A FATHOM Drought Watch Special Edition
World Water-Tech Investment Summit: London, February 2016
The Water Services Regulation Authority, the water regulator for the United Kingdom also known as Ofwat, published its most recent report2 on water affordability and debt for the UK water market in December 2015.
The report highlights several existing or imminent problems facing UK water utilities. Further, it provides recommendations for how UK water companies can improve responsiveness to the affordability issues extant in England and Wales, while at the same time addressing the very real financial impact that bad debt has on the sustainability of the UK water market.
BAD NEWS
The key findings of the report include some stark statistics for the UK water industry:
- Revenue outstanding, or bad debt, has increased from £1.9 billion in 2010, to £2.2 billion in 2014.
This 17% increase is despite the fact that the average bill remained stable over the period. Bad debt remains a significant drag on utility financial performance and a represents a real cost—and risk—for all water customers. Water utilities rely on the revenues from water bills to continue to improve service, invest in the replacement of aging infrastructure and deliver the construction of new infrastructure. These items are critical in achieving Ofwat’s vision of for the water sector in England and Wales—one where customers and wider society have trust and confidence in vital public water and wastewater services.3
Interestingly, while the number of bad debt issues are increasing, the number of debt enforcement claims has decreased over the past five years. This reduction is attributed to the amount of time and resources required to recover these debts—which exceeds the probability of recovery.
- 24% of households spend between 3% and 5% of their disposable income on water and sewer services while a further 11% spend more than 5%.
This indicates that the issue of affordability will likely remain a key driver in regulatory decision-making, and underscores the requirement for utilities to maximize the efficiency of the operations and revenue collection to avoid having to seek price increases.
Collecting all of the revenue to which a utility is entitled and reducing bad debt is a critical element of maintaining Ofwat’s low-cost, high-service objective for the water industry. With Ofwat driving down the recoverable costs of service in the current price review period (PR14) by another 5% by 20204, there is the potential for significantly increased financial risk for utilities that do not respond by improving their accounts receivable metrics.
- Social tariff uptake has missed target registrations.
Fourteen of the 18 largest water companies have introduced social tariffs designed to assist those customers needing financial assistance. Most, however, most have not achieved their targeted registration numbers. This indicates that there is a lack of awareness of the availability and applicability of these programs, most likely as a result of deficient channels of communications between the utilities and their customers.
This situation may also reflect the fact that these programs typically require the aggregation of data from many different data sources including debt servicing agencies, credit reference agencies, and welfare agencies among others. For such a program to be successful, significant data integrity and integration are required.
- More than half of customers are not billed based on the amount of water they use.
The number of customers served with metered water increased from 42% in 2010 to about 50% in 2014. While that is an improvement, the fact remains that more than half of the customers in England and Wales are billed by tariffs based on rate categories for their domicile and not on the basis of how much water they actually use. From an affordability perspective, these customers have no direct control of their costs.
Without access to current, near-real time water usage information—such as that provided by Advanced Metering Infrastructure (AMI)—customers cannot make conscious decisions about their water use. Informing a customer 30, 90, or 180 days in arrears about their usage precludes any affordability benefits of metering, and in fact simply serves to reduce customer satisfaction.5 The result is that even if a customer wanted to actively manage their consumption to control their costs, the lack of metering, or the lack of access to the meter consumption data, prevents them from doing so.
BAD DEBT
Utilities worldwide suffer from the related problems of increasing aged receivables and bad debt. In some cases—particularly in poor economic times or where statutory prohibition of disconnection for non-payment exists—water utilities can see accounts become increasingly delinquent, leading to the ultimate write-off of 10 to 20% of billed revenue.7
And although companies can recover some of the costs of bad debt through rates, Ofwat has taken an active position to make sure inefficient bad debt costs are not passed on to customers. In fact, in 2013 Ofwat rejected Thames Water’s application for a price increase that included recovery of £75 million in increased bad debt costs after “a review which included an assessment of the efficiency of the company’s bad debt management. This meant that the company—not customers—had to absorb these extra costs.”8
This issue is compounded because in reality it is very difficult to collect small bills—and water utility bills are notoriously small. The problem is the cost-to-recovery ratio can, in many circumstances simply be too high.
This means debt prevention must be the mantra for UK water utilities—maximizing the opportunities for a customer to pay, making the payment process extremely flexible, intuitive and easy, and touching the customer through many channels, and at many times during the payment and collection process. By integrating Interactive Voice Response (IVR) technologies with Customer Information Systems (CIS), the payment process can become much more proactive as customers are reminded of their due dates via IVR and offering payment options such as credit card, direct debit, check and more. As a result, fewer accounts become delinquent, fewer customers are subject to late fees, and customers are afforded flexibility and control over their payments. And in fact, acting early when the amounts are small “increases the prospect of recovery by as much as three times.”9
BIG DATA
Collecting bad debt is only the beginning. The fact is, most utilities are not collecting all of their available revenue. Many utilities are losing revenue in their data.
While utilities are good at billing for services that exist within their billing systems, it is surprising that in many cases there are serious data quality and integrity issues that prevent the collection of all revenue for all services. “We are only as good as our data” is a truism when it comes to billing and collections.
Notably, Ofwat has recognized that “the quality of customer data is…critical to successful debt recovery.” They encourage water companies maximize the use of data in eliminating bad debt, and that “there is a clear benefit in companies engaging with customers in arrears as early as possible.”11
FATHOM REVENUE ASSURANCE
Using the principles of big data analytics, FATHOM finds the missing revenue in utility data and provides the necessary architecture to maximize revenue collection, and eliminate bad debt. Combined with our U2You customer presentment portal, near-real time consumption and financial data is immediately available for customers making the bill payment process easier.
FATHOM also unites the physical and logical assets for the utility, ensuring that all services are billed, and gives early warning for potential bad debt situations while significantly expanding outbound communications and payment options for customers. The result is increases in revenue 5% to 20% and bad debt reductions in the order of 75%.12
In short, the utility collects more revenue from their existing customer base, avoids the accumulation of bad debt, and lessens the requirement for price
increases.
Increasing the collectable revenue and reducing the time to receive that cash has a remarkable impact on utility operations. In many cases it can significantly improve the utility’s financial position, funding multi-year capital improvement plans, or materially reducing debt. The combined impact of found revenue and improved cash performance can pay for the investment in smart grid technologies.
And by maximizing their existing revenue opportunities, utilities can turn to more robust affordability management programs such as subsidized social tariffs, and continue to provide exceptional service at very low costs.
REFERENCES
1Ofwat, PN 07/15 Water companies urged to do more to help customers struggling to pay, http://www.ofwat.gov.uk/pn-0715-watercompanies-urged-to-do-more-to-help-customers-struggling-to-pay/
2Ofwat, “Affordability and debt, 2014-15”, http://www.ofwat.gov.uk/wp-content/uploads/2015/12/prs_web20151201affordability.pdf
3Ofwat, “Affordability and debt, 2014-15”, op cit. pg. 1.
4Ofwat, PN 09/14: Water bills held down, http://www.ofwat.gov.uk/pn-0914-water-bills-held-down/
5FATHOM Drought Watch, Utility Ghouls: Consumption, Rates And Revenue… Oh My!, Volume 1, Issue 29, 31 October 2015 (http://www.gwfathom.com/download/1531/)
6Ofwat, “Affordability and debt, 2014-15”, op cit. pg. 8.
7Hill, T., Symmonds, G., The Smart Grid for Water, Advantage Publishing, 2013
8Ofwat, PN 07/15 Water companies urged to do more to help customers struggling to pay, op cit.
9Ofwat, “Affordability and debt, 2014-15”, op cit. pg. 18.
10Ofwat, “Affordability and debt, 2014-15”, op cit. pg. 16.
11Ofwat, “Affordability and debt, 2014-15”, op cit. pg. 18.
12FATHOM. Data from Comprehensive Annual Financial Reports and public utilities commission Annual Reports for utilities employing FATHOM Meter Data Management, Customer Information Systems, and Customer Presentment Platforms.