Imagine your neighbor fell on hard times and found themself struggling to pay their mortgage. Given the economic realities that many are facing today, this scenario shouldn’t be too much of a stretch. But now imagine that the bank associated with that mortgage came to you asking for you to help out your neighbor; chip in a few dollars to cover some of the costs. An odd request from a bank, to be sure, but your neighbor is a good person; no reason for them to lose their house. Besides, if the bank forecloses on them then your home value is going to drop so it’s in everyone’s interest for you to chip in. So, you do.
Now, after all that, the bank turns around and sells the remainder of the debt to a debt collector and forecloses on the house anyway.
Sounds outrageous, right?
Except that is exactly what electric utilities are doing.
The uncollectables misnomer
Chances are the electric company that sends you a bill each month is regulated by a commission of some sort. That regulator is responsible for deciding how much your utility company is allowed to charge you based on a set of costs that the utility incurs and a target rate of return (profit).
The energy burden is a major problem in the US. In fact, about one in three families living in the United States can’t afford to pay their electric bills. And since not everyone can pay their bill, some of those utility costs would not get recovered.
Utilities and regulators account for this shortage and all those unpaid utility bills become ‘bad debt’ on the utilities’ ledger called “uncollectables”. They’re called uncollectables because the assumption is the utility has taken measures to collect those unpaid bills but was unsuccessful. This customer debt gets bundled up and, in some cases, sold to third party collectors. The balance is collected by charging other ratepayers.
“Uncollectables” do end up getting collected.
Where’s the debt?
I can’t tell how far back the practice of collecting these uncollectables on the back of others has been happening. And getting others to cover the costs for those who can’t isn’t necessarily bad. If you are able to pay your utility bill but your neighbor isn’t, then you get charged just a little bit more to cover their bill. It’s like you chipping in to cover your neighbor’s mortgage.
This means that even though the customer who owes the money may not pay their outstanding bill, their debt is still being paid by the rest of society. Technically, there isn’t a debt to sell. It’s being recovered, just not directly from that customer.
So how are many utilities able to sell this “debt” to a third-party debt collector for pennies on the dollar?
Here is how it works:
A group of customers collectively owes $10 million in unpaid utility bills. The utility tries to collect that money through normal processes but eventually gives up and sells that debt for 5% ($500,000). The utility then turns around and charges the customers that can pay their bills $9,500,000. Then the debt collector goes back to those customers who couldn’t pay their bills to try and collect the full $10 million.
This is how the debt gets paid twice. First by you and me and anyone else able to pay their bill. And then again by the original customer, to the extent the collection agency is successful.
And if you haven’t been on the receiving end of a debt collection agency then (1) you are a lucky duck and (2) you should know the lengths they will go to ruin your life in the name of trying to collect on your debt.
Is there at least a good reason for this madness?
If there is a good reason for this practice, for the life of me I can’t find it.
I’ve talked with luminaries in the field, current and former state commissioners, rate design experts, cost allocation professionals, and a host of consumer and environmental advocates. And yet not a single one can provide a good reason for the practice.
The best reason I’ve heard… The closest thing to an explanation I have found, is that utilities can take the revenue from selling the debt and pass it along to customers as a saving. But is it really worth that savings if it means condemning your neighbors to the horrors of debt collection?
Here is a back of the envelope calculation.
The typical household in the US pays approximately $100 a month in electric utilities (obviously this fluctuates by season and location, but just bear with me). Of that $100 monthly bill, approximately $2-$3 helps cover the cost of other customers unable to pay their electric bill. This is based on anecdotal evidence I’ve collected that says about 2-3 percent of residential customers default on their electric bill and end up in uncollectables.
With COVID-19 and the economic downturn, let’s say that number doubles to 5 percent. That translates to approximately $5 a month other customers will need to pay in their monthly bills to cover customers who have defaulted on their bill.
But utilities sell debt at pennies on the dollar. As far as I can tell, 4 percent is a reasonable estimate. For ease of following this example, let’s round that to 5 percent. That would mean that families save 5 percent of 5 percent on your electric bill from utilities selling customer debt. That’s 25 cents in savings for a typical family spending $100 a month in electric bills. And that is a high-end estimate.
Utilities might think they’re doing us a favor by selling off the debt to collection agencies but is it really a savings to us? By condemning our neighbors to a lifetime of debt collector harassment for less than 25 cents a month?
What makes this all the more senseless is that the existing energy system is unjust and racist. It has no intent to be racist, but the disproportionately negative impact of the energy stem has on BIPOC communities is undeniable. BIPOC communities suffer from higher levels of pollution, higher energy bills, and higher rates of shutoffs. It stands to reason that the practice of selling customer debt also follows those same trends.
A simple solution
With the COVID-19 pandemic still raging, now is the worst possible time to lift utility shut-off moratoriums. A new study estimates that a nationwide moratorium on utility shutoffs could have reduced COVID-19 related-deaths by almost 15%. On health and safety grounds alone, those moratoriums should remain in place. Yet, they are being lifted in some states and will eventually be lifted in most (if not all) states. When that happens commissioners must do everything they can not to make a bad situation worse.
As far as I know, there are no laws requiring utilities to sell their customers’ debt. It seems to be something commissioners started approving years ago, the practice spread and eventually became normalized. Once the previous commissioners approved it, the next generation of commissioners simply didn’t challenge it, assumed it was status quo, and went along with it. The precedent has become policy, but it can be undone.
Utilities should voluntarily agree to not sell utility debt.
Commissioners should discourage utilities from selling debt and create disincentives that prevent it.
And to any extent that some law is being misconstrued and used to ‘mandate’ the sale of debt, then legislators should modify those laws.
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