When it comes to collecting overdue consumer debt, America’s electrical utilities are at a peculiar disadvantage. Faced with uncollected debt, businesses like banks can foreclose on mortgaged properties or collateral assets. Automobile dealers and major appliance vendors can repossess their merchandise. But utilities can’t recover electricity that has already been consumed. And their ability to compel payment through sanctions like termination of service is often constrained by consumer protection regulations.
So it’s not really surprising that bad debt write-offs at America’s electrical utilities are skyrocketing. In 2003, write-offs of consumer debt at U.S. utilities grew to 0.5 percent of all revenues – a 20 percent increase over historic levels. Individual utilities sometimes fare far worse. One major gas utility in the Northeast has been obliged to write off 1.7 percent of its revenues for every year between 1999 and 2002.
Clearly, American utilities face two closely-related and critical challenges. How can they recover more revenues from write-offs? And – more importantly – how can they prevent customers from falling so far behind in the first place?
One place they can start looking for relief is in their own customer information and customer relationship management systems. By adroitly leveraging these critical in-house resources, utilities can identify potential bad debts early in the payment cycle. Then, with early warnings in hand, they can institute more effective strategies to prevent write-offs and recover lost revenues.
Determining the Appropriate Response
If you’ve ever worked in a utility’s credit and collections operation, you’ve noticed that all delinquent customers are not alike. Some are forgetful seniors who will pay in full as soon as they remember where they put last their bills for the past several months. Others are honest individuals who are temporarily short on cash because of unemployment, illness or natural disaster. Still others are chronic delinquents attempting to game the system through frequent relocations, name changes and other unsavory tactics that often border on fraud.
Obviously, the bare-knuckle strategies appropriate for chronic deadbeats are not appropriate for forgetful grandmothers. The key to preventing bad debt, then, lies in is a utility’s ability to identify these different types of customers accurately. Once it has segmented its overdue customers successfully, the organization is free to apply remedies that have proven effective with each particular segment. And it can apply these remedies at the earliest possible opportunity in the collections cycle, when the chance of preventing or recovering a write-off is greatest.
For the forgetful senior, the best remedy is usually simple: a reminder in the form of postcard or phone call. If forgetfulness becomes chronic, then the utility can assign a CSR to negotiate other remedies, such as payment by automatic bank draft. For seniors on fixed incomes, a good option might be a budget pay plan that levels out seasonal spikes in cost and usage. Some utilities may even identify responsible relatives who can be automatically notified if payments fall too far behind.
In the case of the customer who professes himself willing but unable to pay, it helps if the utility has good historical data. Given comprehensive payment records, firms can maintain de facto credit ratings on all their customers. Such a rating would indicate whether the overdue customer is a reasonable candidate for cooperative remedies like deferred or partial payment arrangements. If the utility wants to take a more proactive stance, it can even provide these customers with contact information for appropriate social assistance programs.
Customers on fixed incomes, a segment that includes many of the elderly and the disabled, may fall behind when their utility bills exceed their monthly budgets. In these cases, a utility can offer remedies like energy audits. Audits can pinpoint opportunities for use reduction through improved insulation, more efficient appliances and plumbing repairs as well as through changes in consumer behavior. In many cases, publicly funded programs may subsidize the cost of improvements, either directly or through loan guarantees. In the not-too-distant future, new technologies like “smart” meters may allow residential customers to control their bills through time-of-use billing plans and other product innovations. (Assuming, of course, that the utility’s CIS applications can support new metering and pricing practices.)
As these scenarios suggest, utilities don’t necessarily have to take an adversarial position with overdue customers. They can structure their remedies to help genuinely distressed customers while simultaneously safeguarding revenues. These proactive programs will pay added benefits in terms of regulatory relations, since they tend to drive down consumer complaints along with bad debts.
Rightsizing the Collections Cycle
Of course, socially-proactive responses can’t address the problem of serial defaulters. In these cases, there are more aggressive prevention and recovery strategies that a utility can apply, provided its CIS systems can maintain the accurate and comprehensive payment histories needed to identify and track these offenders.
For many utilities, that’s a big “if.” Many legacy CIS systems are premises-based, maintaining payment records by address or meter location rather than by customer. Unfortunately, customers who don’t pay their utility bills often get behind on the rent. So chronic delinquents usually present moving targets, relocating frequently and opening new accounts that will also end up in collections.
With many legacy systems, it can take several monthly cycles to transit from an initial notice of overdue payment to a service termination or write-off. That’s far too long. It does a utility little good to terminate service at an address the defaulting customer has abandoned, or to turn bad debt over to a collection agency when the debtor has disappeared. With delinquents like these, the utility must be able to accelerate the collections cycle so that remedies are prompt enough to be effective.
The payoff for shortening the collections cycle with these customers can be substantial. One large Midwestern utility overhauled its collections operations as part of a larger CIS initiative. Its old software had mandated lock-step collections procedures that took up to four months for the actual collections effort to begin. As a result, its collections operations recovered only about 7.5 percent of its write-offs.
The new collections solution enabled the firm to institute more flexible procedures based on individual customer attributes like payment history. These procedures allowed the collections staff to shorten the credit cycle significantly when circumstances warranted. Over the next six months, the firm’s recoveries more than doubled to approximately 17.5 percent of write-offs. The net impact of this improvement has been an annual increase of more than $1 million in recovered revenues.
Keeping Tabs on Defaulters
Customer systems that maintain comprehensive payment records and track individuals by unique identifiers can readily be leveraged to prevent repeat losses. So serial non-payers pose far less of a threat. If a past defaulter applies for service at a new location, the utility can immediately link the customer to the old write-off and make the new service contingent on repayment of the old debt. The utility can also impose higher deposit requirements on these high-risk individuals. And, like utilities in Europe or telecommunications firms, American utilities may soon be able to get prepayments from delinquent customers through technologies like “smart” meters and prepaid smart cards.
To invoke these more aggressive remedies, utilities must clearly be able to distinguish among customers with the same or very similar names. No utility would want to confuse the Joan J. Jones who skipped out on five months of overdue winter heating bills with the Joan J. Jones who has just moved into its service area as energy procurement manager for the largest manufacturer in the region. Accurate identification will be particularly critical when utilities decide to terminate or refuse service. Nothing puts a utility in a bad light like a wrongful refusal or termination of service. Complete and accurate customer histories will not only prevent these mistakes, they will also help utilities justify their termination practices to regulators.
Evaluating Strategies
Termination of service is always costly and sometimes prohibited, so prevention will almost always be more cost-effective than the drastic cure that termination represents. The real task that a utility faces is to create debt prevention strategies that actually work with its own specific customer populations and in its own unique market environment.
Utilities should realize that developing effective new strategies will be an ongoing and re-iterative process. Measuring and evaluating the net benefits of each new remedy will be essential for the success of any debt reduction initiative. Do aggressively-worded notices produce better responses than friendly reminders? Are automatically-generated mailings and automated phone calls effective, or do they simply waste time and resources better spent on personal calls by trained CSRs? Do budget pay plans and flexible billing dates really reduce delinquencies among low-income consumers, or do they simply postpone the inevitable? The answers to each of these questions will vary with each utility and each customer segment. Getting those answers will be impossible without the ability to segment customers according to comprehensive payment histories and detailed customer attributes.
It should be obvious that the need to conduct continuous evaluations of debt prevention initiatives will place tremendous demands on utility CIS/CRM infrastructures. Traditional premises-based billing systems simply don’t have the capability to track customer response patterns across a wide variety of trials. Many of these systems are already long-overdue for replacement. The credit and collections function is only one of the many areas where customer-related business processes and their associated IT applications may be in need of a thorough overhaul.
To defer action is to ignore the host of indirect costs that these aging legacy systems impose on collection operations; costs like excessive callcenter loads, redundant document generation and postage charges, increased billings for legal and regulatory relations support, unbalanced staff workloads, and excessive field service costs related to frequent service disconnects and reconnects. Like the growing volume of write-offs, these recurring costs represent a constant drain on profits that isn’t going to go away on its own.
The really bad news for the credit and collections function is that, without decisive and concerted action, customer nonpayment rates are certain to continue rising. While oil prices may eventually stabilize, the inexorable pressures of dwindling supplies and increasing worldwide demand will rule out any significant long-term relief in energy prices. As rising energy costs drive service rates up, more and more consumers will fall behind.
Several current demographic trends will probably aggravate the situation. As our population ages, increasing numbers of increasingly forgetful elders will miss monthly payments. Inflation and constraints on social spending will leave consumers on fixed incomes – primarily the elderly and disabled – with diminished abilities to pay increasing rates. Population densities will continue to increase in areas prone to recurring natural disasters like hurricanes, magnifying the impact of these phenomena on local economies and customer incomes. Termination of service will seldom be an effective collections option for customers in these groups, since politicians and consumer advocacy groups will be quick to jump on any collection practices that could be seen as consumer abuse.
In today’s political and economic environments, utilities know they can’t look to regulators or falling energy prices for relief. The only practical solutions will be those they can develop and implement with their own in-house resources. Developing new and more effective debt reduction strategies is the only realistic path utilities can take to stem the rising tide of bad debt. And these new strategies will inevitably require flexible and powerful new infrastructure capabilities that the industry’s aging CIS systems can never provide.
So it’s not really surprising that bad debt write-offs at America’s electrical utilities are skyrocketing. In 2003, write-offs of consumer debt at U.S. utilities grew to 0.5 percent of all revenues – a 20 percent increase over historic levels. Individual utilities sometimes fare far worse. One major gas utility in the Northeast has been obliged to write off 1.7 percent of its revenues for every year between 1999 and 2002.
Clearly, American utilities face two closely-related and critical challenges. How can they recover more revenues from write-offs? And – more importantly – how can they prevent customers from falling so far behind in the first place?
One place they can start looking for relief is in their own customer information and customer relationship management systems. By adroitly leveraging these critical in-house resources, utilities can identify potential bad debts early in the payment cycle. Then, with early warnings in hand, they can institute more effective strategies to prevent write-offs and recover lost revenues.
Determining the Appropriate Response
If you’ve ever worked in a utility’s credit and collections operation, you’ve noticed that all delinquent customers are not alike. Some are forgetful seniors who will pay in full as soon as they remember where they put last their bills for the past several months. Others are honest individuals who are temporarily short on cash because of unemployment, illness or natural disaster. Still others are chronic delinquents attempting to game the system through frequent relocations, name changes and other unsavory tactics that often border on fraud.
Obviously, the bare-knuckle strategies appropriate for chronic deadbeats are not appropriate for forgetful grandmothers. The key to preventing bad debt, then, lies in is a utility’s ability to identify these different types of customers accurately. Once it has segmented its overdue customers successfully, the organization is free to apply remedies that have proven effective with each particular segment. And it can apply these remedies at the earliest possible opportunity in the collections cycle, when the chance of preventing or recovering a write-off is greatest.
For the forgetful senior, the best remedy is usually simple: a reminder in the form of postcard or phone call. If forgetfulness becomes chronic, then the utility can assign a CSR to negotiate other remedies, such as payment by automatic bank draft. For seniors on fixed incomes, a good option might be a budget pay plan that levels out seasonal spikes in cost and usage. Some utilities may even identify responsible relatives who can be automatically notified if payments fall too far behind.
In the case of the customer who professes himself willing but unable to pay, it helps if the utility has good historical data. Given comprehensive payment records, firms can maintain de facto credit ratings on all their customers. Such a rating would indicate whether the overdue customer is a reasonable candidate for cooperative remedies like deferred or partial payment arrangements. If the utility wants to take a more proactive stance, it can even provide these customers with contact information for appropriate social assistance programs.
Customers on fixed incomes, a segment that includes many of the elderly and the disabled, may fall behind when their utility bills exceed their monthly budgets. In these cases, a utility can offer remedies like energy audits. Audits can pinpoint opportunities for use reduction through improved insulation, more efficient appliances and plumbing repairs as well as through changes in consumer behavior. In many cases, publicly funded programs may subsidize the cost of improvements, either directly or through loan guarantees. In the not-too-distant future, new technologies like “smart” meters may allow residential customers to control their bills through time-of-use billing plans and other product innovations. (Assuming, of course, that the utility’s CIS applications can support new metering and pricing practices.)
As these scenarios suggest, utilities don’t necessarily have to take an adversarial position with overdue customers. They can structure their remedies to help genuinely distressed customers while simultaneously safeguarding revenues. These proactive programs will pay added benefits in terms of regulatory relations, since they tend to drive down consumer complaints along with bad debts.
Rightsizing the Collections Cycle
Of course, socially-proactive responses can’t address the problem of serial defaulters. In these cases, there are more aggressive prevention and recovery strategies that a utility can apply, provided its CIS systems can maintain the accurate and comprehensive payment histories needed to identify and track these offenders.
For many utilities, that’s a big “if.” Many legacy CIS systems are premises-based, maintaining payment records by address or meter location rather than by customer. Unfortunately, customers who don’t pay their utility bills often get behind on the rent. So chronic delinquents usually present moving targets, relocating frequently and opening new accounts that will also end up in collections.
With many legacy systems, it can take several monthly cycles to transit from an initial notice of overdue payment to a service termination or write-off. That’s far too long. It does a utility little good to terminate service at an address the defaulting customer has abandoned, or to turn bad debt over to a collection agency when the debtor has disappeared. With delinquents like these, the utility must be able to accelerate the collections cycle so that remedies are prompt enough to be effective.
The payoff for shortening the collections cycle with these customers can be substantial. One large Midwestern utility overhauled its collections operations as part of a larger CIS initiative. Its old software had mandated lock-step collections procedures that took up to four months for the actual collections effort to begin. As a result, its collections operations recovered only about 7.5 percent of its write-offs.
The new collections solution enabled the firm to institute more flexible procedures based on individual customer attributes like payment history. These procedures allowed the collections staff to shorten the credit cycle significantly when circumstances warranted. Over the next six months, the firm’s recoveries more than doubled to approximately 17.5 percent of write-offs. The net impact of this improvement has been an annual increase of more than $1 million in recovered revenues.
Keeping Tabs on Defaulters
Customer systems that maintain comprehensive payment records and track individuals by unique identifiers can readily be leveraged to prevent repeat losses. So serial non-payers pose far less of a threat. If a past defaulter applies for service at a new location, the utility can immediately link the customer to the old write-off and make the new service contingent on repayment of the old debt. The utility can also impose higher deposit requirements on these high-risk individuals. And, like utilities in Europe or telecommunications firms, American utilities may soon be able to get prepayments from delinquent customers through technologies like “smart” meters and prepaid smart cards.
To invoke these more aggressive remedies, utilities must clearly be able to distinguish among customers with the same or very similar names. No utility would want to confuse the Joan J. Jones who skipped out on five months of overdue winter heating bills with the Joan J. Jones who has just moved into its service area as energy procurement manager for the largest manufacturer in the region. Accurate identification will be particularly critical when utilities decide to terminate or refuse service. Nothing puts a utility in a bad light like a wrongful refusal or termination of service. Complete and accurate customer histories will not only prevent these mistakes, they will also help utilities justify their termination practices to regulators.
Evaluating Strategies
Termination of service is always costly and sometimes prohibited, so prevention will almost always be more cost-effective than the drastic cure that termination represents. The real task that a utility faces is to create debt prevention strategies that actually work with its own specific customer populations and in its own unique market environment.
Utilities should realize that developing effective new strategies will be an ongoing and re-iterative process. Measuring and evaluating the net benefits of each new remedy will be essential for the success of any debt reduction initiative. Do aggressively-worded notices produce better responses than friendly reminders? Are automatically-generated mailings and automated phone calls effective, or do they simply waste time and resources better spent on personal calls by trained CSRs? Do budget pay plans and flexible billing dates really reduce delinquencies among low-income consumers, or do they simply postpone the inevitable? The answers to each of these questions will vary with each utility and each customer segment. Getting those answers will be impossible without the ability to segment customers according to comprehensive payment histories and detailed customer attributes.
It should be obvious that the need to conduct continuous evaluations of debt prevention initiatives will place tremendous demands on utility CIS/CRM infrastructures. Traditional premises-based billing systems simply don’t have the capability to track customer response patterns across a wide variety of trials. Many of these systems are already long-overdue for replacement. The credit and collections function is only one of the many areas where customer-related business processes and their associated IT applications may be in need of a thorough overhaul.
To defer action is to ignore the host of indirect costs that these aging legacy systems impose on collection operations; costs like excessive callcenter loads, redundant document generation and postage charges, increased billings for legal and regulatory relations support, unbalanced staff workloads, and excessive field service costs related to frequent service disconnects and reconnects. Like the growing volume of write-offs, these recurring costs represent a constant drain on profits that isn’t going to go away on its own.
The really bad news for the credit and collections function is that, without decisive and concerted action, customer nonpayment rates are certain to continue rising. While oil prices may eventually stabilize, the inexorable pressures of dwindling supplies and increasing worldwide demand will rule out any significant long-term relief in energy prices. As rising energy costs drive service rates up, more and more consumers will fall behind.
Several current demographic trends will probably aggravate the situation. As our population ages, increasing numbers of increasingly forgetful elders will miss monthly payments. Inflation and constraints on social spending will leave consumers on fixed incomes – primarily the elderly and disabled – with diminished abilities to pay increasing rates. Population densities will continue to increase in areas prone to recurring natural disasters like hurricanes, magnifying the impact of these phenomena on local economies and customer incomes. Termination of service will seldom be an effective collections option for customers in these groups, since politicians and consumer advocacy groups will be quick to jump on any collection practices that could be seen as consumer abuse.
In today’s political and economic environments, utilities know they can’t look to regulators or falling energy prices for relief. The only practical solutions will be those they can develop and implement with their own in-house resources. Developing new and more effective debt reduction strategies is the only realistic path utilities can take to stem the rising tide of bad debt. And these new strategies will inevitably require flexible and powerful new infrastructure capabilities that the industry’s aging CIS systems can never provide.
