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RD 7/00
TO THE REGULATORY DIRECTORS OF ALL
WATER AND SEWERAGE COMPANIES AND
WATER ONLY COMPANIES
9 March 2000
INFORMATION REQUIREMENTS FOR NOTIFIED ITEMS FOR BAD DEBT AND THE ADMINISTRATIVE COSTS OF PROVISION FOR VULNERABLE CUSTOMERS
In Final Determinations: Future water and sewerage charges 2000-05, the Director announced that an increase in the level of bad debts and costs of debt recovery due to the provisions of the Water Industry Act 1999 and increases in costs due to administering provisions protecting vulnerable customers would be treated as notified items. He said that the bad debt notified item was structured to maintain the incentives to collect bad debt, and would require the collection of additional information on debt collection costs and practices in order to identify benchmark companies in this area of activity.
In MD 157, Licence modification - condition B, the Director said that Ofwat intended to consult shortly on the data required to identify the revenue effects and additional costs in these areas. Attached is a paper forming that consultation. Comments are invited on the proposals made in the paper, in particular on any practical difficulties companies might have in providing the data requested (both for 1998-99, the benchmark year, and future years), and when companies would be able to comply with these data requirements.
The proposals in this paper focus on the information that would be required for the operation of the notified items. Ofwat will be consulting separately on proposals to monitor companies' debt recovery and payment activities.
In selecting data to be collected to support the notified items, Ofwat has been mindful of the need to strike a balance between minimising the extra burden on all concerned, and collecting enough data annually across the industry to be able to benchmark the revenue effects and costs incurred.
Responses to these proposals should be submitted no later than Friday 14 April 2000 to Rob Wesley at Ofwat. This will allow time to incorporate comments into the paper to be issued in the summer about reporting requirements in the new quinquennnium.
Yours sincerely
M Saunders
Head of Consumer Affairs and Tariffs
Information requirements for Notified Items for bad debt and the administrative costs of provision for vulnerable customers
Information for the bad debt notified item
Information requirements for this notified item fall into two groups – information about revenue lost due to non-payment or late payment and information about the costs incurred in collecting revenue. The aim is to collect baseline data for 1998-99 on pre-Water Industry Act 1999 revenue collection and bad debt costs, so that any change in costs for an individual company due to the legislative change can be identified, and compared with the change in costs for other companies.
It is proposed that a separate, new table be created in the Annual Return for these two sets of data. Ideally, information about 1998-99 and 1999-2000 would be collected at the same time as this year's Annual Return, or later this year, in order to iron out any reporting difficulties. A proposed structure for the table, and detailed line definitions, is given in Appendix 1.
Revenue lost due to bad debt
The information on bad debt that is currently collected is the annual charge or credit to the profit and loss account for bad and doubtful debts (June Return Table 21, line 18 for water, Table 22, line 19 for sewerage). This is the increase or decrease in the accounting provision for bad debt, not the actual amount of bad or doubtful debt for that year, and so is not suitable for the purposes of the notified item.
The suggested approach is to collect information on the amount of outstanding revenue at the end of each financial year, and the amount of revenue that at the end of the financial year has been outstanding for less than 6 months, from 6 to 12 months, from 12 to 24 months and for over 24 months.
Outstanding revenue is revenue that has been billed and is due, but has not yet been collected. This will include revenue that is paid late as well as bad debt, and should include any sums that have been written off. If a customer has agreed to pay in instalments, then "outstanding revenue" should only include instalments that are due, but have not yet been paid. Instalments that are not yet due should not be included as outstanding revenue.
Collecting information on the amount of revenue that has been outstanding for the periods of time given above would allow any drift towards late payment to be monitored. These figures would also be less affected by end of year effects than the total outstanding revenue figure.
The ban on disconnecting customers for non-payment in the Water Industry Act 1999 affects household customers and certain specified non-household customers such as hospitals. Other non-household customers are not affected. To simplify data collection, it is suggested to collect information only about household customers – it is unlikely that the amount of revenue lost from the small number of specified non-household customers, or from mixed use premises, would be at all material in terms of the notified item.
It is proposed that the information should be split between measured and unmeasured customers as billing patterns are different between these two groups (generally unmeasured customers are billed in advance, but measured customers billed in arrears), so late (or non-) payment patterns are likely to be different. Outstanding revenue from a customer who has changed between measured and unmeasured charging during the year should be assigned to the customer class (measured or unmeasured) at the end of the financial year.
It is also proposed to collect the number of customers with outstanding revenue for each time period, to allow the average outstanding revenue per customer to be calculated. As a customer who has had revenue outstanding for more than 24 months may also have revenue that has been outstanding for less than 24 months (and for the other time periods), the number of households in each category may not sum to the total number of households with revenue outstanding.
For water and sewerage companies, the information should be collected for each service. For water and sewerage companies that have billing arrangements with water only companies, a further issue which could be considered is the proportions of revenue that are collected by water only companies and by the water and sewerage company itself. Information on this matter could be collected as part of the information requirements, or companies could include, if relevant, details in their commentary on the table.
Detailed line definitions are given in Appendix 1
Information on customer services costs
Currently customer services costs are collected in the "Operating expenditure – Customer services" lines of the June Return (Table 21, line 13 for water; Table 22, line 14 for sewerage). The definitions for these lines are:
Total costs directly associated with customer services, except for current cost depreciation.
Include the customer accounting, the reading of meters, debt recovery, customer enquiries relating to tariff matters and charging/billing, and complaints handling. (The costs incurred within the water distribution and sewerage activities in dealing with complaints about matters, other than those related to tariff changes and charging/ billing should be recorded within those activities.) The cost of billing services purchased should be included but the costs of services provided to third parties excluded. For these purposes, the latter cost should be estimated, and adjustments made to the appropriate subjective lines (and compensating adjustments made under Services provided for third parties).
It is suggested to keep the same overall definition of customer services costs, but to subdivide these lines (in a separate table) into: - general customer services expenditure excluding the items below;
- costs of collection of outstanding revenue from household customers;
- legal and other costs recovered from customers;
- donations to charitable trusts assisting customers in debt; and
- costs of administering provision for vulnerable customers.
Detailed line descriptions are given in Appendix 1.
Costs of collection of outstanding revenue from household customers
Only costs incurred in collecting outstanding revenue from household customers should be included in this line; costs due to collecting outstanding revenue from non-household customers should not be included. It would be difficult to specify precisely all items that should or should not be included in this line; it may be better to have a non-exclusive list of items.
Costs to be included could include: - costs of reminder bills, including warning letters
- costs of dedicated debt handling or revenue collection teams
- court and legal fees
- third party costs incurred (such as local authority fees, billing arrangements with other companies or agencies)
- debt collection agency costs
- subsidies to Citizen Advice Bureaux
- costs of visits to customers and of telephone contacts (excluding costs of receiving calls)
Billing costs for the first bill are likely to be large in relation to the costs of outstanding revenue collection, as these are the standard costs of billing all customers, not of dealing with a small group of late (or non-) paying customers. Changes in these "standard" billing costs could hide any changes in outstanding revenue collection costs, so it would be preferable to include them in the general customer services expenditure line, rather than the outstanding revenue collection costs line. The costs of receiving telephone calls should also be regarded as general customer services expenditure.
The full amount of any court and legal fees incurred should be included as outstanding revenue collection costs; if any of these costs are recovered from customers then the amount recovered should be given in the separate line for "legal and other costs recovered from customers"
Donations to charitable trusts should not be included as outstanding revenue costs; these donations are to be recorded in a separate line.
For companies that collect revenue on behalf of other companies, only the costs of collecting their own outstanding revenue should be included.
In their commentary on these lines, companies could be asked to give details of any significant changes in revenue collection practices over the reporting year, and to explain any significant changes in costs compared to the previous year. If a company incurred significant exceptional capital costs associated with revenue collection, then they could include this in their commentary.
Information for the vulnerable customers notified item
For this notified item, only information about the administrative costs of provisions for protecting vulnerable customers will be required. Lost revenue from this group of customers can be recouped from other customers through the tariff basket, but the administrative costs cannot – it is these costs that are the subject of the notified item. As described above, it is proposed to collect information on these costs as a separate subdivision of the current customer services costs lines, distinct from any costs associated with debt collection. For water and sewerage companies, this information is to be collected for each service. Information about the revenue consequences of provisions for vulnerable customers will be collected separately each year as part of the Principal Statement.
To determine unit costs of administering the provision for vulnerable customers, the number of applicants (and the number of successful applicants) for each category of vulnerable customers should be collected. This data will also inform any future review of the Regulations. This information would form a new, separate table as part of the Annual Return for 2000-01. For water and sewerage companies, information would be collected for each service. A proposed structure for this table is given in Appendix 2, along with detailed line descriptions.
How the information is to be used
1. Bad debt notified item
The notified item is for net increases in total costs (loss of revenue and collection costs) due to the ban on household disconnections in the Water Industry Act 1999. Hence it is the difference between a company's costs in the base year (1998-99) and subsequent years that would be considered. To determine whether any increase in costs was justifiable, comparisons of absolute levels of costs and of increases over the same time period would be made across the industry (on a unit cost basis) to determine a benchmark level. Decisions would be also informed by information on changes in companies' procedures and practices relating to debt recovery
2. Vulnerable customers notified item
This notified item is for increases in costs due to the administration of provisions for vulnerable customers. To determine whether any increase in costs was justifiable, comparisons of unit costs (in terms of number of applicants) would be made across the industry (on a unit cost basis) to determine a benchmark level. Decisions would be also informed by information on companies' procedures and practices relating to provision for vulnerable customers (including audit requirements) and the balance of applicants under the medical and large family criteria.
Appendix 1
Proposed table and line definitions for information on outstanding revenue and breakdown of customer services operating expenditure
The table below is for the water service; it is proposed that there should also be an equivalent table (with equivalent definitions) for the sewerage service. For the sake of brevity, only the table and definitions for the water service have been included in this appendix.
Revenue outstanding means the amount of revenue at the end of the financial year in question that has been billed and is due, but has not been collected. Revenue that has been written off should be included in this amount. The information about revenue outstanding is to be split between measured households and unmeasured households, on the basis of whether the household is charged on a metered basis at the end of the financial year. All monetary values are to be given in outturn prices.
Line definitions
Revenue outstanding - measured households
1 | Total revenue outstanding – measured households | £m (3dp) |
Definition: The cumulative total amount of water service revenue outstanding from measured households at the end of the financial year.
2 | Number of measured households with outstanding revenue | 000 (3dp) |
Definition: Number of billed measured households with water service revenue outstanding at the end of the financial year.
3 | Revenue outstanding < 6 months (measured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from measured households for less than six months from the date on which the amount became due.
4 | Number of measured households with outstanding revenue < 6 months | 000 (3dp) |
Definition: Number of billed measured households at the end of the financial year with water service revenue that has been outstanding for less than 6 months.
5 | Revenue outstanding 6-12 months (measured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from measured households for at least six months, but less than 12 months, from the date on which the amount became due.
6 | Number of measured households with outstanding revenue 6-12 months | 000 (3dp) |
Definition: Number of billed measured households at the end of the financial year with water service revenue that has been outstanding for at least 6 months but less than 12 months.
7 | Revenue outstanding 12-24 months (measured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from measured households for at least 12 months, but less than 24 months, from the date on which the amount became due.
8 | Number of measured households with outstanding revenue 12-24 months | 000 (3dp) |
Definition: Number of billed measured households at the end of the financial year with water service revenue that has been outstanding for at least 12 months but less than 24 months.
| 9 | Revenue outstanding ³ 24 months (measured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from measured households for at least 24 months, from the date on which the amount became due.
10 | Number of measured households with outstanding revenue ³ 24 months | 000 (3dp) |
Definition: Number of billed measured households at the end of the financial year with water service revenue that has been outstanding for at least 24 months.
Revenue outstanding - unmeasured households
Lines 11-20 follow the format of lines 1-10, but for revenue outstanding from households that are not charged on a metered basis at the end of the financial year.
11 | Total revenue outstanding – unmeasured households | £m (3dp) |
Definition: The total amount of water service revenue outstanding from unmeasured households at the end of the financial year.
12 | Number of unmeasured households with outstanding revenue | 000 (3dp) |
Definition: Number of billed unmeasured households with water service revenue outstanding at the end of the financial year.
13 | Revenue outstanding < 6 months (unmeasured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from unmeasured households for less than six months from the date on which the amount became due.
14 | Number of unmeasured households with outstanding revenue < 6 months | 000 (3dp) |
Definition: Number of billed unmeasured households at the end of the financial year with water service revenue that has been outstanding for less than 6 months.
15 | Revenue outstanding 6-12 months (unmeasured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from unmeasured households for at least six months, but less than 12 months, from the date on which the amount became due.
16 | Number of unmeasured households with outstanding revenue 6-12 months | 000 (3dp) |
Definition: Number of billed unmeasured households at the end of the financial year with water service revenue that has been outstanding for at least 6 months but less than 12 months.
17 | Revenue outstanding 12-24 months (unmeasured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from unmeasured households for at least 12 months, but less than 24 months, from the date on which the amount became due.
18 | Number of unmeasured households with outstanding revenue 12-24 months | 000 (3dp) |
Definition: Number of billed unmeasured households at the end of the financial year with water service revenue that has been outstanding for at least 12 months but less than 24 months.
| 19 | Revenue outstanding ³ 24 months (unmeasured households) | £m (3dp) |
Definition: The amount of water service revenue that, at the end of the financial year, has been outstanding from unmeasured households for at least 24 months, from the date on which the amount became due.
20 | Number of unmeasured households with outstanding revenue ³ 24 months | 000 (3dp) |
Definition: Number of billed unmeasured households at the end of the financial year with water service revenue that has been outstanding for at least 24 months.
Revenue written off
21 | Amount of revenue written off from measured households | £m (3dp) |
Definition: The amount of water service revenue outstanding from measured households that has been written off in the financial year.
22 | Amount of revenue written off from unmeasured households | £m (3dp) |
Definition: The amount of water service revenue outstanding from unmeasured households that has been written off in the financial year.
Customer services operating expenditure
23 | General customer services operating expenditure | £m (3dp) |
Definition: Total costs directly associated with water service customer services, except for current cost depreciation and costs directly associated with outstanding revenue collection or administering provisions for vulnerable customers.
Include the costs of customer accounting, the reading of meters, customer enquiries relating to tariff matters and charging or billing, and complaints handling. Costs of initial bills should be included, including purchased billing services, but not costs of subsequent reminders bills. (The costs incurred within the water distribution and sewerage activities in dealing with complaints other than those related to tariff changes should not be included.) Costs of services provided to third parties should not be included.
24 | Outstanding revenue collection operating expenditure | £m (3dp) |
Definition: Total costs directly associated with outstanding water service revenue collection, except for current cost depreciation.
Include the costs of reminder bills and of debt recovery. The cost of outstanding revenue collection services purchased and of commission payments to third parties contracted for billing services should be included. Relevant costs could include costs of dedicated debt handling or revenue collection teams, court and legal fees and subsidies to Citizen's Advice Bureaux, but donations to charitable trusts assisting customers in debt should not be included.
25 | Legal and other costs recovered from customers | £m (3dp) |
Definition: Court and legal fees and other charges recovered from customers (water service only).
26 | Donations to charitable trusts assisting customers in debt | £m (3dp) |
Definition: Donations to charitable trusts assisting customers in debt (water service only).
| 27 | Operating expenditure due to vulnerable customers | £m (3dp) |
Definition: Total costs directly associated with the administration of provision for vulnerable customers for the water service, except for current cost depreciation.
28 | Total customer services operating expenditure | £m (3dp) |
Definition: Total costs directly associated with water service customer services, except for current cost depreciation, as defined in line 13, Table 21 of June Return.
Processing rules: Calculated field. Sum of lines 23, 24, 26 and 27, minus line 25.
This line should equal line 13, Table 21 of the June Return for the relevant year.
Appendix 2
Proposed table and line definitions for information on applications for vulnerable customer status
The table below is for the water service; it is proposed that there should also be a similar table for the sewerage service. For the sake of brevity, only the table and definitions for the water service have been included in this appendix.
Line definitions
1 | Applications: large families | nr (0dp) |
Definition: The number of applications from water service customers for vulnerable customer status on the basis of large family size.
2 | Successful applications – large families | nr (0dp) |
Definition: The number of successful applications from water service customers for vulnerable customer status on the basis of large family size.
3 | Applications: desquamation | nr (0dp) |
Definition: The number of applications from water service customers for vulnerable customer status on the basis of being affected by desquamation.
4 | Successful applications – desquamation | nr (0dp) |
Definition: The number of successful applications from water service customers for vulnerable customer status on the basis of being affected by desquamation.
5 | Applications: weeping skin disease | nr (0dp) |
Definition: The number of applications from water service customers for vulnerable customer status on the basis of being affected by weeping skin disease.
6 | Successful applications – weeping skin disease | nr (0dp) |
Definition: The number of successful applications from water service customers for vulnerable customer status on the basis of being affected by weeping skin disease.
7 | Applications: incontinence | nr (0dp) |
Definition: The number of applications from water service customers for vulnerable customer status on the basis of being affected by incontinence.
8 | Successful applications - incontinence | nr (0dp) |
Definition: The number of successful applications from water service customers for vulnerable customer status on the basis of being affected by incontinence.
| 9 | Applications: abdominal stoma | nr (0dp) |
Definition: The number of applications from water service customers for vulnerable customer status on the basis of being affected by abdominal stoma.
10 | Successful applications – abdominal stoma | nr (0dp) |
Definition: The number of successful applications from water service customers for vulnerable customer status on the basis of being affected by abdominal stoma.
11 | Applications: renal failure | nr (0dp) |
Definition: The number of applications from water service customers for vulnerable customer status on the basis of being affected by renal failure.
12 | Successful applications – renal failure | nr (0dp) |
Definition: The number of successful applications from water service customers for vulnerable customer status on the basis of being affected by renal failure.
13 | Total number of applications | nr (0dp) |
Definition: The total number of applications from water service customers for vulnerable customer status.
14 | Total number of successful applications | nr (0dp) |
Definition: The total number of successful applications from water service customers for vulnerable customer status.
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