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16 | 6TH - 12TH OCTOBER 2017 | UTILITY WEEK Finance & Investment Analysis T he £2.2 billion mountain of bad debt carried by UK water companies is a well-known problem, costing every customer in the UK an estimated £21, accord- ing to Ofwat. But not for much longer. As the regulator seeks to drive efficiencies across the board in preparation for the next price review, PR19, it has turned its sights on bad debt. Ofwat commissioned a report from con- sultant PwC, comparing UK water compa- nies' handling of bad debt to that of other sectors. It finds that water companies lag behind their peers – evidence that Ofwat will use when setting the financial parameters that will drive penalties and rewards for bad debt in PR19. The Retail Services Efficiency Benchmark- ing report published on 28 September says "the efficiency of debt management is now critical". "Bad debt impacts on all customers because companies recover the cost of bad debt from all customers," David Black, sen- ior director of Water 2020 at Ofwat, explains. The regulator says it is becoming "increasingly important to measure how effi- cient water companies are relative to other sectors, and whether there is scope to push the efficiency challenge even further". And with the study showing the water sector is being outperformed in all areas relating to bad debt management by retail energy and telecommunication sectors, as well as local authorities, there is certainly room for improvement. Ofwat estimates achieving an average performance level across the sector at the current frontier level of 0.6 per cent could save customers up to £9.40 each on their water bill. So why are water companies performing poorly? Reasons in the report include: poor management of property voids and debt management in general; infrequent billing and contact with customers; and not provid- ing real consequences to address payment avoidance. The water industry may be "lagging" behind other sectors, but the gap in perfor- mance "cannot be explained entirely by the different legal frameworks" such as those that prevent the sector cutting off the supply to households due to non-payment, Ofwat suggests – insisting there's no scope to rein- troduce cutting off supply as a last resort for dealing with bad debt. The regulator says companies could do more themselves to improve bad debt levels by focusing on areas such as debt manage- ment practices and customer service. How- ever, it acknowledges there has been some improvement in recent years, although it highlights that net debtors are on the rise in the water sector. Black hints Ofwat is interested in seeing more frequent billing and billing in advance to improve the management of customers that do get into a position of bad debt and measures "ensuring there are real conse- quences for customers who can pay but won't pay". The report suggests water companies suffer significantly higher bad debt charges (the real cost to the business of uncollected debts) compared with energy, telco and local authorities, and more should be done to investigate void properties. In its assessment of bad debt manage- ment, the report explores six areas in which companies can improve: the number of days sales are outstanding; doubtful debt provision; bad debt charges; unbilled debt; customer prepayments; and voids. Ofwat explains that in setting targets for water companies to drive improvements, it is important to be aware of "unintended consequences". It acknowledges companies may have previously avoided good debt management practices because of the perceived impact on SIM or that the investment required to investigate void properties would be too expensive. But the regulator says it will consider "a broad range of measures when determining water company performance on bad debt". It depicts a stark difference in perfor- Fix water bad debt In a drive for efficiencies across the board in the next price review, Ofwat has turned its sights on bad debt, says Katey Pigden. Areas for improvement Taking inspiration from the comparable sectors, Ofwat is urging the water sector to: • proactively manage customer data; • move to more frequent or advanced billing; • improve availability of affordability schemes; • provide real consequences to address payment avoidance; • increase level of customer prepayments; • improve customer service and increase contact with customers. WATER AND SEWERAGE COMPANY PERFORMANCE WATER-ONLY COMPANY PERFORMANCE Weighted average deprivation score (IMD) Weighted average deprivation score (IMD) Voids/bad debt rate Voids/bad debt rate Bad debt expense (%) Deprivation Voids Bad debt expense (%) Deprivation Voids Source: PwC Source: PwC SVT YKY NES WSX ANH TMS SWT WSH UU SRN 15 20 25 30 0% 2.0% 4.0% 6.0% 1.8% 0.6% 0.6% 0.7% 1.4% 2.0% 3.4% 3.5% 3.6% 2.4% 2.4% 2.7% 2.9% 3.0% 3.2% 4.1% 4.3% 5.7% SEW SBW SES PRT DVW BRL SSC AFW 10 15 20 25 30 0% 2.0% 4.0% 6.0%