Utility Company Debt

malcsaunders

I was watching a recent BBC news feature about the Energy Price Cap being lowered in the near future and the discussion of the £3bn bad debt within the industry. There was an interview with someone that said that the the decrease in the Price Cap was welcome but it would not help them pay off the debt that had built up. It appeared as though this person's debt would not be written off.

I am very confused over why this bad debt is the responsibility of the customers that are non-debtors.

If anyone can provide me with any clarity on the following points I would be extremely grateful:

1. How have Ofgem verified the amount of this bad debt?
2. Why is the bad debt the responsibility of the paying customer?
3. Is the customer only being asked to pay the subsidy for debts that are written off or the entire amount of debt as it currently stands?
4. If debts are going to be written off isn't that an incentive to become a debtor?
5. Since it is not possible to know how much of the debt will be recovered how has Ofgem arrived at its subsidy figure?
6. How will Ofgem track which customers are being pursued to repay their debt and which debts are written off?
   
7. What happens to the monies once our supplier has collected them?
8. How could I become the owner of a very profitable business and still have my loyal customers pay for any losses that I incurred?
   

I am going to have a go at answering 4. myself. Ofgem will not be doing any auditing of the subsidy monies meaning the monies can go anywhere that the suppliers want them to go.

Brie

Not numbered or in the right order but some thoughts....

Debt is easy to track.  A company looks at it's accumulated book of accounts and sees how many of it's customers are in credit and how many are not and by how much.  And reports this amount to Ofgem.  It's a moving target given that as we all know companies like to have us on a fixed DD which means that by the end of summer we're in credit and by the end of winter we are in debt and they then say they need to put up our DDs to "keep us financially safe".  

Bad debt will be those customers who miss a lot of payments completely or are on repayment plans that are insufficient to ever clear their debt.  Those who at the end of summer are still in debt despite their DDs being higher than their monthly use.  

Any one who does any accounting work and has IT skills should be able to set up a system that will track both of these as well as those accounts that suddenly go to zero due to being written off.  

Companies will likely have a rating system that tells them who the profitable customers are and who are the less desirable.  

Why should people support those that are in debt?  Because that's what we do in our society.  Same as the childless pay for schools and the income taxes from all of us support those who cannot work.  One could have money and decide to not pay and join the debtors but then those individuals would have their credit history affected and stop being able to get loans, mortgages, mobile phone contracts etc.

MacPingu1986

Bad debt from other customers isn't the responsibility of paying customers as such - but because it's effectively a cost that energy suppliers have to bear, it's built into operational margins, as it is in most sectors (eg: supermarkets factor in theft of products into their operational models).

To respond to your queries...

1) - Suppliers have to report to OFGEM regularly with all sorts of data and analytics - bad debt is one of them and OFGEM can audit this and request supporting information and methodologies. Sending deliberately misleading information to the regulator could result in substantial fines, supply license loss, etc...

2) - It isn't, but as above almost all large consumer businesses that supply products on credit ultimately factor bad debt into their pricing models so they can achieve (or hope to achieve) target profit margins.

3) - Customers aren't being asked to pay of debts of other customers at all - the debts remain outstanding debts. How it works is that a bad debt element is included to covers that element of the suppliers operational costs (because they have limited avenues to recover bad debt themselves)

4) - Covered in 3) above - debts aren't being written off.

5) - There's lots of information and analytics to create a reasonably accurate figure of the likelihood of bad debt recovery - OFGEM has probably obtained information from energy suppliers on their bad debt recovery data for the past X years (and adjusted to reflect the recent increased barriers/protections against fitting prepayment meters)

6) - OFGEM doesn't track this - Energy companies themselves will work out where to spend their debt recovery resources to optimise recovery rates.

7) - They are debts owed to the supplier so the money belongs to the energy supplier.

8) - Almost any business set in a sector that provides goods/services on credit will factor in a bad debt cost into how it prices its products.

MultiFuelBurner

Which means from 1st April some regions will get nice and close to the £1 a day £365 a year in standing charges for those that have gas and electricity.

Just one of the contributing factors is this "bad debt"

I don't mind this too much but do question one are of bad debt and that is those who received the £900 worth of government help. Twice.....what did they spend it on?

malcsaunders

I definitely never meant to suggest that we should not help people in debt and I do not recognise that in my post.

My point is that it should not be a legal requirement that customers pay a debt levy to companies that have a debt problem caused by their own greed. I am reasonably sure that the directors of these energy supply companies will already be far more comfortable financially and healthily than any of their customers.

I do think that it is a brilliant business model. Make your prices for essential services unaffordable, push a large number of your customers into debt and then get Government assistance in forcing the remaining customers to pay down that debt. And repeat!

400ixl

Energy suppliers haven't set their own prices for a few years now, that has been Ofgen, so it isn't their business model at all and not their greed as you put it.

MacPingu1986

malcsaunders said:

I definitely never meant to suggest that we should not help people in debt and I do not recognise that in my post.

My point is that it should not be a legal requirement that customers pay a debt levy to companies that have a debt problem caused by their own greed. I am reasonably sure that the directors of these energy supply companies will already be far more comfortable financially and healthily than any of their customers.

I do think that it is a brilliant business model. Make your prices for essential services unaffordable, push a large number of your customers into debt and then get Government assistance in forcing the remaining customers to pay down that debt. And repeat!

I'm not sure if you're just trolling but to respond again.

Bad debt in the energy supply sector isn't caused by corporate greed.

The retail energy market is a pretty competitive one and prices rose because of large increases in the wholesale price of energy. This caused many suppliers to either go bust or suffer huge losses because the price cap meant they were having to sell energy to customers for much less than it cost to buy it.

Unlike most other sectors that provide goods on credit, energy companies have much more limited avenues to recover bad debt. They can't really choose who their customers are (they can inherit customers from other suppliers via deemed tariffs and have to offer the SVT tariff to anyone) and where a customer doesn't pay you can't shut of the service, nor can you stop more debt accruing unless you install a prepayment meter - and that has been made much more restrictive so substantial debts can build before (and if) a prepayment meter is ever installed. So to recap:
1) - You have limited choice over your customers; and
2) - Without a prepayment meter your product is supplied on credit by default; and
3) - Its really hard and lengthy, and in many cases not possible at all, to install prepayment meters;

This means bad debt arises to a much greater degree than other sectors, the regulator had a number of choices and wanted to protect vulnerable customers and struggling households against prepayment meters installations, which means wider industry charges to cover the shortfall created.

Hoenir

Bad debt. Let's say you owe your energy supplier £300 for electricity supplied to your rental flat. One day you decide to upstick and return home to Spain. The bill never gets paid. The energy supplier isn't able to pursue you to recover the debt owed. That's a cost to the business. That's what everybody else has to chip in and pay for. 

Take any business. Bad debts are a problem. That's why there's credit checks, identity verification, trade references, review of annual accounts. To minimise the losses. As bad debts are simply passed onto every other customer. There's no free lunches in this world. The pie can only be cut so many ways. 

BobT36

Brie said:

Why should people support those that are in debt?  Because that's what we do in our society.  Same as the childless pay for schools and the income taxes from all of us support those who cannot work.  One could have money and decide to not pay and join the debtors but then those individuals would have their credit history affected and stop being able to get loans, mortgages, mobile phone contracts etc.

Then nationalise it and pay it as a tax. 

This privatised profits, socialised losses system has to go. 

malcsaunders

MacPingu1986 said:

Bad debt from other customers isn't the responsibility of paying customers as such - but because it's effectively a cost that energy suppliers have to bear, it's built into operational margins, as it is in most sectors (eg: supermarkets factor in theft of products into their operational models).

To respond to your queries...

1) - Suppliers have to report to OFGEM regularly with all sorts of data and analytics - bad debt is one of them and OFGEM can audit this and request supporting information and methodologies. Sending deliberately misleading information to the regulator could result in substantial fines, supply license loss, etc...

2) - It isn't, but as above almost all large consumer businesses that supply products on credit ultimately factor bad debt into their pricing models so they can achieve (or hope to achieve) target profit margins.

3) - Customers aren't being asked to pay of debts of other customers at all - the debts remain outstanding debts. How it works is that a bad debt element is included to covers that element of the suppliers operational costs (because they have limited avenues to recover bad debt themselves)

4) - Covered in 3) above - debts aren't being written off.

5) - There's lots of information and analytics to create a reasonably accurate figure of the likelihood of bad debt recovery - OFGEM has probably obtained information from energy suppliers on their bad debt recovery data for the past X years (and adjusted to reflect the recent increased barriers/protections against fitting prepayment meters)

6) - OFGEM doesn't track this - Energy companies themselves will work out where to spend their debt recovery resources to optimise recovery rates.

7) - They are debts owed to the supplier so the money belongs to the energy supplier.

8) - Almost any business set in a sector that provides goods/services on credit will factor in a bad debt cost into how it prices its products.

Does point 8) above mean that the energy suppliers would already have factored in bad debt?

MacPingu1986

malcsaunders said:

Does point 8) above mean that the energy suppliers would already have factored in bad debt?

No, I explained this in my previous two posts but as a recap:

In the business of energy supply the SVT price cap limits suppliers ability to factor bad debt into their pricing.

Secondly, further OFGEM restrictions on installing prepayment meters make it much harder to recover bad debt so bad debt costs have increased. Remember again that energy suppliers can't particularly choose their SVT/deemed customers and they can't disconnect them if they don't pay. So if you can't install a prepayment meter there are very few other actions available to suppliers to recover the debt.