June 9, 2014 (LBO) Government-owned monopoly telephone companies did not connect 100 percent of households anywhere in the world. But in Sri Lanka, the government-owned monopoly electricity companies are approaching that threshold.
But Sri Lankan citizens pay among the highest prices for electricity in the region. The reason is that they live in a country that has decided that load shedding is unacceptable, but which neglected to install adequate low-cost, base-load capacity at the right time.
When LIRNEasia conducted quantitative and qualitative research on poor micro entrepreneurs in Colombo and secondary cities in Wayamba, it was clear that there was significant interest in managing their energy bills. Sixty one percent had already changed to energy-efficient lighting; over 15 percent were switching off/disconnecting appliance and lights.
There was significant concern about bill shock. People wanted more information about their consumption; after the fact, at the end of the month, was not enough. For people with income that varied by the day, having enough money to pay the bill in the specific window provided by the electricity distribution company was a problem. They wanted to know how much they owed so they could manage their consumption better.
LIRNEasia has proposed a number of solutions to address these concerns to CEB, LECO and the Public Utility Commission of Sri Lanka (PUCSL). One that deserves broad discussion is the provision of prepaid meters as an option.
Lessons from mobile
South Asia, which has the lowest mobile voice prices in the world,is almost fully prepaid. Over 92 percent of all mobile SIMs in Sri Lanka are prepaid, the lowest proportion among the South Asian countries. But that is still a very high number.
We would not be enjoying the lowest mobile voice prices in the world (and the concomitant high levels of connectivity) if not for prepaid. The average monthly revenue per SIM is over LKR 300, many SIMs yield less than LKR 200 a month. If the mobile companies had to spend LKR 100 on producing and distributing paper bills, many of these customers would be uneconomical and would not be served. The Budget Telecom Network business model that has made possible the success of mobile in this region would not be viable.
Prepaid has a number of advantages to the user. Addresses and deposits are not necessary because the supplier does not bear the risk of non-payment. Postpaid bills do not come due when people have money to pay; they come due at times the companies decide. Prepaid on the other hand gives control to the customer. They can be paid when the customer has money or when the need to communicate is very strong. Postpaid may be suitable for people with salaries that are paid regularly; prepaid is ideally suited for people, the majority, who get by on irregular earnings.
Why not in electricity?
The first prepaid tariff was approved in Sri Lanka in 1998, as competition was gaining traction. In theory, a monopoly does not go out of its way to serve customers, especially low-yield customers. We have a counter example in that CEB is pushing hard to connect 100 percent of Sri Lankan households to the grid. Given uncertainty about whether they would be allowed to commission adequate capacity in time and implement cost-reflective tariffs, CEB and LECO have an interest in reducing costs.
Every month CEB and LECO produce and distribute close to five million paper bills. Around half of these are for less than sixty units and are for small amounts. I am not sure if a proper costing has been done, but even if one assumes a low figure such as LKR 50 per bill, per month, the total annual cost of 1 million paper bills would be LKR 600 million, a not-insignificant sum. In addition, the companies would benefit from reducing bad debts and from having payments come in before the service is consumed.
Implementing prepaid is much easier now that the mobile companies have developed extensive value distribution networks. All that is required are prepaid meters and a tariff system that provides incentives for the low users to switch.
But it need not be low users only. Those who give out apartments on rent now bear the risk of having to pay outstanding electricity bills if deadbeat tenants abscond. Those who maintain holiday bungalows with sporadic occupancy would also benefit.
Ways it could fail
Prepaid has benefits for electricity customers and for the electricity distribution companies. It is a win-win. It should succeed. But it may fail.
If prepaid electricity service is made compulsory, it will fail. Rationally, it may be appropriate to move all low-users to prepaid. But this could backfire. It is one thing to move new customers to new plans; but the migration of existing customers must be done with utmost care. Customer research must be conducted and the proper incentives provided. It should be marketed well. The success stories must be publicized. But it should be a choice.
If the upfront costs of installing new prepaid meters are imposed on customers, it may fail. The long-term savings accrue to the companies. It is only fair that they pick up most of the costs. After all, it is they who will be ordering and installing the meters.
If the rollout of meters is not accompanied by availability of prepaid value, it may fail. Given the value distribution networks established by the mobile operators, this should not be too difficult.
Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.