Receivable/Accounts - Information for Credit and Collection Issues

Monday, June 3, 2013

Energy & Utility Debt Collection


 
Something that has been spoken about recently is utility collections in Canada.  Many hydro-electric utility RFPs have come up for tender in the last six months.  While I've written specifically not long ago about discussing a reasonable contingency rate for this industry, what is worth further discussion are some of the operational challenges surrounding utility collections.

Generally speaking, utility paper is very collectible -- in my experience, 30% is the typical median for third party collection success rates, with the usual proviso that this can be affected by aging of accounts, client information gathering processes, and internal recovery attempts at the front end of the credit cycle.

Difficulties to be overcome on utility receivables is that often individual clients do not list large numbers of files, and these accounts typically perform poorly on predictive dialer systems.  Because these portfolios are smaller, they typically are not given dedicated manual attention or an individual work plan by larger collection vendors, which causes a shortfall in performance.  Recently I viewed a hydro RFP which stated the utility's historical collection liquidation was 5% -- this is simply deplorable.

So let's look at some of the hurdles that need to be overcome on both sides of the fence...
 

Challenges For The Collection Industry

When a collection agency receives utility paper, it's important to understand that standard utility assignments aren't one portfolio -- they are really three separate sub-portfolios combined together, and each segment requires its own strategy.

q The largest portion of the utility portfolio is a consumer trace portfolio.  Many of these accounts occur from a change of address rather than a deliberate desire to withhold payment.  Trace tools are important to find these consumers, as often they will change cities.  Credit bureau reports and triggers, data appends, Canada Post NCOA searches, and a review schedule to revisit trace files are important strategy points for success.

q The second largest segment of utility accounts are straight-forward consumer accounts with an average principal balance of $300 to $500.  This segment has the potential to liquidate 50-75%, as right party contacts are reasonably viable.  Many utility debtors are home owners or are employed consumers, but they are suffering from financial hardship -- a registered item against their personal credit report is strong leverage, but it needs to be used with some compassion and patience.  This segment of accounts do not require a hard line approach -- finesse and persistence are an important part of recovery results.

q The last but still significant segment of the utility portfolio is a commercial segment -- this can be proprietorships or limited corporations with debt owed.  Again, many of these accounts move to collections because the business relocates.  As well, a  common occurrence are struggling or unstable businesses attempting to evade creditors by changing their operating name or business structure while retaining the same ownership, location, or business clientele (most provinces have laws to prevent evasion of debts in this manner -- refer to the Bulk Sales Act, etc).

Because this portfolio is contains a significant amount of trace accounts, a manual process will prove to be the most effective, with a minimum workflow cycle of at least 120 days for maximum recoveries.  Tools such as leveraging interest on accounts, credit reporting, and considering larger balances for litigation are all key components for success.

 
Challenges For The Utility Industry

Internally, many utility providers have their collections and customer service staff intermingled, with credit controls more focused on customer service.  The client service or credit manager of a utility often wears many different hats and has a variety of responsibilities.   Technical support, receivables manpower, and customer screening are often resources that are in short demand to the credit department.

Because hydro utility receivables has a lower range of average balances owing, and a requirement for a quick turnaround on new customer integration, internal first party commercial screening of accounts is often not thorough enough, and proper background information on companies (proprietorship vs. corporation, personal guarantees, commercial surety bonds as security, etc) are simply not present.

Externally, most utility providers do not command the attention or support deserved by their collection vendors.  They typically don't list enough files to require segregate staff -- even medium to large utility providers only list upwards of 300 collection files per month, which would be the minimum of a single FTE (full-time equivalent, or individual staff member).  The average balance is also lower than a financial institution or financial lender, so it often is difficult to expect an experienced collection staff member assigned to their paper. 

As well, utilities have a delicate balancing act to maintain -- while their delinquent receivables are important to their credit cycle and revenue stream, many utility providers have a strong municipal presence and involvement in local communities, and their public image is important to them.  An aggressive collection vendor can often do more harm than good if local image is not considered.


Advice For The Utility Credit Manager

Whether you are currently reviewing a collection vendor, or you are seeking to improve your internal credit controls, here are a few points to consider:
 
q Utility providers with a lower bad debt write off ratio often have solid credit cycle controls -- this might include multiple contact points for consumers (places of employment, email addresses, cell phones), personal or trade references, update account information regularly, require security deposits for trouble accounts, have distinct information gathering templates for consumer and commercial accounts, and may require personal guarantees for borderline accounts.
 
q There should be a review and confirmation process of customer data, at least once a year, if not more, to ensure long-term customers' profiles remain accurate.
 
q An internal receivables team should have a workflow plan to deal with accounts, including some internal recoveries after termination of services.
 
q If you use an RFP to select new collection vendors, have a scoring criteria that does not necessarily award the business to the lowest bidder, but can ensure some level of success for a solid net back result.
 
q Third party liquidation should be in the range of 25-35% for primary assignments, and 5-10% for secondary assignments.
 
q Your collection vendor should be able to demonstrate some ability to trace your accounts, and report to both Equifax and Trans Union.  See the article Auditing Your Collection Agency http://receivableaccounts.blogspot.ca/2011/12/auditing-your-collection-agency-101.html
 
q For larger balances owing, have a process to evaluate small claims court actions resulting in a garnishment of wages or a lien against property owned.

 
Conclusion

I have always believed that utility collections can be a high performing portfolio by first party creditors and third party collection vendors if handled correctly.   If you are an energy, utility, or natural gas creditor and would like to discuss credit cycle strategies, I would be happy to discuss any challenges you are encountering.  I can be reached directly at 226-946-1730.

Thanks kindly,

Blair DeMarco-Wettlaufer
Kingston Data and Credit
Cambridge, Ontario
226-946-1730