Tuesday, July 27, 2010

A Proposed Smooth Billing Plan for Utilities

The typical equal billing plan has customers pay exactly the same amount each month for gas or other utilities. If the utility gets the estimated consumption wrong, customers face a large correction at the end of the year. Many Enbridge customers are unhappy about the recent large end of year bills they received to make up for monthly payments that were too low.

One way to avoid this problem is to use a smooth billing plan of the type I’ll describe. This plan allows for modest changes in the amount billed each month to correct for poor initial consumption estimates. This smooth billing plan has the side benefit that consumers can see with each bill whether their consumption is rising or falling. Without this feedback, consumers are encouraged to increase consumption.

Suppose that your estimated consumption of natural gas is as follows:

Jul: \$30
Aug: \$30
Sep: \$60
Oct: \$80
Nov: \$100
Dec: \$180
Jan: \$220
Feb: \$190
Mar: \$140
Apr: \$100
May: \$40
Jun: \$30

These numbers are cooked to work out to an average of \$100 per month. One way to do the billing is to charge exactly \$100 each month and correct any estimation error at the end. But what happens if consumption is actually 25% higher than the estimate? In this case, the final bill has \$300 added to it for a total of \$400.

Another approach is to adjust the bill by small amounts each month to correct for estimation errors. If actual consumption for July is \$42 (\$12 over the estimate), this is split evenly over the 12 months, and the July bill is \$101. If August’s consumption is under the estimate, the difference is divided by the 11 remaining months and the bill goes down by a small amount.

With this approach, even if consumption is consistently 25% higher than the estimate, the gas bills will start at \$100 and rise steadily to \$163 in the final month. The total amount billed over the year exactly matches consumption, and there is no \$400 shock in the last month.

This approach gives the consumer a fairly smooth bill, but does have enough change each month to alert the consumer to unexpected increases or decreases in consumption. This feedback encourages adjusting usage habits to conserve energy.

1. You could use rolling 12-month periods. That prevents the monthly price from becoming unstable as June approaches.

2. @Patrick: I thought about that. It's definitely a possibility. I prefer to have the account definitely come back into line once per year. But, this is a fairly minor consideration.

3. What about tacking the differential from the estimated amount directly on to each month's bill?

In your example, July's bill would be \$112, August would be < \$100.

If consumption was consistently 25% over, the largest bill would be \$155 in Jan. While the largest bill is similar to your example, this scheme trades volatility at the end of the cycle for volatility at times of highest usage. This encourages customers to be most energy conscious when it counts most.

I can see benefits to both approaches, but I think this does a better job of providing the best of both worlds -- direct feedback to encourage energy savings and smoother billing.

4. @Returns Reaper: I think your approach is probably a little more volatile than mine, but I like it. It's definitely much better at giving feedback on unexpectedly high or low consumption.

5. I like this idea, MJ. It's a good compromise between "I want to be able to budget to the penny every month" and "I don't care if I have to pay \$250 one month and \$50 another". How would you like to run the Enbridge billing department?

6. @Gene: Running some company's billing department sounds close to the worst possible job to me :-)