National Consumer Law Center Issues Recommended Regulations for Prepay Offerings

The National Consumer Law Center released a report stating that prepaid utility service programs are, "putting low- and moderate-income households' health and safety at risk, and setting up an inequitable two-tiered customer delivery system."

The report, available here, largely looks at prepay in vertically integrated models, but does cite several products in the ERCOT market.

Among the National Consumer Law Center's recommendations with the most relevance to the restructured environment is that states should adopt adequate financial mechanisms to guarantee that funds prepaid by customers are returned to customers if a prepaid provider becomes insolvent or goes out of business.

The National Consumer Law Center's full recommendations are as follows:

1. Regulatory consumer protections and programs should be maintained or enhanced. These include existing limitations or prohibitions on disconnection of service, advance notice of disconnection, availability of payment plans, availability of bill payment assistance or arrearage forgiveness, and the right to dispute bills.

2. Health and safety risks must be reduced. When the billing credits of a customer receiving prepaid residential electric or natural gas service are exhausted, the customer must be given a five-day disconnection grace period, after which the customer must be restored to traditional, credit-based service, subject to all rules and customer protections applicable to such service. Prepayment customers should be allowed to return to credit-based service at no higher cost than the cost at which new customers can obtain service.

3. Vulnerable populations must be protected. Prepayment service should not be offered to low-income households or households that include any person who is elderly, disabled, or who has a serious illness. Households with young children should also not be eligible to enroll in prepayment service.

4. Marketing of service should be voluntary. Prepaid service should only be marketed as a voluntary service and should not be marketed to customers facing disconnection for non-payment.

5. Payment assistance and arrearage management programs must be adopted or maintained. Utilities offering prepaid service to low-income customers must also offer effective bill payment assistance and arrearage management programs to those customers.

6. Rates for prepaid service should be lower than rates for comparable credit-based service. This lower rate reflects the lower costs associated with reduced carrying costs, collection costs, uncollectible accounts, and shareholder risk.

7. Costs should be transparent. Prior to implementation, utilities should demonstrate the cost effectiveness of any proposed prepaid service program and reveal how costs will be allocated among various classes of customers.

8. Transaction and other junk fees should be eliminated. Prepayment customers should not pay security deposits or additional fees that traditional customers are not required to pay. Examples of such fees include initiation fees, equipment charges, or transaction fees to purchase billing credits, or frequent payment fees.

9. Initiate "on demand" service. Utilities must ensure there are readily available means for prepayment customers to purchase service credits on a 24-hour a day, seven-day a week basis to prevent potential health and safety risks.

10. Tracking and reporting should be monitored and disclosed. Prepaid service programs should be monitored to ensure there is not an increased rate of service disconnections for non-payment.

11. States should proactively plan for customer protections in case of company default. States must have adequate financial mechanisms to guarantee that funds prepaid by customers are returned to customers if a company becomes insolvent, goes out of business, or is otherwise unable to provide the services for which the funds were prepaid.