Utilities strike gold on direct debit mountain

Direct debits are a hugely popular way of paying off monthly bills and this is the time of year when people may choose to sign up for monthly payments as they try to sort out budgets for the next 12 months. But handing over regular sums to a utility firm can build up a sizeable cash credit on which they - not you - will earn interest.

The consumer watchdog Energywatch suspects that the cash mountain could run to millions of pounds and has called on companies to refund the cash automatically. The DTI-funded overseer also urges consumers to submit regular, accurate reports on their home energy consumption, to ensure that utility firms don't take more money than they are entitled to, or to make sure they do not sink into debt because of pessimistic meter estimates.

Energywatch says that, of 90,000 complaints it receives a year, about 50 per cent relate to billing, including direct debits.

A few firms - as a comprehensive Which? report found last year - automatically refund cash to customers who have built up credit over a 12-month period, either through a straight rebate or taking substantially less money in future monthly payments. Examples include British Gas (if credit is over £50) and London Electricity, which also encompasses Virgin HomeEnergy and SWEB, though its automatic cash refund trigger point is set fairly high at £150.

Powergen says rebates are not automatic on any amount, and have to be requested by the customer.

This attitude, says Energywatch spokesman Adam Scorer, is not good enough. 'If a customer is in credit, it needs to be made crystal-clear on the bill, with a telephone number clearly visible so a customer can claim their cash back.'

Jon Miller, of utility tariff comparison firm uSwitch, says anyone concerned that their utility provider may be sitting on a pile of their own cash should take the initiative in tackling the firm.

'Not everyone will automatically send you a refund cheque, but most will on request or will modify your payments automatically. Our advice is that, if you are paying by direct debit, check on a quarterly basis exactly how much you're using with a proper reading - most companies will listen if you challenge them, making a correction on a 12-monthly basis.'

The 12 months is important. So that customers aren't stung with nasty surprise bills when consumption has been high, for example in winter, utility firms average estimated bills over a year. It also means only a fixed amount of cash is taken from your account each time, helping you to budget. But it's hardly a one-way street. The pay-off for utility providers is regular guaranteed cashflow, as well as a vastly reduced payment collection burden.

In an effort to recruit more people to direct debit, most utility operators offer discounted bills, typically through a reduced unit rate and a fixed percentage discount on the overall bill. Almost all utility firms argue that such direct debit discounts act as a carrot, rather than a tax on those who refuse to toe the DD line.

This is little comfort for non-direct debit Scottish Power customers who were hit by an average 5 per cent rise in fuel bills in November. Its direct-debit customers, however, remained unaffected by the price increase.

Despite promises of extra savings through direct debit, the former principal lecturer in electronics at Wigan College, Joseph Regan, is sticking to quarterly payments based on his meter readings. He recently changed from British Gas to Atlantic Electricity & Gas via uSwitch. 'I want to make a direct comparison for bills up to last year, so that after 12 months I can make an accurate comparison. It also will tell me if uSwitch are doing their job - either they're dead on, or they're not. If I use more energy in that time, I'll put more money on the price.'

Only when 68-year-old Regan is absolutely sure his supplier is saving him money will he consider, he says, taking advantage of future direct debit discounts.

Worryingly, if a utility firm collapses with money still owed to you, getting it back is not guaranteed. Ofgem, the regulator for gas and electricity markets, says customers would need to join the queue for the administrators if a utility firm hit the buffers - so a dismal chance of getting near the top of the creditor list. This is unlikely to change with a revised banking code now being thrashed out (the UK direct debit industry is self-regulated by the banks).

However, anyone unhappy with their energy firm should complain, says Ofgem, or switch if they're not happy. 'Clearly, the emphasis is on the customer to keep on top of things,' said a spokesman. 'If they're not happy, then they should complain to that firm. If they're still not satisfied, they should take it up with Energywatch.

'It's a competitive market and we would urge people to go elsewhere and get a better service.'

How to be in control

Follow these tips to avoid the worst traps

· There is no legal requirement for utility firms to re-credit customers automatically, It's up to you to keep tabs on how much credit you build up.

· What if your bank takes too much money? You are guaranteed your money back through the Direct Debit scheme. The scheme, agreed to by all banks and building societies, promises an immediate refund.

· Look carefully at your utility bills to see if you are in credit. 'Too many utility firms do not make it dramatically obvious,' says Adam Scorer of Energywatch. If you're £50 in credit, why not claim it back and earn some interest on it?

· Cancelling - most banks can cancel with immediate effect over the phone or in a local branch, but always check. If it's close to the payment date you could find yourself unexpectedly overdrawn. Contact the utility provider before contacting your bank when cancelling, so a request for payment is not declined by your bank.

· Don't forget your investments. Give yourself extra time in March if you intend to change Isa providers for the new tax year starting April 6, as most require advance warning. 'Otherwise,' says Jane Mack from the Motley Fool personal finance website, 'your annual tax-free investment strategy will be scuppered.'

· Energywatch offers a fully independent gas and electricity tariff comparison service at www.ukpower.co.uk.