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UTILITY Week 6th October 2017

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UTILITY WEEK | 6TH - 12TH OCTOBER 2017 | 17 Finance & Investment mance levels across the water companies, but even frontier companies are not perform- ing on a par with the other sectors. Water and sewerage companies with the highest percentage of bad debt costs include Southern Water (5.7 per cent); United Utili- ties (4.3 per cent) and Welsh Water (4.1 per cent). Better performers include Severn Trent (1.8 per cent); Yorkshire (2.4 per cent) and Northumbrian (2.4 per cent). Water-only companies perform better gen- erally, with South East Water, Bournemouth Water and Sutton and East Surrey Water all achieving bad debt costs below 1 per cent. Worse performers include Bristol Water (3.4 per cent), South Staffordshire Water (3.5 per cent) and Affinity (3.6 per cent). Then there are inconsistences with how companies perform despite having to con- tend with similar situations. For example, there is a strong correlation between depri- vation and bad debt charge, but some com- panies are outperforming their peers with similar levels of deprivation. Water-only companies are performing better than water and sewerage companies, due to, among other things, lower depriva- tion levels and lower bill values. With bad debt forming a large proportion of the cost to serve equation – a key area of focus for PR19 – water companies will need to take stock of their current handling of bad debt and look within the business, across the sector and beyond for ways to improve. Black says: "We have put more emphasis on not just comparing companies with each other and trying to see how this impacts on the sector, but also expanding the compari- son to take into account leading practices in other sectors." He adds: "The good news for the sector is there is actually significant scope for improvement and the study has identified a number of areas where the sector could do better – drawing on other sectors particu- larly around better use of customer data and understanding who the customers are." Nonetheless, Black says PR19 will not include "glidepaths" to allow companies time to work towards the new, efficient cost of bad debt. A spokesperson for Water UK says the industry provides support measures of more than £40 million each year to vulnerable customers. "The water sector is proud of its unique statutory commitment to maintain supply to those who are struggling to pay their bills. However, some consumers do refuse to pay and we are working hard to tackle such situ- ations and minimise the impact of any bad debt," they add. Some customers really can't afford to pay, but that doesn't explain the level of bad debt in the sector. Are there going to be financial penalties and rewards associated with bad debt? The level of bad debt is a key element of the cost allowance for retail price controls. In PR14, the conversation around bad debt was [whether it was] in proportion [to] the retail cost. What we'll be doing in PR19 is seeking an efficient level of cost draw- ing on this report, evidence from other sectors, and evidence of the best prac- tice in the sector. Companies that have inefficient levels of bad debt costs will have to bear those costs themselves. Companies with better and efficient levels will enjoy the benefit of being better performers of efficient bad debt. So, companies will make more money if they manage down their bad debt and less if they don't? If companies have inefficient levels of bad debt, and there is evidence to suggest that quite a lot of them have, then they will have to bear that cost themselves rather than be able to recover them. What about exceptions for compa- nies in areas of high deprivation? One of the points that this study found, and we identified in PR14, was that the level of deprivation impacts the level of bad debt for the company. There are some customers who really can't afford to pay and that does drive some of the level of bad debt, but as the study notes that doesn't explain the full difference between companies, nor does it explain the level of bad debt in the sector, so it may well be in PR19 there is a case for making some adjustments for the level of bad debt in allowance for the level of deprivation but it wouldn't be the case that it would explain all the differences between companies. Why aren't water firms handling this as efficiently as other sectors? It's been a difficult issue for the sec- tor for some time. I think retail costs themselves and bad debts are a key part of that. Prior to the introduction of price controls in PR19, it has been an area the sector hasn't had to focus on. There has been more focus in the last two to three years, but we think there is some way to go. It squares with our findings on the retail review that when we compare the sector's practice of retailing it hasn't kept pace with other sectors. The level of bad debt is growing despite the fact water companies have all introduced social tariffs – are these not doing what they are supposed to do? The evidence suggests there has been some reduction in the level of bad debt charged in the last couple of years, but not strong enough to con- clude what has been an improvement in the level of bad debt. I think the level of social tariffs will help; it's moved from 44,000 people on social tariffs in 2014 to 130,000 last year. That will help but it's only part of the picture. How far to do you want water companies to go? Would working with third parties to collect debt be a move you would look favourably on? Water companies already engage with third parties to collect debt but we think there is more they can do in terms of data sharing. Some of the more exciting things are around the ways companies bill customers – and particularly the frequency of billing. Some companies are billing on a six-monthly basis. That's not common, other retailers are oen billing much more frequently. For people struggling with tight cash flows, large bills every six months can be difficult to manage. There also needs to be better iden- tification of customers; if you don't know who you are supplying it can be difficult to collect from them. There's lots more companies can do to get on top of it early. Q&A David Black Senior director of Water 2020, Ofwat

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