Prepayment Metering: A Credit to the U.K. Energy Supply Businesses?

By Ian White

As many of the world’s energy markets open up to competition or liberalization, utilities are becoming more interested in prepayment systems. For many years, the U.K. energy market has contained a high proportion of prepayment customers in both gas and electricity. Currently, approximately 16 percent of electricity customers and 9 percent of gas customers have a prepayment meter installed in their home, compared with 5 percent electricity and 4.3 percent gas in 1990. A recent report released by the U.K. energy regulator OFGEM (Office of Gas and Electricity Markets), which is based on the Mori Survey, indicates that almost three-quarters of prepayment meter customers would not return to a credit meter even if it resulted in cheaper energy bills. These findings have since been reinforced by a research study commissioned by the U.K.’s Electricity Association Fuel Poverty Task Force.

Before utilities were privatized and energy markets were opened up to competition, utilities were able to manage their own customers through their own systems. Prepayment customers required specific infrastructures that allowed them to buy or recharge their tokens at sites local to their homes, and, on average, prepayment customers required more visits than customers with credit meters. These factors tended to increase the cost of managing prepayment customers; therefore, most prepayment customers paid a premium. On the upside though, the supply businesses were assured revenue streams and were able to monitor prepayment customers’ usage. This was usually sufficient compensation for the expensive risks of “no payment” or “late payment,” and made the costs of providing and operating the prepayment systems worthwhile.

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For many years prepayment meters were operated by coins. The tokens developed to replace coins ranged from simple “one shot” magnetic stripe cards to multi-use and multi-function microprocessor based smart cards (Figure 1). Most of these are still in widespread use, but they are not designed with the extra functionality required to operate in a competitive environment. There are still no systems in development designed to overcome these shortcomings.

Problems of the Pre-Privatization Legacy

In the United Kingdom, post-privatization supply companies inherited a prepayment infrastructure from their pre-privatization days. Although there were some common choices of token type (magnetic card, key and smart card), the way companies operated their systems, including tariff charges, generally differed from company to company.

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The systems worked well when each supply company was only responsible for managing its own customers within its own franchise area (Figure 2). Today’s competitive environment, however, is very different. Existing suppliers who win customers outside their franchise area, and the new suppliers who have no franchise area, must negotiate with the company holding the area franchise, known as the host Public Electricity Supplier (PES), to supply services to their new customers.

Available Options

The fundamental options available to suppliers wanting to operate on a national basis are:

a) Implement their own systems in every part of the country where they acquire customers;

b) Re-introduce coin or mechanical token prepayment meters; or

c) Develop ways to share existing systems.

Option “a” is a very expensive and inefficient way to achieve the desired result. A high degree of redundant overlap causes additional expense for a small population of customers. In addition, it is extremely unlikely that all systems can be implemented in time for full competition.

Option “b” is superficially attractive because coins are a nationally ubiquitous token. However, token meters replaced coin meters rapidly during the 1980s, largely because of associated crime and the cost of coin collection. Consequently, this option is not nearly as attractive as it once was.

From 1994 to 1998, the industry set up several groups under the leadership of the then U.K. industry regulators, OFGAS (Office of Gas Regulation) and OFFER (Office of Electricity Regulation), to define processes that would introduce competition to all customers. Several of these groups were specifically designed to address option “c” and the needs of prepayment systems and customers.

The main concerns raised by suppliers over the implementation of option “c” were commercial. These concerns included confidentiality of commercial information transfer, whether every system had the capability to handle the various tariff requirements, and charges (through lack of competition) imposed by the host PES to the suppliers using its system.

Gas Prepayment-The Quantum System

As a supply company, British Gas operated on a national basis before privatization and continues to do so now under the business name Centrica. British Gas introduced the Quantum system to replace its coin and mechanical token meters in 1992. The system uses a smart card as the payment token. It has very powerful security and can operate complex tariffs. Quantum can transmit and store messages to simplify, for example, debt collection, standing charge collection, tenancy exchanges and meter exchanges. When competition was introduced, the new gas suppliers, which were largely the existing electricity suppliers, needed access to the Quantum system to service the gas prepayment customers they acquired.

Under the control of OFGAS, and following several principles that were developed, British Gas set up a central clearinghouse-The Quantum Office-where all the prepayment transactions made throughout the country were processed. Records of the amounts paid by every customer during a day were collected and processed daily. From there the transaction details were sorted based on supplier and customer details, the amounts paid and any other information collected. The actual cash was taken from each point of sale (POS) and transferred to a bank holding account, and then, when each supplier’s sales had been calculated, the cash was transferred to the suppliers’ banks.

At first this was done within British Gas’s own offices. Not surprisingly, there was a degree of suspicion among some of the new gas suppliers that British Gas might be able to access and make use of commercially sensitive customer information flowing through the clearinghouse. OFGAS developed a solution to quell this concern that required British Gas to spin off the Quantum Office business and sell it to a commercially independent company. This was achieved during 1998, and Siemens Metering Ltd. now operates the Quantum office on behalf of more than 20 gas suppliers in the United Kingdom.

Another concern for new suppliers and those operating outside their franchise area, was the lack of competition in metering services, such as meter reading, meter installation and maintenance. These services are now, for the most part, deregulated and opened to competition. Transco, the metering business of the “old” British Gas, still performs or subcontracts, most of the required work. It is planned, however, for Transco to separate into two businesses, the gas transporter business and the meter supply, installation and maintenance business. This separation will allow new businesses to enter the market on a more equitable basis.

The clearinghouse approach resolves issues associated with reconciling customer payments to the correct suppliers and ensuring that those suppliers receive the correct money. However, it does not resolve the problem of managing prepayment customers’ accounts. Very few suppliers have integrated the new prepayment processes into their central billing systems; instead, the vast majority has opted for a more cost-effective third party solution.

Electricity Prepayment

The fragmented nature of the electricity market has created even greater difficulties than those evident in the gas market. Currently, there is no electricity equivalent of the central clearinghouse model that exists for gas prepayment. So, each supplier must make arrangements with every host PES in areas where it has customers. In addition, there is still no option other than to use the host PES to provide all the basic prepayment and metering services. The wide variety of tokens used and the different ways in which the systems have been set up all conspire to make sharing the systems difficult.

Electricity suppliers in the United Kingdom have been able to choose a meter operation services company since March 2000, and it is also likely that the PPMIP (Prepayment Meter Infrastructure Provider) will be opened to competition shortly. One function now devolved to national, independent providers is the collection of payments and the corresponding issue or recharging of customer tokens. Companies like PayPoint, POCL and De La Rue provide cash collection and token handling systems for both gas and electricity suppliers.

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Through the industry groups set up and monitored by the regulator, a mechanism was developed by which all the parties involved in electricity supply, distribution, metering and settlements can communicate among themselves. This allows actions, such as meter exchanges, meter readings and prepayment debts, to be requested and appropriate actions to be taken. Information that flows along this channel is highly defined and formatted in data sequences. All the data flows are listed in the Data Transfer Catalogue (DTC). Twenty-six, or 10 percent, of these data flows are specifically for prepayment customers. In addition, there are other flows that apply to all meters, and thus are also needed for prepayment meters (Table 1).

The DTC contains all the forms that can, if necessary, be filled out manually for each of the jobs. Dealing with data flow requirements manually, however, is error prone. Automated systems are therefore essential for all companies other than those with a very small number of customers. Few electricity suppliers have gone to the expense and difficulty of integrating the special requirements of prepayment customers into their billing systems. Instead, most have selected the 2nd Tier Prepayment Customer Manager system from Lerryn Consultancy. Similar to the Quantum System Manager for prepayment gas customers, the 2nd Tier Prepayment Customer Manager system does the following:

  • Maintains a comprehensive database of all prepayment customers and their accounts;
  • Simplifies and automates the generation of all prepayment related data flows, with users merely required to select an action (i.e. Activate Account);
  • Provides comprehensive data flow validation for incoming and outgoing flows;
  • Automatically logs all data flows sent and received for each customer together with their effects on the customer’s account;
  • Interfaces directly to the message gateways for data flow output and input;
  • Supports direct fax delivery of data flows; and
  • Provides a range of reports to simplify the management of prepayment customers.

Has Competition Been Good for Prepayment Customers?

There are a number of ways to measure whether competition has been advantageous for prepayment customers. Success can be measured by identifying the number of customer service issues and the number of customers switching suppliers, as well as by looking at energy costs.

The number of customers using token meters increased rapidly during the 1990s as replacements for coin operated meters were installed. Today the numbers are still slowly increasing, but there are indications that the U.K. government wants to discourage prepayment meters by requiring suppliers to offer a wider range of payment methods. One probable reason for encouraging this reduction is the result of research carried out on “switchers”-customers who have chosen a new supplier.

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This research clearly indicates that prepayment customers switch about half as frequently as those paying by other methods (Table 2). Reasons for this could include: “debt blocking,” a process by which a supplier can prevent a customer with a debt from leaving them; reluctance of new suppliers to take on prepayment customers; or difficulty customers may find in making price comparisons.

OFGEM is examining the process of debt blocking and how to ensure that indebted customers can take advantage of lower energy prices. In addition, a reduction in the number of customers on prepayment tariffs has been made an important target for all supply companies. Additionally, difficulties in price comparison, such as varying tariff charges, block tariff structures and the presence or absence of standing charges, are also being investigated, as such charges can make it difficult to compare prices.

Conclusions

Prepayment for energy purchase in the United Kingdom is well established, and is often the method of choice by customers who would otherwise have difficulty paying.

Prepayment customers often pay a premium and frequently are less able to benefit from the cost saving opportunities provided through customer choice. Even so, many would not give up their prepayment meter for a credit meter. Although there is pressure on suppliers to artificially hide the difference between credit and prepayment tariffs, prepayment processes are always likely to be more expensive to operate than credit processes. Therefore, suppliers will need to find and implement efficiencies that will help reduce those costs. This should not prevent suppliers from expanding into the fashionable “pay as you go” market via customer service management programs in order to convert clients who wish to use a payment meter.


Ian White is business development manager at The Lerryn Consultancy Ltd., a supplier of prepayment customer management software to the privatized electricity and gas supply businesses in the United Kingdom.
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