In an economic recession, more consumers assign utility bills a low priority, especially given the widespread perception that delinquent gas and electric accounts are not likely to be terminated (versus cable TV or wireless phone). For electric and gas utilities, it’s increasingly important to know how customer payment behavior is changing, how quickly, and how much the risk of bad debt is rising.
Oliver Wyman recently completed a benchmarking study on how utilities estimate their receivables risk, what risk trends they are seeing in the current economic environment, and what tactics they are using to stay ahead of the situation. Out of a dozen participating major utilities, ten reported increased receivables, and most were finding it necessary to increase their uncollectible accounts reserve as the result of reduced customer payments. These findings, coupled with our experiences working with utilities on collections and bad-debt issues, highlight the importance of several practices that are particularly useful when economic conditions cause customer behavior to change:
- Collecting and analyzing real-time customer behavior data. Observing customer behavior in real-time is the most effective way to anticipate potential baddebt problems as customers wait longer to pay, more accounts go delinquent, and accounts receivable deteriorate rapidly.
- Applying customer behavior analytics across the customer lifecycle. From customer acquisition through delinquent noticing and termination targeting, there are many opportunities to reduce bad debt through the smart application of customer behavior insights to credit and collections processes and policies.
- Building a flexible yet sustainable bad-debt reserve model. Leading utilities are moving to reserve frameworks that are forward-looking, well-integrated, and aligned with operational strategy.