Cutoffs, complaints abound with Texas' prepaid electric providers

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by First of two parts By STEVE McGONIGLE and ED TIMMS / The Dallas Morning News

kvue.com

Posted on October 5, 2009 at 5:59 AM

Updated Wednesday, Oct 21 at 4:06 PM

The fear of losing her electricity haunted Charisse Bailey.

With a failing heart, she needed power for her oxygen machine. Jobless and on welfare, she scrambled to pay an escalating bill.

"She was laying there worrying about whether she was going to be in the dark," said her aunt, Ruby Mosley.

Electricity in her Houston apartment was cut off twice in summer-like temperatures in 2007 before Bailey died of cardiac arrest at age 34.

Bailey was a customer of Freedom Power, a Dallas company that routinely draws the highest rate of consumer complaints of any electricity provider in Texas.

Freedom is a "prepaid" electric company, a type of subprime provider that emerged after Texas deregulated the retail power market in 2002. Unique to Texas, the prepaid companies charge customers in advance based on estimated usage.

State officials tout vigilant consumer protection, especially for the needy, as fundamental to the deregulated electricity market. But as the Bailey case showed, the safety net has holes.

Prepaids market themselves to people who, like Bailey, lack credit or money for deposits - often the poor, sick and disabled. Prepaid electric rates sometimes are 50 percent higher than those of traditional providers. Quick cutoffs are a constant threat.

As a result, sick people have gone without air conditioning during sizzling summer days. Families with children have been forced to abandon their homes. The elderly have had to forgo buying necessary medicine.

Those who have run prepaid companies include inexperienced operators, convicted criminals and undercapitalized entrepreneurs who have failed and left consumers scrambling to keep power.

Texas utility commissioners, intent on spurring competition, have licensed prepaid electric companies even though consumer protection rules do not address their unconventional business model.

The Public Utility Commission has not involuntarily revoked a single operating company's license despite rising consumer complaints against all types of electricity providers. It has withdrawn staff recommendations for stiff penalties in favor of negotiated settlements.

The PUC refuses to disclose how many customers each electric company has and says it does not know how many prepaids are operating in Texas because it does not classify companies by business model. Unofficial estimates put the number of prepaid customers at up to 100,000.

PUC Chairman Barry Smitherman said he was not aware of widespread problems with prepaid providers.

"The prepay space, in general, is a very, very small slice of the total market," he said.

The PUC director of consumer protection, however, said that he had often raised concerns that prepaid customers were being exploited but that his warnings were largely ignored.

"The trouble is these people are desperate," Mike Renfro said. "You and I would walk away from that deal, but they can't. They have no other place to go."

Letting market decide

When Texas threw open the doors to competition in one of the nation's largest electricity markets, state officials did not know for sure what type of provider would emerge.

They generally left it to the market to decide. Regulators set minimal qualifications for licensing, and scrutiny of applicants was modest.

Prepaid companies have operated for more than a decade overseas and in a few U.S. jurisdictions. Elsewhere, magnetic cards are used to run a prepurchased amount of power through meters.

But in Texas, prepaid customers are given an estimated charge after telling the provider the size of their dwelling and how long they want service. Typically, a cash payment is wired from a payday-lending outlet.

Many Freedom customers complained they were told after paying the estimate that additional funds were required because of "historic usage." They also claimed they were not reimbursed when estimates exceeded usage.

Randy Chapman, executive director of the Texas Legal Services Center in Austin, said a prepaid customer can be snared in a cycle of rising charges with few options.

"For a life-essential product," he said, "I don't think there should be traps."

Billing customers based on estimated usage is a formula for exploitation, said Mosley, a community activist in Houston. "It's fattening frogs for snakes," she said.

Prepaid operators say they supply power to people who might not be able to obtain it otherwise. Higher rates reflect the risk to the company that customers will use more electricity than they paid for, they say.

Though prepaid companies now target Texas' poorest residents, similar products could be offered to millions of consumers within a few years.

Utility commissioners have repeatedly voiced support for the more conventional, metered version of prepaid electricity.

High-tech "smart" meters now being installed statewide will afford large retailers the option to offer almost anyone a prepaid service.

Consumer advocates fear that a leap in prepaid services will lead to a two-tiered system of electricity delivery defined by a customer's credit and payment history.

Carol Biedrzycki, executive director of Texas Ratepayers' Organization to Save Energy, said all consumers should be concerned about prepaid service.

"Once you degrade the quality of service or a customer protection standard for one class of customers," she said, "then you are opening the door to making everybody else accept that lower standard, too."

Companies go bust

In 2008, five prepaid companies collapsed after a sharp spike in wholesale electricity prices. More than 42,000 customers had to scramble to find other companies to keep their power flowing.

Some people paid for electricity they never received.

Ricky Moore of Haltom City said he lost $300 in spoiled groceries and was forced to vacate his home after his power provider, Pre-Buy Electric, went bust. Moore, 48, is a paraplegic who survives on disability payments.

"I don't sweat but over half my body, and I have to have air conditioning," he said. "They cut me off in 100-degree weather. It was bad, man. It really was."

Moore was switched to TXU Energy, which soon had him cut off. Tom Stewart, a spokesman for TXU, said Moore was disconnected for not paying a $300 deposit.

Had TXU known of Moore's disability, Stewart said, he might not have lost power.

"It was an unfortunate sequence of events," Stewart said.

The Dallas Morning News found that two of the five electricity providers that collapsed were run by people with criminal convictions; two others had prior bankruptcies. Some used fronts to obtain licenses, and some didn't bother to notify the PUC they had bought the company.

The PUC let them operate for years without checking out their owners.

Other agencies stepped in: The U.S. Securities and Exchange Commission filed a lawsuit in March 2008 charging the owners of National Power Co. with buying their controlling interest with proceeds from a fraudulent investment scheme.

In June, the Texas attorney general accused owners of two defunct prepaid companies, Pre-Buy Electric and Etricity, of collecting $2 million while their businesses were folding and transferring customer funds to themselves or shell entities.

The PUC's enforcement division didn't file a notice of rules violation against Etricity until a week after the attorney general sued the company. The agency seeks $1.44 million in fines from a company that no longer operates.

The PUC stripped four of the defunct companies of their licenses - but only after they went out of business. The fifth failed company, Blu Power, remains licensed.

In April, utility commissioners modified licensing rules by enhancing capital and managerial requirements. Now, the PUC chairman said, license applications will be scrutinized more closely.

"I think the public has an expectation that the people who are running these companies know what they're doing," Smitherman said.

'Flagrant' disregard

Freedom Power was born in March 2004, two years after deregulation.

Ken Weaver, a Dallas entrepreneur who also owned a prepaid phone-services company, purchased Freedom and its operating license in 2006.

Weaver had an extensive criminal record dating to the 1970s. His rap sheet included a felony conviction for stealing a small plane and running a car-theft operation that spanned two states.

He operated Freedom Power for more than three years without filing the required licensing documents to reflect his control of the company, records show.

In July, two weeks after The News questioned him about his criminal record, Weaver informed the PUC that he had sold his interests in Freedom to a trust controlled by his former wife.

Freedom - which Weaver described as having fewer than 10,000 customers - has had repeated skirmishes with the PUC during its short life.

In November 2006, the PUC legal staff filed a petition to revoke Freedom's license. The company had compiled 379 violations of commission rules, the staff said.

The alleged violations stemmed from a PUC moratorium on cutoffs during a summer heat emergency. The staff petition accused Freedom of "flagrant, pervasive and willful disregard" of commission rules.

Freedom sued to block enforcement of the moratorium. The company contended it could not survive without the ability to do timely cutoffs. Attorney Chris Malish argued in a losing effort that "air conditioning is not an inalienable right."

PUC's legal staff withdrew the revocation petition in September 2007. The agency subsequently fined Freedom $21,050 for other violations.

Thomas Hunter, director of the legal division, declined to be interviewed, as did members of his staff involved in the Freedom case.

Agency spokesman Terry Hadley said the legal staff concluded there were not enough rule violations to warrant revocation. Freedom also responded to complaints in a timely manner, he said.

Since Weaver took control of Freedom, PUC staff has found rule violations in almost half the 516 consumer complaints filed against the company. The violation rate was more than three times the average for all other electricity providers.

Freedom amassed 276 customer complaints after the revocation petition was withdrawn, PUC records show. More than 20 percent of those complaints resulted in findings that Freedom had violated PUC rules.

Weaver attributed the complaint rate to his clients' financial struggles.

"We see a lot of complaints filed right when payment is due," he said.

One of the most common complaints, PUC records show, was that Freedom cut off power without providing proper notice to the customer.

Prepaid providers like Freedom rely heavily on prompt disconnections. Every kilowatt-hour past the amount paid in advance is a cost the provider may have to absorb.

PUC rules are designed to limit disconnections. Customers must receive 10 days' notice, and no one can be cut off on days of extreme heat or cold, or on weekends and holidays.

Smitherman said prepaids, like any other provider, must abide by the disconnection rules despite any difficulties it might pose.

"If you want to be in that business," he said, "you have to understand there are going to be periods of time when you are going to be giving power away."

Spotty enforcement

Consumer advocates accuse the PUC of protecting the interests of electric companies, including prepaids, over the rights of those who struggle to pay their bills.

"In Texas, we believe in the religion of competition as opposed to the religion of compassion," said Tom Smith, director of Public Citizen of Texas.

The PUC's consumer protection division has no authority to bring enforcement actions. Its staff is smaller than it was in 2002.

Yet consumer complaints against all electric companies more than doubled from 2005 to 2008, according to PUC records. Customer disconnections rose nearly 30 percent during that period, records show.

Consumers filed 54,356 complaints against electric providers from July 2002 to May 2009. PUC staff found rule violations in 11 percent of those and made only 34 attempts to seek sanctions.

Most actions arise from technical violations such as breaking a filing deadline. Penalties are typically the product of negotiations between agency lawyers and power companies. Outside parties, including consumers, are not given a chance to participate.

Biedrzycki, the consumer advocate, said the deterrent effect is negligible.

"If enforcement is doing its job, these companies would be very reluctant to step out of line," she said. Instead, "they hire some people to go over and glad-hand all the PUC staff, and they make a settlement."

Smitherman contended that the PUC's enforcement is tough and about to be tougher with reforms that took effect in September.

"If they lie to you or cheat you, then we are going to come after you," he said.

State Rep. Sylvester Turner, D-Houston, remains unconvinced.

Turner, a member of the committee that oversaw creation of the deregulation bill, said he supported the measure because he was assured consumer rights would be protected. But he said the record of the past seven years has him feeling betrayed.

"We deregulated the marketplace on a commodity that is essential," he said.

It was Turner who asked the PUC to investigate the struggles of Bailey, the infirm Houston woman whose electricity was disconnected twice.

Freedom Power told the PUC that it had worked with Bailey to arrange a payment schedule but that she had failed to abide by it. Her power was on when she was rushed to the hospital in August 2007, Freedom said.

The Houston Fire Department, which normally transports emergency patients to hospitals, declined to release its records on Bailey, citing privacy, and appealed an open-records request by The News to the attorney general.

Bailey died in September 2007 after spending her last weeks in a rehabilitation center. She was buried at county expense in an unmarked pauper's grave.

Officially, her death was attributed to natural causes.

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