Affordable service and utility profit: doing well by doing good in the utility industry

by Jerrold Oppenheim, Ron Grosse, Theo MacGregor, Penni McLean-Conner, Wally Nixon

As energy prices rise higher and higher, utility arrears are increasing sharply. As nearly all customers are struggling to pay their bills, it is in utilities’ financial interests to find ways to help their customers. A nation as rich and civilized as ours expects all-but-universal provision of essential services such as natural gas, electricity, and water. Customers with limited resources who cannot pay their bills can therefore be very expensive.

Many utilities already extend themselves for their low-income customers. Some have figured out that they can share in the very substantial benefits that they provide to their customers. The cost of shut-offs can be reduced by as much as 90%, for example, and write-offs can be cut as much as 25%. Today’s price environment makes it especially important to focus on customers’ ability to pay their utility bills. The bottom line is that low-income customers are important to the bottom line.

In Massachusetts, for example, an agreement among utilities and non-utility parties — representing such diverse interests as industrial customers, environmental concerns, and low-income customers — partnered with the regulator to allow successful efficiency programs to earn the utilities extra profits. Community Action Program agencies (CAPs) implement the low-income programs, which are piggybacked on existing federally-financed efforts and easily meet cost-effectiveness tests. The programs are implemented in the names of the utilities. The result is low-income clients who are better off — saving 10-35% from their home energy consumption — and utility shareholders who not only provide a social good but also profit from it.

Similarly, low-income rates, shut-off protections, and arrearage management provide benefits to all sides. The programs are coordinated with local, state and federal assistance programs such as fuel assistance, case management, budget counseling and access to other resources to help customers become the regularly paying customers they aspire to be by giving them the means and skills they need to pay their bills.

Again, one result is that low-income clients are better off because payment pressures are relieved. Another result, again, is that utility shareholders are better off as utilities retain customers, increase revenues, and lower costs.

The experience of KeySpan’s Brooklyn gas operation is illustrative. There, an arrearage management program combines arrearage forgiveness with the hiring of social workers and specially trained dedicated customer service representatives to help customers learn budgeting and other skills. The program, called “OnTrack,” has had these results, according to reports filed with the New York Public Service Commission:

* Office collection actions were down 34 percent;
* Field collection actions were down 75 percent;
* Shut-offs were down 62 percent;
* LIHEAP and other grants almost doubled;
* Total payments were up at least five percent.

Most of these gains have been retained in subsequent years. KeySpan exported this OnTrack program to its Boston operation, but, after its profitable New York experience, did so with shareholder money. Subsequently, the Massachusetts legislature adopted arrearage management for all utilities.

The need is great

Between 1995 and 2005, on average across the US, natural gas prices for residential customers doubled — going from $5.54 to nearly $11 ($10.96).

During the same time period, the price of natural gas for the production of electricity more than doubled — it went from $3.10 to $6.62. Yet, while gas and electricity prices were going through the roof, incomes for all but the wealthiest were flat in real terms — they didn’t keep up with the price increases, and people could not pay their bills.

The average energy burden for a minimum wage earner is four times that of a median income family. The energy burden referenced here is the percentage of a household’s annual income that must go to pay for just electricity and heat from natural gas and does not take into account other energy needs, such as for transportation. This statistic represents the burden for the states in middle America — it is higher on the coasts and if a household heats with electricity.

The result of these increasing energy burdens is that other necessities are being short-changed. More people are using food banks. The Iowa LIHEAP Energy Survey found nearly one in five low-income seniors went without medical care to pay heating bills. A National Bureau of Economic Research survey showed that poor children outside of the South eat 292 fewer calories per day in cold months than in other months. The questions many families in the U.S. face today are stark: Do we pay for heat or do we eat in the winter? Do we get needed health care or just avoid heat stroke in the summer?

Lessons from Wisconsin in the 1980s

It is necessary to fully understand the context within which one is operating to make good decisions and develop appropriate strategy. Even though one may not be purposely operating under a pretext, the results are the same: policies are not appropriately researched before implementation; strategies and tactics are not questioned; and the operating results are never critically assessed. As a result, to quote another old maxim, “If you do what you always did, you get what you always got.”

Nowhere is that more true than in utility credit, collection, and disconnection policies and practices. With very few exceptions, there has been little research on alternative methods and policies. Conventional wisdom [read: pretext] prevails, and each company tends to repeat their performance of past years without questioning whether there might be ways to lower costs and reduce reliance on disconnection as a collection tool.

As a result, a 1983 study of US utilities showed that the number of disconnections per 1000 customers varied from one percent to more than 12 percent, as large a variation in an operating statistic that one is likely to see. Even more surprising, hardly anyone in the industry seemed to be bothered by this wide variation. Most seemed content to chalk the variation up to regional differences in customers rather than fundamental issues of policy and practice.

At least three context questions are raised by these data.

Context # 1 — Where are utility costs incurred and what are the implications for service policy?

* Research at Wisconsin Public Service (WPS), serving the area around Green Bay, showed that 70-80% percent of all customers pay before the next bill is rendered and therefore cost $0.00 in collection costs;
* 15-20 percent receive reminder notices — the costs for which increase with the frequency and complexity of contacts; and
* 5-10 percent receive disconnection notices and contacts, with the most severe cases having service disconnected multiple times at great utility expense.

These percentages are generally true for most companies. A cost curve would be at zero for the first 70-80 percent of customers and then ramp up exponentially as it approaches the most chronically disconnected customers.

Two things seem to be obvious from this simple analysis. First, the greatest cost saving potential would address those customers who are disconnected the most. Second, the only way to accomplish such savings would be to assess the effectiveness of current theories about why people don’t pay their bills and implement policies to address the reasons.

Without critical assessment of effectiveness, the proper context for understanding would never accurately be known and, more importantly, there would be little understanding of how to achieve change for the better.

Context #2 — What are the underlying assumptions of our policies regarding disconnection of service?

For many years most utilities have assumed that disconnection is an effective collection tool and if collections are poor it’s probably because there haven’t been enough disconnected customers. But is that really true? Or is it in fact a pretext that serves to perpetuate old practices that are really not effective?

In this context, disconnection would be effective provided that all customers receiving notices had the money to pay their bills, knew exactly what they were doing and forked it over just before or when they were actually disconnected.

This is the assumption that was tested in 1983 in the WPS Lifestyle survey of customers who were subject to disconnection. Here are the results:

* Only 12 percent of customers subject to disconnection actually had the resources to readily pay the bills. This group is the only segment that fit preconceived notions of the disconnected customer.
* About half of the remainder (i.e., about 44 percent) had to divert resources and generally lacked the skills to effectively manage their finances. More often than not, disconnection resulted in other significant problems in their life and the cycle was usually repeated month after month without improvement or resolution.
* The remainder simply didn’t have the resources. Disconnection of this group produced a statistic — one disconnection — but no money. Many of the disconnect statistics were made up of these customers.

With this insight and consequent changes in tactics, WPS reduced disconnections by 90 percent over the next ten years while holding write-offs to the same range as the historical average, i.e., in the best 15% of all companies.

Context #3 — How should agencies and utilities work together to lower costs and avoid disconnections?

In spite of some recent changes in the industry, there are some simple facts that are still true:

* Utilities are often the first ones in the community to know a customer is in trouble. Therefore, they are the logical information source and starting point to work toward resolution.
* Most of the resources are in the administrative hands of community agencies, either public or non-profit. If the utility customer is to receive help, their utility and the agency must cooperate.
* Developing working relationships is a prerequisite to ensuring effective and efficient use of resources that are always in short supply.

A utility’s long term goals must be to effectively provide affordable and continuous service for all consumers. Broader contexts and critical understanding of theories and policies by both utilities and agencies can thus make a difference for all customers and particularly low-income customers.

What utilities don’t know CAN hurt them

Five years of low-income program experience at Entergy, an electric utility serving four states in the middle South, shows that utility companies too often do not know a great deal about the overall costs and benefits of low-income energy assistance. As a result, they may underestimate the importance and value to all customers and company shareholders of programs that keep service connected for households in need. This presents both a challenge and an opportunity for utilities.

Notwithstanding its size and sophisticated billing, credit and information systems, Entergy’s low-income initiative found it difficult to ascertain, track and report to senior management even an estimate of the amount of LIHEAP revenue received. Indeed, Entergy’s credit and collections department did not know how many of its residential customers were low-income or were eligible for or actually received LIHEAP, let alone how many dollars were received from third-party sources of bill payment assistance, including LIHEAP.

To get at the LIHEAP data, the company’s low-income initiative engaged the Arkansas Community Action Agencies Association (ACAAA). After almost a year of gathering input from its 16 member agencies, ACAAA reported that Entergy Arkansas, Inc. received almost $2.5 million in LIHEAP payments in 2003. As a result of similar research in its other states, Entergy estimates that it was paid more than $10 million in 2003 LIHEAP funds.

On the other hand, utilities in other parts of the country know much more about their low-income customers — their income levels, their needs for assistance, and the sources of that assistance. There is thus a wide divergence in the level of utility understanding of the need for low-income energy assistance, the levels of assistance available from all sources, and the value that increased assistance can provide to customers and utility shareholders.

Some things utilities don’t know

At many utilities, there remain many unsubstantiated myths about who are the “bad pay” customers. Without good information on income levels, segmentation studies, and payment behaviors, it may be easy to lump all low-income customers in with the generic “deadbeats” who are often said to cause high uncollectibles and write-offs.

The fact is, most low-income customers — especially the elderly — pay their bills on time and in full, and without causing the utility to incur costly collection expenses. In short, they are a profitable segment to serve — albeit too frequently at the expense of their health, medicine, comfort, or nutrition.

Through research conducted in Texas in 2004, Entergy determined that its low-income customers, especially the elderly, actually had better payment records and fewer uncollectibles than other residential customer segments. The study, conducted by Louisiana State University, confirmed that low-income customers as a group are overwhelmingly “good pay” or “slow pay” — but they do pay and should not be the primary focus of intensive collection activity. Earlier research had allowed Entergy to estimate that low-income customers contribute over $631 million a year to the company’s revenues.

The Texas research shows that many of the “bad pay” cost causers are in fact not low-income. Rather, they are younger, working poor and middle-income families who have taken on too much consumer debt and do not pay their utility bills on time because of poor money management skills, lack of education, vulnerability to predatory lenders, abusive product and service marketers, coupled with ineligibility for the very limited governmental assistance programs like LIHEAP or charitable assistance from utility or other “fuel funds.”

More things utilities don’t know — the unmet need for assistance

Utilities that don’t have a handle on who their low-income and working poor customers are and what their payment behaviors reveal will of course have a poor idea of how few of their eligible customers actually receive bill payment assistance of any kind. The sad fact is that on a national basis fewer than 12 percent of those who are income-eligible actually received any assistance from LIHEAP in 2004. This percentage is declining, owing to the chronic and worsening funding inadequacy for the program, exacerbated by the drastic run-up in natural gas and heating oil prices since 2000.

Many utilities know even less about the income status, needs or access to assistance of the remaining 88% of their low-income customers, let alone those working poor households who earn just enough to cut off their eligibility for LIHEAP.

If utilities don’t know the income levels and payment behaviors of their customers in poverty, they will fail to recognize how much it costs to futilely seek to get “blood from turnips” and will be unable to determine whether the company would be better off with “half a loaf” collected from customers kept on the system under a rate discount, percentage-of-income payment plan (PIPP), credit counseling, or arrearage forgiveness plan, or through reduced usage and bills as a result of weatherization assistance.

Likewise, such companies will not know whether they are actually able to collect late fees (where applicable) and reconnection fees from low-income customers who truly lack the ability to pay.

What can be done to boost the appeal of utility affordability programs?

Ignorance can be a pretext for doing too little to provide energy assistance for those in need.

But utilities can educate themselves about their low-income and working poor customers: who they are; how many there are; what their needs and options are; how much revenue they contribute; what would make them better, more valuable customers; what it costs to serve them; what it costs to NOT serve them. There are many steps that companies can take that will add to their bottom lines and provide win/win opportunities for their customers.

Options for companies include:

* Starting a low-income initiative;
* Engaging people in affected departments in learning more about low-income customers and their behavior: Credit & Collections, Regulatory, Governmental, Customer Service, Community Relations, Public Affairs, Corporate Social Responsibility, Communications;
* Assessing the costs and benefits of improving energy affordability;
* Begging, borrowing and stealing best practice program and regulatory approaches across the region; and
* Reaching out to and working with other utilities, as well as with community organizations and state agencies and regulatory commissions.

Utilities can also help dispel the myths that are obstacles to effective assistance by educating shareholders, executives, employees, regulators, legislators, policy makers, and the public at large about the immense unmet need for help and how meeting it can add to the company’s bottom lines, while providing compassionate help to those in need.

Companies should be bold in asking regulators, fellow utilities, advocates and provider agencies to join them in innovating and adopting best practices for improving energy affordability. What they learn can help both their bottom lines and their customers.

What utilities HAVE learned can be profitable
NSTAR Electric and NSTAR Gas present a current-day example of these principles in action in Greater Boston. Many utility executives are challenged in today’s age to reduce arrears and subsequent bad debt. Too many times the tendency is still to rely on non-pay disconnects as a primary method for encouraging payment. However, there are more cost-effective and customer-focused approaches in use at NSTAR. CEO Tom May often says that serving customers well means they are not in the dark literally or figuratively. With credit-challenged customers, NSTAR focuses on a comprehensive service offering that includes programs, proactive outreach, early-targeted intervention, and customer feedback. The results are increased customer satisfaction and reduced costs.

A foundation for reaching NSTAR low-income customers is the offering of a low-income rate. Over 69,000 customers are on this rate. Customers eligible for this rate include customers who are eligible for the low-income home energy assistance program or who receive a means-tested public benefit with a gross household income less than 200 percent of federal poverty level.

NSTAR’s arrearage forgiveness program, which is administered by local agencies, offers budget and other counseling, payment plans, and needed assistance of $200-700. The LASER (Leveraging Assets for Self-sufficiency through Energy Resources) program combines funding from NSTAR with federal grants administered by state and Community Action Program agencies, which provide the counseling. The ultimate objective of the arrearage forgiveness programs is to move customers off of funding assistance.

“Energy Bucks” is the brand-name used to promote energy efficiency programs and related services. This community-based program is a collaborative effort with the low income agencies and the other investor-owned gas and electric utilities in the state. Targeted multimedia advertising, press conferences, TV ads, transit system signage and print ads are leveraged in this program.

NSTAR also promotes its offerings using standard methods of bill messaging and bill inserts, as well as at various community events. In addition, NSTAR was the first in the state to promote the Energy Bucks campaign and other services to low-income customers via proactive outbound telephone messaging. NSTAR also offers energy educational programs for children in kindergarten through eighth grade.

For credit challenged customers, NSTAR activities are focused around customized early intervention. The objective is to use field disconnects as the exception rather than the rule.

To continue to improve service offerings, NSTAR maintains a close partnership with state and Community Action Program agencies, regulators, municipalities, and advocates. Together, they share ideas and concepts on how to better serve the diverse customer base. In cooperation with the Community Action Program agencies, NSTAR also monitors best practices in the industry and completes thorough cost/benefit evaluations on all programs.

NSTAR’s low-income programs, focusing on low-impact interventions early in the credit cycle, have had an extremely positive business impact. In three years, overall customer satisfaction increased while regulatory commission billing complaints decreased 51 percent. Award-winning energy efficiency programs for low-income customers received national recognition. The reduction in the net write off rate has been 25 percent.

Conclusion

The bottom line is that low-income customers are important to the bottom line. A carefully designed and operated series of efficiency, arrearage management, and credit management programs can have big bottom-line results — decreased costs for shut-offs and other collection actions, increased revenues from customer payments and other sources, and reduced write-offs. Is it prudent to operate any other way?


Jerrold Oppenheim has represented Attorneys General, consumers, low-income consumers, labor unions, environmentalists, and industry before utility regulatory commissions and other forums for more than 35 years. His precedent-setting cases brought requirements for service quality, the first low-income discount rates in three states, and an end to discrimination in utility pricing, credit and marketing. He has also negotiated nationally recognized low-income efficiency, renewables and arrearage management programs and legislative provisions protecting consumers from volatile utility rates, rates that subsidize industrial customers, and service short-cuts by non-utilities.

Ron Grosse graduated from the University of Wisconsin Milwaukee and had been with WPSC from 1965 until his retirement on January 2, 2001. He has served in a variety of customer related capacities within the company, and has also served on the leadership team of the American Gas Association / Edison Electric Institute Customer Services Committee. He has been a leader in development of customer service programs for low-income customers. His interest in low-income energy and customer service issues has resulted in several published articles and numerous presentations to utility and retail trade organizations. Ron serves on the board of directors of the National Low Income Energy Consortium [NLIEC].

Theo MacGregor was director of the Electric Power Division of the Massachusetts commission, where she oversaw all of the utilities’ energy efficiency efforts, helped develop regulations for electric industry restructuring, and co-chaired the NARUC Staff Sub-Committee on Energy Resources and the Environment. Since 1998, she has provided expert analysis to state governments, attorneys general, utility companies, consumer advocates and others, specializing in policy development in the electric and natural gas industries, especially in the areas of affordability, energy conservation, consumer protection and utility bill management. MacGregor has nearly 20 years’ experience in energy issues, including more than ten as a regulator, and has an MBA from Simmons College School of Management in Boston.

Penni McLean-Conner, in her role as vice president, is responsible for overseeing the company’s Customer Care organization. She’s responsible for all customer services including customer inquiries, billing, metering, credit & collections, energy efficiency and energy services. Since joining NSTAR, the Customer Care team has improved customer service through initiatives around automated meter reading, customer relationship management, and customer self-service. Penni joined NSTAR in 2002 after serving as Director of Customer Service for Tampa Electric in Florida, a position she held since 1998. Prior to that, Penni worked for 12 years with Duke Power. During her time at Duke, she had roles in Electric Operations and Customer Service.

Wally Nixon was a champion of residential consumer interests at Entergy Corp. where he directed the company’s low-income programs, including promotion of federal, state, local and charitable energy assistance. For 15 years prior to joining Entergy in 1990, he led consumer advocacy activities as a deputy attorney general of Arkansas and as special legal counsel to the Arkansas PUC, where he served on the NARUC Committee on Energy Resources and the Environment. Since January 2005, he has provided consulting services to utilities, other organizations, and utility regulatory agencies on residential energy and affordability issues.

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