Energy and water companies must adopt the same innovative approaches being used to improve front line services to help customers control debt before it becomes unmanageable, argues Parseq’s Harvey Hieke.  

Bad debt continues to be an endemic problem for UK utilities. It’s been a critical industry agenda point for some time. Yet there is no indication a dent has been made in the £2.2 billion owed to water companies alone discovered by Ofwat and PwC in 2017.

Reducing the cost to serve

The lack of progress in tackling the issue has meant the importance of collecting revenue effectively now goes beyond its most obvious commercial dimension. Managing debt, and in turn reducing the cost to serve, has become a significant competitive and reputational differentiator for utilities.

More so than ever before, water and energy companies are in the spotlight. The target of media pressure, scrutiny from charities and, most recently, the Labour party’s radical plans to renationalise the sector. In this climate, the methods utilities use to collect revenue are arguably a more pressing consideration than balancing the books. Energy and water companies cannot afford to treat customers struggling financially without care.

Helping control bad debt

If a customer is in arrears, water and energy companies are obliged to offer a fixed payment plan. This must take into account how much they are able to pay. However, by the time it gets to that point, the amount of debt the customer has accrued is often so large that they will struggle to pay off the full amount. It leaves the utility out of pocket and often vulnerable people in even greater financial distress. To avoid this, utilities need to identify when customers are struggling to pay their bills. They should use solutions that are often earmarked for customer experience to help them proactively control debt before it’s unmanageable.

One great example of a solution that can help utilities do this is the provision of a flexible payment option. At Utility Week’s recent Consumer Debt Conference, N-Power’s head of regulation said cancelling a Direct Debit is one of the first indications a customer is struggling to pay their bills. Some energy companies offer a payment option that allows customers to pay for exactly what they’ve used. This is at the end of each month, instead of a flat rate.

Flexible Direct Debit could prevent spiralling arrears

However, by expanding this, and giving customers the option to miss a payment through flexible Direct Debit, or pay a reduced amount if they cannot afford it, without cancelling their Direct Debit altogether, water and energy companies could help customers avoid spiralling into arrears that are hard to overcome, while maximising revenue. And by enabling them to better manage bad debt, it can also help utility companies reduce their cost to serve. Therefore boosting their profitability and increasing their competitive advantage.

In practice, when a flexible payment option is used as a tool to let energy customers pay exactly what they owe, the customer must evidence what they’ve used by supplying meter readings. If flexible Direct Debit was used to give customers the ability to pay less, or indeed nothing one month and make it up the next month, there would need to be a similar mechanism in place to evidence their inability to pay, or a willingness on the part of the utility company to let payments roll over. However, no matter how it actually works, the availability of the option should discourage customers from cancelling their Direct Debit and ignoring a debt before it becomes too big to tackle.

Innovative debt management that supports vulnerable customers

Ultimately, the onus is on utilities to work with customers that are struggling to pay their bills. By adopting an innovative, progressive outlook to debt management that leverages the latest solutions, such as flexible Direct Debit, water and energy companies can support and cultivate better relationships with their most vulnerable customers and protect themselves from scrutiny.

Harvey Hieke is head of client and business development at Parseq

Originally published in Utility Week