both the retailer and the customer.
• Regular payments can be made automatically from customers’ bank accounts, reducing transaction costs and removing the risk of ‘forgetting’ payments.
• Only one bill per year need be calculated, reducing billing costs. (Reads can still be taken if required for market and/or reconciliation purposes).
• Customers find budgeting for payments easier, knowing that there is stability over the year. Payment Options (Channels) and Incentives Several surveys have shown that significant numbers of customers fail to make bill payments by the due date merely because of the need to find the time to get their payment to a receiving point. Therefore electricity retailers need to offer a number of payment channels.
A traditional – and often the only – channel for receiving payments is a service desk within the offices of the electricity company. In the UK, a CSE report noted that customers who need to physically go to a payment office were more likely to fall into arrears than users of other payment channels. The same report noted that where a common payment agency (for example a Post Office) was used for multiple bills (electricity, rates, taxes and so on) this problem was significantly reduced.
Electronic Bill Payment / Bank Direct Debit
From a retailer’s perspective, the most reliable form of payment channel is the use of bank direct debit (also known as ABP (automated bill payment) and EBP (electronic bill payment). This has a high take-up level in the UK; 49% of all bills are paid this way (CSE). In the USA 54% of households pay at least one regular bill this way and would pay more bills in this manner if offered (NACHA).
EBP is a mechanism whereby the customer authorises his bank to make payments to retailers when requests are made to the bank by the retailer. The US Automated Clearing House claims an average transaction saving of US11.5 cents can be achieved by this method, compared to payment by cheque.
Internet and B2B Billing
Internet and B2B (Business to Business or EDI) technologies considerably reduce the cost per transaction and remove barriers to timely payment. Business customers are increasingly seeking electronic bill presentation, the options being:
• E-mailed bills – the paper bill is replaced by an electronic document.
• EDI bills – the paper bill is replaced by a file that can be processed by the customer’s accounts payable systems.
• Web site bills – the customer can retrieve billing data from the electricity company web-site. Payment options include on-line credit card payments, and funds transfer via a bank ‘portal’, whereby the customer instructs his bank to transfer funds to the electricity company’s account. This is the preferred choice for business customers.
BAD DEBT MANAGEMENT
The goals of debt management are to:
• Minimise the cost of debt recovery costs.
• Maximise debt recovery levels (minimise write-offs).
• Maintain revenue streams.
The threat of disconnection works by encouraging consumers to prioritise utility payment over other essential expenditures. Disconnection is punitive and unhelpful, as it incurs unwanted additional costs on the part of both suppliers and customers.
There are essentially two components to any debt management strategy.
1. A risk scoring system to differentiate the ‘good’ customers from the ‘risk’ customers.
2. A set of communications and debt recovery processes, to provide options for dealing with each customer on the basis of his risk score and the age of the debt.