A new trend among utility companies is offering consumers the option of prepaying for their utility services. Unfortunately this service is not as good a deal as it sounds and often ends in disconnections and interruptions in services.
Prepaid utility payment options are usually targeted toward low- and moderate-income consumers and are marketed in predominately minority neighborhoods. By targeting these communities, utility companies are essentially creating a two-tier system, thereby widening the racial wealth gap.
A recent National Consumer Law Center (NCLC) research paper showed that most prepaid users pay in small increments throughout the month in order to keep their utilities connected. They often find out too late that their account balance has reached zero—instead of the usual 14-day notice, prepaid customers only receive 4 days’ notice—and that their services are about to be turned off. There are even talks of new a new product called a Smart Meter, which would shut off power immediately if a customer owed more than $20.
Some states, including California, are holding hearings about the legality of these arrangements; others, including Maryland, have made the practice illegal. In other states, such as Texas, companies are pushing for the use of prepaid utility services. NCLC has created a map of states that currently offer and/or have proposed prepaid utility programs. The National Association of State Utility Consumer Advocates has also expressed concerns about prepaid utility plans.
Prepaid plans are attractive to low- and moderate-income consumers because they typically do not require credit checks or security deposits. While these are big draws for low-income consumers, these features can allow companies to prey on vulnerable populations. To prevent this, some cities, like San Diego, are protecting at risk populations by adding provisions that prohibit these companies from offering prepaid options to elderly and disabled consumers who would suffer greatly if their utilities were shut off with short notice due to insufficient funds.
Advocates are demanding that the same level of consumer protections be applied to these prepaid utility service plans as are to traditional plans. For example, prepaid customers should have the opportunity to pay their outstanding balance over time and should be mailed shutoff notices within the same time period, 14 days, as traditional utility customers. Consumer protection is a must for prepaid utility services if they are allowed to exist.
This post was coauthored by Alison Terkel.