Special report: customer service and bad debt
A special report sponsored by CGI that looks at how utilities can reduce bad debt and improve customer service.
Utilities count the cost of debt
Energy and water companies must understand the circumstances of customers that cannot afford to pay their bills – and customer service is the key.
Debt, in particular bad debt, is a perennial problem for the energy and water companies. And the bad debt problem is getting worse. Analysis from PwC has revealed a 60 per cent rise in bad debt across the energy sector, and the water sector has seen a 44 per cent increase.
This burden adds hundreds of millions of pounds to the total customers have to pay, and utilities are eager to recoup as much of this as possible.
For water companies, the growing burden of bad debt rose from £263 million to £379 million in 2015. The impact on customer bills is an increase from an average of £15 to £21 a year in England and Wales.
Energy companies face similar problems. In the four years from 2011 to 2015, bad debt to energy retailers rose from £400 million to £640 million.
This level of bad debt, which is debt that cannot be recovered, increases business risk for utility companies, and they have to find ways to service and cover these costs.
Some offer, and are obliged to offer, social tariffs, under which vulnerable consumers are given discounted rates and different payment options to ensure they can at least pay something towards their utility bills. The logic behind this is that collecting some money is better than nothing at all.
For this to work, companies must contact the customer, decide whether they are a “can’t pay” or a “won’t pay” customer, and then follow courses of action to deal with the affordability of energy and water bills.
Affordability is a complex subject with many variables. A customer’s ability to afford a service is not fixed by income alone, but also by family and personal circumstances, such as school-age children or dependents with disabilities, other financial commitments and previous credit history.
This complexity, tied in with the customer service aspect of the utilities, means it can be difficult to recover debts and deal with the unrecoverable money that is owed.
In this special report, Utility Week looks at some of the customer service techniques that are used to help address the issue of bad debt, and how this practice will evolve in the future.
Try to understand your customers
Technology can help utilites learn more about those who struggle to pay
Bad debt is a serious problem for the utility companies. The collective money owed – and that will not be directly recovered – across the energy and water industry was more than £2 billion in 2015 alone.
To make up the shortfall, this money is then divided up across the remaining customer base of those who do pay. In the water industry, this now adds £21 to every bill in England and Wales.
In the energy sector, the average debt of customers who are prevented from switching rose from £268 in 2013 to £418 in 2015.
The situation is more pressing in the water sector because disconnections as a result of debt are not allowed. In the energy sector, disconnections are now rare, but self-disconnections, where a pre-payment meter is not topped up with sufficient credit before it runs down, can occur relatively often.
Deryck Hall, head of policy and research at the Consumer Council for Water, told Utility Week: “Growing levels of bad debt suggest too many customers that are struggling to pay their water bill are not seeking or getting the support they need.”
Identifying and tackling the issue before it becomes a serious problem is the key to reducing the scale of the problem. This can involve informing customers and putting them on social tariffs to repay any debt that is owed and prevent any more debt being built up.
Currently, all but two of the water companies offer social tariffs, with Hartlepool Water and Bournemouth Water set to introduce them next month.
Regulator Ofwat has identified this and said it will “challenge” companies on bad debt in PR19.
Speaking at Utility Week’s Consumer Debt Conference, John Russell, senior director of strategy and planning at Ofwat said: “For PR19, when companies submit their plans, we will be looking for efficient debt management practices and considering ways to reduce bad debt levels.”
Russell said: “We will challenge companies’ bad debt levels in our price-setting process. We will do that by using evidence from within the sector, and from other sectors.”
He also highlighted evidence that increasing numbers of customers are struggling to pay their utility bills. One in five households across England and Wales now say they feel their bills are unaffordable.
The problem of bad debt, especially in the water sector, has been highlighted further as the government continues to push for domestic retail competition.
The Department for Environment, Food and Rural Affairs (Defra) said the challenges of bad debt and innovation must be resolved before the introduction of domestic water competition.
PPMs and smart meters
In the energy sector, indebted customers are also an issue. Of customers with pre-payment meters, 42 per cent are using them to repay a gas debt and 39 per cent are using them to repay an electricity debt, according to Ofgem figures.
Failure to keep the meters in credit, a proportion of which goes straight to paying off some of the accrued debt, could result in self-disconnection.
However, Energy UK members have signed up to the Safety Net for vulnerable customers in 2004. This was set up to prevent self-disconnections, with the member organisations making a commitment to never knowingly disconnect vulnerable customers.
If a customer has been disconnected and is subsequently identified as vulnerable, the supplier will reconnect its customer as a priority.
The impact has been profound. In 2003 there were about 16,000 disconnections of domestic customers for debt in the UK. In 2015 – the most recent year for which published data exists – there were just over 250.
However, more can still be done, and the suppliers, both across energy and water, are seeking to do more to prevent customers, in particular vulnerable ones, from getting into debt.
Utilities are seeking to use technology, data quality audits and affordability assessments to get an insight into what services consumers are able to afford, enabling them to offer more realistic payment plans.
Eamonn Tierney, managing director of Credit Solutions, said: “Affordability assessments using big data technologies give the most accurate, real-time view of a customer’s income, living costs and spending habits without the need for manual intervention.
“By gaining a complete understanding of customers’ financial circumstances from the day they sign up, you as a utility provider have a better view of their ability and readiness to pay bills on time, and can help ensure they can afford the payment plans they sign up to.”
By working with customers and predicting those who may enter difficulties, utilities can improve the service these customers receive.
Customers that receive well-targeted mobile communications are more inclined to pay their debts on the spot because automated communications are less embarrassing than talking with a collections agent. Tailored, automated contact enables personal, secure and convenient self-service options for making a payment, or even negotiating a payment plan.
Identifying issues before they become bigger problems, and engaging and working with customers, is key to solving the bad debt problem. This improved customer service will lead to a better relationship with the bill payers, and to the recovery of more money in a sustainable manner.
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