April 14, 2020

Shorten the Pandemic Bad Debt Exposure Tail

Kevin Peterson

Kevin Peterson

Program Delivery Leader

Utilities have very robust and mature customer bad debt simulation modeling capabilities that drive their policies and operating business models.

These simulation models typically examine a distribution of bad debt outcomes based on key business drivers and assumptions to inform policy decisions by the utilities and support regulatory prudency justification.  Their respective utility computer systems have been designed to support their leading business practices and regulatory obligations to effectively support revenue management processes, including bad debt management and control practices.

woman-in-black-blazer-sitting-on-black-office-chair-3727464Even so, given that the coronavirus pandemic is a 100-year event, utilities will likely be experiencing unprecedented financial exposures due to economic distress and/or higher levels of bankruptcies across their customer base than ever experienced in the past.  For example, the S&P Global Ratings is forecasting a steep drop of the GDP during the second quarter of 2020 (more than 12% contraction), partly due to reducing commercial and industrial usage of electric power as well as the probability of increasing “bad debt expense” as utilities struggle to obtain payment from their customers on bills.  Given this emerging reality, utility executives are concerned about the actual impact to their financial bottom-lines as well as ensuring that the prudency of their current decisions as they progress through the pandemic will withstand the prudency reviews by regulators after the fact.

Utegration is situated to support utility decision-makers around shortening the longer-term tail and/or mitigating the overall magnitude of this unprecedented exposure to bad debt. We can take 3 different approaches to mitigate this risk. 

  • First, we can utilize machine learning to customer payment history and demographic information to more accurate predict the risk of late or non-payment.
  • Second, review the utility’s prior history of bad debt around key drivers to establish pre-pandemic baseline of bad debt profile by customer sector. Then, conduct pandemic scenario-based simulations to quantity bad debt exposures. Utegration’s deep industry expertise, as well as regulatory jurisdiction rules, can help to formulate potential levers to mitigate bad debt exposures and durations.
  • Finally, for utilities considering SAP S/4HANA benefit cases, we can provide recommendations (e.g., contract restructuring, applying stimulus funds at the customer level, amortization of debt, etc.) to offer creative innovations for their customers to reduce the likelihood of customer unpaid bills turning into bad debt.

In summary, as utilities prepare to face their bad debt exposures from this event, there are creative measures and actions that decision-makers can proactively exercise to shorten the tail. We are here to help North American utilities running SAP with system-related questions as they adjust to COVID-19. Just submit your question here on our Digital Help Hotline.