Forgiving Utility Debt, Waiving Penalties

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Forgiving Utility Debt, Waiving Penalties
Punitive Deposits How to Make the Case

• H. Gil Peach, PhD
• H. Gil Peach Associates LLC/Scan America
• 16232 NW Oakhills Drive
• Beaverton, Oregon 97006
• [phone]
• hgilpeach_at_scanamerica.net

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SOME BACKGROUND

• 30 Years doing program evaluations, public
  services and policy work.
• Originally in NYC Studies in Housing Urban
  Renewal, Health, Transit System (Subways), Child
  Services, Hospital Services (Pediatric Medical
  Care), Taxi Bureau, Employment Department, etc.
• Since 1980 Utility Load Research, Rates, DSM
  Evaluation, Low-Income, Universal Services
  Program Evaluations, Policy Studies.
• First Low-Income Evaluation 1988.

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Why the Problem in Paying Gas, Electricity, and
Water Bills?

• Since about 1972, the force of poverty has been
  increasing. It is largely driven by what
  economists call globalization of production,
  although there are other factors.
• Globalization is a new economic order (or the
  resurgence of an old problem for working people).

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Why the Problem in Paying Gas, Electricity, and
Water Bills?

• Income inequality is dramatically increasing. We
  are about back to 1900 in terms of the pattern of
  incomes. The upper 1 now take 20 of all
  household income. The upper 5 own 50 of
  everything. The pattern is getting stronger and
  as it does, cost of service rates cannot work.
• Federal poverty and income measures are
  mis-calibrated. Households up to 350 of poverty
  need some assistance. Most households do not
  have sufficient income money runs out before
  basic needs are met. But we dont like to admit
  it.

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Why the Problem in Paying Gas, Electricity, and
Water Bills?

• The Solution Space is getting smaller for most
  households, and for communities and the country
  as a whole. There is a growing network of
  interconnecting problems, including global
  warming, failure of wheat crops, dead zones off
  the West Coast, loss of jobs, pressure to reduce
  pay, turning key government agencies into raggedy
  ramshackle outfits, increasing cost of living,
  and more

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• Some Positive Examples
• (New Programs)

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Three Examples of New Programs

• (1) Nevada If under 150 of Poverty, and at a
  utility where they pay into the Universal Service
  Program Total cost of gas plus electricity is
  set at the median energy burden for the state
  (about 3).
• (2) New Jersey set at 175 of Poverty and 6.

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Three Examples

• (Example 3) PECO Energy (Philadelphia)
• Token rate with no penalties and no fees for
  customers from 0-25 of poverty

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PECO Rate CAP A
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Examples of New Programs

• It can be shown mathematically that the optimum
  approach is the Percentage of Income Payment Plan
  PIPP.
• A PIPP rate is the best one to go for if you can
  get it. Some utilities are afraid of PIPP
  programs.

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Why Would a Utility want a PIPP Rate?

• Develop the business case for showing the Limits
  to Cost-of-Service based rate designs.
• Show the Need for Percentage of Income or Closely
  Related Design Approaches

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The Benefits to the Utility

• Use the Sector Map tool to look at what
  households can pay.
• Optimize from a utility collections perspective
  (to get households to pay what they can of the
  cost-based bill)
• Structure rates to recover the rest up front
  ask only for what is reasonable and possible
  but optimize that amount.

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Utilities have other Collections Tools Expect
them to continue in use

• Adherence to plan
• Adherence to regulatory requirements
• Payment agreements
• Credit scoring/data mining/segment customers
• Use of trade allies (Collection Agencies)
• New technologies (AMR, Remote Disconnect, Pre
  Pay)
• Etc.

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What to Focus On

• First Focus on Write Offs
• Second Interest on Debt (Cost of Working
  Capital)
• Third Cost of Collections (by activity and step)

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Utility Collections Tools that need to Structured
for Low-Income Households

• Rate Design (PIPP)
• Arrearage Management

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Arrearage Management Can Lower Cost
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Bottom Line

• Utility loses least money with a well structured
  low-income rate that is actually affordable to
  customers.

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Things You Need to Know

• All Utilities have an account for uncollectibles
  (write-offs)
• This account is one of many items that determine
  revenue requirements.
• Revenue requirements are reflected in the current
  utility rate.

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Things You Need to Know

• If the amount for uncollectibles is not correct
  it is trued up in the next rate case.
• Bottom line Customers are already covering all
  the costs of both the collections activities and
  the write offs.

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Things You Need to Know

• To Repeat Customers are already covering the
  costs of uncollectibles (bad debt or write-offs)
  plus the cost of running the utilitys collection
  function in current rates.

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Things You Need to Know

• Most arrearages are temporary and are from missed
  payments. Most are made up within one billing
  cycle.
• Usually, low-income customers are not responsible
  for the bulk of arrearage.
• However, if an account goes three cycles without
  payment, it usually becomes a write off.

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Things You Need to Know

• Arrearages on the books cost utilities money.
  The part of arrearage that is going towards
  write-off costs more the longer it is held on the
  books.
• Utilities typically do not help collections staff
  understand these realities. However the Rates
  Manager and the Treasurer or Budget Director will
  know.

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What did it Take to get PECO CAP A?

• Commission ordered a special study.
• In the rate study we showed every possible
  combination under different rate approaches.
• It became clear that households from 0-25 of
  poverty and in special circumstances needed a
  token rate.

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Why is a Special Rate Necessary?

• The US is a poor country for most households. We
  dont like to admit this, but we are
  transitioning from a manufacturing economy to a
  service economy and our productive assets are
  going into foreign ownership.
• There is more

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Pattern of Income Changes
CBPP data, adjusted. John Mitchell
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Implications of Income shifts for Programs
Program Evaluations

• an increasingly impoverished underclass is
  falling out of the new globalized economic
  system.
• so, this contextual or background factor is a
  major force affecting all programs, including
  utility collections and low-income programs.

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Implications of Income Shifts for Program
Evaluations
Roger Colton, The Home Energy Affordability Gap
in Pennsylvania, April 2003
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Representations of Inequality

• Example - The Income Donut

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Poverty Donuts

• This donut is typical of of the US the bottom
  20 of families receives 3 of community income.
• If this were a mechanical system, an engineer
  would never put equal stress on each sector.

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Poverty Donuts

• If this were a real donut shared by five
  children, we would expect more equality.
• The top 5 receives 18 of community income.
• The top 1.5 receives 8 of community income.

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Where Does Income Come From?

• Market Derived For Utility Customers, market
  income comes mainly from the Job Structure but
  the Job Structure has been weakened by
  Globalization
• In the absence of substantial income transfers,
  traditionally, in the US, we have relied more on
  economic activity and economic growth to increase
  demand for labor and employment.
• But, this mechanism no longer works.

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• JOB STRUCTURE

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Job Structure

• The income donut that we just reviewed reflects
  the underlying
• job structure of a community.

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Job Structure

• Poverty is produced by economic arrangements,
  reflected in the job structure.
• Poverty may be influenced by individual action,
  but only if a structure of opportunity opens up.

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Job Structure

• At any one time, a community, city, state, or
  service territory has a job structure.
• You can picture it as like an organization chart
  for a corporation

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Globalization Centralization Effects on Local
RegionalJob Structures
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Job Structure

• So long as the job structure of a Service
  Territory does not provide enough jobs that
  supply a family wage, a significant portion of
  the families in the community will be payment
  troubled and in poverty.
• - H. Gil Peach

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Job Structure - Market Income inGlobalized
Markets

•  
•  

• On the positive side, prices of goods decrease,
  reflecting lower cost of labor.
• On the negative side, locally produced goods are
  replaced by goods produced overseas. As jobs
  disappear, so do many local businesses as, for
  example, big box stores replace local
  entrepreneurs.

•  
•  

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Job Structure - Market Income inGlobalized
Markets

•  
•  

• The long term trend is to continually drop job
  slots from the job structure.
• This both eliminates jobs and restrains wages and
  benefits.

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Job Structure - Market Income inGlobalized
Markets

•  
•  

• It is now commonplace for young persons to feel
  that they cannot achieve the level of living of
  their parents.
• Structurally, that perception is correct.

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Market Determination of (Market) Income with and
without Globalization.

• With globalization, the local market may clear at
  point G,
• the intersection of line D2-D2 (reduced local
  demand for labor)
• and line S3-S3 (labor supply augmented by
  global labor supply).

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Implications

• As real income declines funding of quality of
  life must take place outside market mechanics.
• Markets have their place but when the job
  structure is broke the market cant fix it.

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Energy Burden

• Reichmuth Sector Maps

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• MISLEADING FEDERAL STATISTICS

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Statistics on Unemployment - 1

• The Bureau of Labor Statistics (BLS) puts out the
  unemployment numbers you hear on the radio or TV.
  As a rule of thumb, economists know to double
  whatever they say. If the government says 6, it
  is actually about 12.

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Unemployment - 2

• Unemployment is a good example of how government
  statistics are defined in ways that diverge
  substantially from useful information.
• They just dont count people who are beaten down
  and give up.
• They dont count people who want full time work,
  but dont have the energy to keep pushing while
  still working less than full time.

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Unemployment - 3

• Bottom Line Unemployment numbers are not true
  in an ordinary sense. In this case, you know the
  true number is always about double what the
  government says, so the true number is not hidden
  very well.
• Still, everyone is repeatedly told on the radio,
  TV, and in the papers and government speeches a
  number that is about half the number that makes
  sense from the perspective of workers and
  families.

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Employment Statistics - 1

• Government numbers on employment are also
  misleading in an ordinary sense.
• Employment is defined in a way that does not make
  sense from a workers perspective or from a
  family perspective.

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Employment - 2

• Lets say the US loses 20,000 manufacturing jobs
  in auto plants this year.
• Suppose over the same year, Wal Mart plus Wendys
  hire 22,000 people.
• According to the government, that is a net gain
  of 2,000 jobs.

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Employment - 3

• The government does not keep the numbers in terms
  of jobs that offer a living wage, along with the
  prospect of job security, some kind of career
  ladder, a defined-benefit pension, and a decent
  medical and dental plan.

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Employment - 4

• The government will barrage us with talk about
  how the job situation is improving because it
  does not care to report about what is really
  happening to the quality of jobs.
• If it reported accurately, it would be reporting
  a national emergency the deterioration of the
  job structure over the last 40 years. Generally,
  the federal government is silent on this sea
  change.

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Consumer Price Index -1

• The CPI is an index that is supposed to indicate
  overall changes in prices experienced by people
  in their role as consumers.
• It is used to adjust Social Security payments,
  other Cost of Living adjustments, and figures
  into the major numbers used to describe the
  national economy.

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Consumer Price Index - 2

• At about the end of the 1960s the method of
  calculation was changed to permit hedonic
  adjustments and substitutions.
• Hedonic adjustment example

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Consumer Price Index - 3

• Hedonic Adjustment
• Lets say a family had a large black and white TV
  in 1968. In 2008 a similar family is looking to
  buy a TV. The kind of unit from 1968 is no
  longer on the market. So the family has to buy a
  color TV set up to receive high definition
  pictures over cable.
• The low end TV is no longer in the market, and
  the new TV costs twice as much.
• The CPI calculation is adjusted to say the new
  TV costs less than the old one due to the
  increase in pleasure.

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Consumer Price Index - 4

• Leave out Actual Costs Families Have to Pay
• Another questionable practice they ask that
  people focus on the CPI with the energy items
  removed (core CPI). When energy prices are
  increasing, how useful is that?
• Example if natural gas price runs up suddenly,
  leave it out because it fluctuates. In this case
  the government reports results with and without,
  but asks that the core CPI be the one that
  everyone focuses on.

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Consumer Price Index - 5

• Treatment of Housing Cost
• Another questionable practice Instead of
  putting the costs of buying a house into the CPI,
  they use the cost of equivalent rental housing.
• That might work sometimes but not in the context
  of the run up in housing prices over the last 15
  years.

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Consumer Price Index - 6

• Substitutions
• Remember that the purpose of the CPI was to hold
  a basket of goods constant so that comparisons
  of prices could be made across years.
• Since the early 1990s substitutions have been
  allowed in the CPI calculations. Williams notes
  that this changes the index from a cost of
  living to a cost of survival index.

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Consumer Price Index - 7

• One of these adjustments might not cause much of
  a problem, but over the years since 1968 there
  have been many.
• So the official CPI is not a real number
  anymore. And, everything it adjusts is therefore
  out of calibration.

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Consumer Price Index - 8
Bottom Line -- What has really happened to pay
since 1968.
See Paulos, Alternative Inflation Index
(1968-2004). Source George J Paulos,
www.gold-eagle.com
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Consumer Price Index - 9

• Bottom Line What has happened to Social
  Security since 1968.
• The cumulative distortions in the CPI result in
  current Social Security payments that are
  somewhere between 40 to 70 too low. If a
  Social Security payment is 20,000 per year, it
  should be by law and if the CPI system had
  not been distorted, about 33,000. (See Williams
  study)

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Poverty Statistics - 1

• The official statistics on poverty in the US were
  created in the 1960s.
• The system was defective from the start because
  it was based on a basket of subsistence goods and
  did not take income inequality into account.

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Poverty Statistics - 2

• The basket of goods would have been hard to find
  even then.
• The method assumes someone at home full time and
  does not take child care expense when everyone
  must work into account.

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Poverty Statistics - 3

• The New Massachusetts Health Insurance proposal
  puts the poverty cut off at 300 of poverty
  (April 2006). Why?
• Because if you have a consensus across the
  political spectrum and are trying to do something
  real, you have to use real numbers.

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Poverty Statistics - 4

• All of the state income self-sufficiency studies
  come out with self-sufficiency income for a
  family at over 200 of official poverty and, in
  some cases to 323 of FPL.
• The self-sufficiency studies are based on family
  budgets, but do not include provision for severe
  illness, retirement income, or (sometimes) a car.

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Poverty Statistics - 5

• In our work, we come up with at least 250 of
  official poverty as the breakpoint.
• Massachusetts and California use the equivalent
  of 250 and use 300 for some (limited) programs.

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Poverty Statistics - 6

• Bottom Line on Poverty
• Conservatively, 100 of poverty in 1965 is 250
  of poverty in 2006. Using the income
  insufficiency methodology and in more
  progressive perspective, program eligibility
  should be at 350.

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• SECTOR MAP TOOL

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Sector Map Tool

• The basic idea is just a graph
• Usage or a proxy for usage on the side.
• Income or a proxy for income on the bottom.

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Sector Map Tool

• Reichmuth Sector Maps For energy burden.

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Energy Burden
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Sector Map Tool

• Reichmuth Sector Map for Affordability.