Utility companies should look into selling bad debt

Joel S. Lewis, InoVision Inc.

There is no question that the utility landscape is rapidly changing from the protected environment of a state-regulated monopoly to today’s open marketplace full of benefits and challenges. While this reality is effecting many aspects of the utility industry, a significant and largely underutilized area rests in the selling of bad debt.

Joel S Lewis
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As the utility industry evolves, there seems to be a gradual understanding of this opportunity with industry leaders who recognize that there is a way to recover profit from zero-valued assets. And yet, even with this evolving attitude toward selling bad debt, there remains a wealth of untapped revenue for every utility company who has un-collectable accounts that are draining profits from their bottom-line.

Changing attitudes

On the operations side, one segment of the utility industry that has been particularly slow to take advantage of this opportunity are credit departments. Historically, credit managers viewed unpaid accounts–and the customers–with outright disdain. Such customers are perceived as an inconvenience, since they represent only incremental work and no returns to the company.

The handling of bad debt is seen strictly as an additional administrative cost to the utility company, ultimately recoverable by charging higher rates to all customers, including preferred customers over many years. Consequently, there never seemed to be any overriding incentive to even address the issue of written off debt. Utility companies simply continued to refer accounts to traditional collection agencies and accept the recoveries, however marginal, after primary collection activity ceases.

Choosing the right partner

Fear of complaints to regulatory bodies is the single greatest fear that utility credit managers face. In fact, although deregulation is upon us, state regulation has not entirely been lifted. This means that among other considerations, utilities are still somewhat dependent on regulators for ratemaking. If your company lacks control of the collection activity and consumer complaints to regulatory bodies arise, the negative impact on your public image could mean even more losses to the company than the bad debts themselves.

Even if you manage to avoid bad publicity, a major business concern arises if the purchasing entity is unable to thoroughly address consumer inquiries and the ineptitude results in a back flow of calls to the utility call center. Such mismanagement of your accounts could ultimately result in more than the original losses to your business. It could mean lower productivity and decreased profits, too.

Because of these and other concerns, utility companies are often hesitant to adopt even the most proven strategies from other non-utility business segments, who may not be as sensitive to the challenges of regulated industries.

Helpful considerations

After your company makes the determination to sell the zero-valued accounts, the next decision is when. Should you sell after your internal collection efforts finish, or wait until the next stage in collections, once a debt-recovery agency has exhausted their collection cycle? While there are advantages to each approach, selling your bad debt early in the charge off timeframe eliminates administrative expenses associated with administrating bad debt internally, and usually results in a better price for the new accounts.

When tallying up the benefits of selling bad debt, it is important to consider the impact of the returns beyond just the immediate returns. In most cases, the advantages of selling dormant bad debt extend far beyond just increased cash flow. Utilities who sell bad debt can:

“- Reallocate staff to profitable ventures. A utility company can streamline staffing or reallocate employees. The result: staff is focused on reducing losses and staffing costs decrease.

“- Receive higher returns than by traditional collection methods. Not only does the utility immediately benefit from the instant infusion of cash to the bottom-line, but the returns are usually higher than even the best case scenarios of collection companies who handle the accounts beyond the primary agency collection cycle.

“- Eliminate liabilities. Eliminate any liabilities for FDCPA [Fair Debt Collection Practices Act] violations by in-house staff or in a collection agency environment, primary or post primary placements.

“- Project recoveries with confidence. When you sell accounts regularly and at established rates, you can maintain recovery rates without increasing administrative costs, i.e. forward flow selling. With forward flow selling, you can predict returns and accurately establish budgets.

“- Enjoy the time value of money with guaranteed returns. Instead of waiting months or years with no guarantee of any future return, enjoy the opportunity to reinvest and yield future value from current bad debt.

Right information, right decision

The benefits of selling bad debt can be substantial; however, in order to be successful, it’s important to choose the right partner. Conventional wisdom may suggest that price should be the dominant factor. While price is important, utilities need to also consider the experience and track record of a potential partner when making a decision.

Consider the following steps when deciding on a partner:

“- Look for industry-specific experience and a track record of positive results. It’s hard to believe now, but recognize that the bad debt customer of today may one day return to the service territory and be a good paying customer which means more business in the future. For this reason, you need a qualified partner who handles each account with the respect and professionalism that reflects well on your company.

“- Look for flexibility. Choose a buyer who permits account options, such as closing, repurchasing, or replacing accounts.

“- Check for forward flow. Will the prospective buyer enter into a ‘forward flow’ contract so that you can budget bad debt recoveries at set intervals, like on a monthly, quarterly, or annual basis? If not, consider that the buyer may not be interested in maintaining a relationship but only in maximizing the return on this investment. This attitude may show itself in the way your accounts are handled, too.

“- Make sure that the company does not resell accounts. Be aware of your buyer’s practices before you sell your accounts. If the company resells accounts, you run the risk of losing all control over how the accounts are handled.

“- Find the win-win situation. A true partner will be interested in your future success. The selling of bad debt should always be a ‘win-win’ situation and by having the purchaser share his results, it will enable both parties to ensure that the relationship is mutually beneficial by adjusting any new purchases, or a forward flow, in accordance with the buyer’s actual collection experience.

Lewis is president of InoVision Inc. He was previously employed at Dominion Virginia Power for over 25 years. Following his departure from Virginia Power, He helped found InoVision.

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