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This episode brings to light the growing debt owed to electric utilities by households and small business, the choices people make when financially constrained and also the impact these bills are having on the financial condition of electricity providers. The discussion ends with some suggestions on how to handle the pandemic-induced debt burden.
This podcast series is produced by Fernando Di Laudo and Jonathan Davidar.
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Transcript
Roumeen Islam: This is the World Bank's Infrastructure podcast. In today's episode, we discuss the buildup of household utility debt during the pandemic and financial solutions moving forward.
, whether working, studying, or even at leisure. Overall, electricity demand has been recovering at different paces around the world, reports the International Energy Agency (IEA).
At the same time, people lost their jobs, and some were unable to pay electricity bills that they'd paid before. Many are still without jobs and governments around the world have required companies to maintain service to all customers, even if they were unable to pay, granting moratoria on this debt.
Yet, utilities do need to pay their creditors, maintain infrastructure, and invest for the future. Let's find out how to deal with all this debt. Good morning and welcome. I am Roumeen Islam. Host of Tell Me How. And today, we have with us Mark Wolfe who is the director of the National Energy Assistance Directors Association.
Mark will be talking to us about electric utility debt today and sharing ideas about how to resolve the post-COVID debt overhang in this sector. Welcome, Mark!
Mark Wolfe: Well, thank you for inviting me.
Roumeen Islam: It's a pleasure to have you. Now, before we get into any of the details, the first question I'm going to ask you is how big actually is this problem?
Mark Wolfe: We think it's almost tripled from what it was of pre- pandemic times. We track residential debt very closely across the country. We don't track small business debt, but we do get that data as well sometimes and it looks like it's following residential patterns. Compared to pre-pandemic, which say the end of 2019, was about $8 billion of residential debt outstanding, that's grown to about $24 billion since then. A few months ago, when we did an earlier estimate, we thought it might grow as high as $30 billion at this point, but it hasn't because of all the stimulus money that's been put out. The Federal Government has done a lot to provide additional funding to families and unemployment insurance and unplanned payments have been continued. So, the amount of residential debt is not as high as we thought it would be.
Roumeen Islam: So, people are actually using their stimulus payments to pay back debt. And is there a moratorium in some states, on your consumer electricity payments, right? Is that still in effect?
Mark Wolfe: The moratoriums are expiring. About half the states right now have moratoriums. About three months ago, close to all the states had some form of moratorium in place. Some moratoriums are flat out, across the board. Nobody gets shut off. That's still the case in New York and California. Other moratoriums were temperature based and some were temporary in that they ended. So as of the end of April, only about 10 States had moratoriums in place. So, it is declining quickly. And we're concerned about that. We're concerned about families who, in spite of all the federal resources that are in place, still don't have enough to pay their bills.
Roumeen Islam: So, I think this is very interesting that there's so much variation across the states because we see this kind of variation across all our client countries. And there are different types of moratoria. There are different lengths. And then, there are different rates at which consumers are paying back their debt as well. Now, do you see differences in terms of certain states being in worse situations than others? And is this sort of related to how well economically the state is doing overall?
Mark Wolfe: It's a number of things. So, like other countries, do you think of the states at 50 states the amount owed, and the percent of families in debt reflect both the overall economy in that state, the strength of the unemployment insurance program, how easy it is to sign up. That's a major thing. Some states are much more organized than others. And then third, what protections were in place prior to the pandemic? So, prior to the pandemic states like Massachusetts and Connecticut had discount programs for low-income families, they had supplemental funding. Some states have something called percent of income payment plan so that the amount you pay on your energy bill is a function of your income. In a few states, for example, you won't pay more than six or 7 percent of your income. It's capped. That's the maximum you can pay. So, in those states, you're seeing lower amounts of families being in arrears, just because the state has already taken some of the money off the table. Other states that have weaker programs in place, the situation is far worse.
And also, the states that didn't have that a much smaller say, percent of the population working professional jobs, which have been far less hit by the pandemic than frontline workers, like restaurant workers, in those states, you see much deeper impact. So, Nevada, for example, Las Vegas, was it quite hard by the pandemic and the unemployment rate was much higher than other states. So, in, in Nevada you saw much higher arrears, and on top of that, you didn't have a statewide moratorium. So, some utilities on their own say, "If you call us, you've lost your job, we'll put you on a moratorium until you get a job or the pandemic ends." It's a little bit fuzzy exactly when those things change. Other utilities take a totally different approach, and their position was you have a bill we expect to be paid. So, I think what we saw in the United States and probably in other countries as well, utilities have a certain mindset. You know, they're not social service organizations. What they've all learned over time is that if you threaten to shut off, people will pay. They'll stop doing other things. They won't pay for food. They won't pay for medicine. They'll cut back in order to pay that bill; they'll borrow from a relative. By and large, most people either find the money or they get reconnected within a few days. It's a rather harsh system, but that's in a sense, worked.
Roumeen Islam: That's interesting. I was just going to say that it's really interesting that you know that they'll cut back on food and everything else, to keep the electricity on. But of course, I mean, it makes sense. You don't want to be living in the dark.
Mark Wolfe: Yeah, in a sense, we used to say, you know, what do the families do to pay their energy bills. They will cut back on food. They'll cut back on medicine. They'll cut back on buying clothing, all of those kinds of things. But if you think about another way by having the threat of shut off, the utility goes to the front of the line. So, families that are struggling to pay their energy bills are struggling to pay all of their bills. Who gets paid first? Well, if one bill says: "Look, we can put you back in the stone ages here. We can take away your power." You'll find every which way to pay them. There was a study done a number of years ago in Massachusetts. It was done by one of the children's hospitals. They studied young children in Boston and the premise was that during the winter, they thought that young children in poor neighborhoods would get less exercise and would gain weight ... seemed plausible. What they found was that many children lost weight and it was puzzling like, why did that happen? So, they went to some of the families to say: "Well, why did this happen? Why did the children lose weight?" Well, the oil dealer would come, and wouldn't deliver oil unless they were paid. What they found was that some of the families were just cutting back on food and they thought this was like a developing country where you have to wait for the harvest to come in. They were very surprised that things were that bad in Boston, you know, a highly developed city, very upper income, lots of resources. And yet still you saw families struggling this way. So, I think what has happened is that the utilities that are using a method that is quite cruel, but they do go to the front of the line in terms of getting payment.
As a pre pandemic strategy, it worked in a sense because it was a limited number of families and we don't usually have enough energy assistance funds to help those families in crisis. During the pandemic, it's changed because the number of people behind are so much greater. So, you can't threaten 10 percent of your rate base, with shut off. It just won't work. It's too many people. And so, what we found during the last few months was that we need a different way of addressing this, and yet we still have utilities who were threatening to shut off with the old model. And I'll say to them: "Look that worked fine if one or 2 percent of your rate base was behind. It doesn't work if 10 percent of your rate base is behind it.
Roumeen Islam: In terms of the size of the debt relative to the revenues of the corporations, is there some range that you can give us that gives us an idea. You gave us an absolute number, but how important is this to a particular utility? There are so many of them.
Mark Wolfe: The answer is that it depends. For the small municipally owned utilities that are relatively small. Some of them have three or four people. They serve a few thousand households. I've seen numbers suggesting their debt can be as high as eight to 10 percent of their total revenue. And also, they don't have a lot of industrial counts. They tend to be primarily residential.
Roumeen Islam: All right. So, we've been talking mostly about household debt, but you also said that you think that small business debt, which you also looked at somewhat is showing a similar trend, and the people that are working in service sectors and are unemployed, right? So, how big are the businesses when you say small businesses?
Mark Wolfe: Well, you look across the country. I think maybe this gets more to the point of what's been the impact on utilities. It varies greatly by the state's economy. So, states that are doing better, we are seeing a lower rate of increase, and states that have been hit harder, we're seeing a higher rate of increase. Also, it varies by the number of households, that reflects again. So, in terms of dollars, California, for example, the total amount of debt increased by 172 percent, about $422 million.
Roumeen Islam: 172 percent, that's large.
Mark Wolfe: Yeah, like $422 to $1.2 billion where the average rate of increase was about 88 percent during posts during pre-pandemic to current times. So, we'll see numbers that vary considerably. New York, for example, increased by 67 percent. So, these are significant numbers, and they add up to the billions of dollars. And how do you get those numbers paid? The number of households in debt, however, was not as significant an increase. It was about 42 percent. But what that reflects is that many low-income families are behind, in general. It's always tough for them to pay the utility bills. It's the amount they owe. So, when we looked at patterns across states, what happened was the number of families by the middle of the pandemic that stopped increasing. The amount they owed kept increasing. So, there's a group of people that lost their jobs early on. They stayed unemployed and the amount they owed kept growing. Other families became reemployed, or they were able to get the additional unemployment funds. It was a very mixed picture across the country. But the bottom line is that the numbers of households in arrears, is we believe total close to 30 million now, which is a very large number.
Roumeen Islam: One thing I wanted to move on to now is about information and transparency regarding the financial condition of the utilities. And, you know, you cited a lot of debt numbers. So, I'm just wondering, is it very easy to get all of this information? Are there requirements that apply to all utilities, public, and private, and to all states? Regulations that require them to be transparent about their accounts and in a timely manner.
Mark Wolfe: It depends again, it's 50 states each with their own set of rules. California, for example, requires that the numbers are reported periodically in a transparent way. So, you can understand the extent of the problem and it's publicly available. Illinois requires the numbers be reported down to the zip code level. So, you can understand trends within the state. Very significant because it helps you understand who's not paying their bills and what the problems are and then how to target assistance. Other states, especially those in the South don't require any reporting at all about utility arrearages for a couple of reasons. One, if you don't know the extent of the problem, you don't have to do anything about it. You know, not to be cynical, but that really is part of it. Transparency is a tricky question here. So, you're a utility in a Southern state or any state for that matter. You have a set of rules you have to follow before you set somebody off, you follow all those rules and then the person doesn't pay. Maybe they leave, they move. They can't find them. That's bad debt. You can recover that in the rate-base provided you follow those rules.
So that's when you report it to the public service commission, when your next rate case comes up, you say, well, we had $5 million of bad debt. You weren't able to collect it. And we want to raise rates to collect that $5 million. But you don't have to report it other than them. Other state commissions that are much more engaged in this question. You know, Massachusetts, they have very strong reporting requirements, and the commissions use that to set state benefit programs for low-income families. So, they're very proactive. California is very proactive. Other states are less proactive.
Roumeen Islam: Right. But these rules may apply to public utilities or also private ones? I mean, private utilities, if they're borrowing on private capital markets. I mean, they need to be transparent about their accounts so creditors will know in any case.
Mark Wolfe: Not that straightforward a question here. So, you're a utility and you have $20 million in 90 day plus debt from residential customers. You know that if you follow the rules, you can probably be captured most of that in the next rate hearing, or as part of your balancing accounts. So, you might view it as, yes, it's bad that at one level, a low level, it's collectible, it's going to be recovered. So, during your financial reporting, you don't report as bad debt per se, it's a recoverable debt.
Roumeen Islam: That's because you know that the regulator will allow you to recover it. So, there are no utilities that are continually loss-making. Is that what you're saying?
Mark Wolfe: Exactly. In that sense, there was the residential debt because they're required to serve. Someone comes to sign up, you have to provide electric or guest service to that family, and you also follow a lot of procedures before you shut them off. So, you can end up having a debt for several months. You're following the rules and the commission cannot require a company to lose money indefinitely.
Roumeen Islam: Yes. We're going to go later on in the podcast to how we should think about paying back all of this debt that has come up. You've just mentioned one way, which is increasing the price, you know, but what happens if you're in a town where, you know, if you increase the price, that's going to be, hard for the consumers because they can't afford that increased price. What then?
Mark Wolfe: So, say your utility has a high percentage of low-income families. You can't raise rates enough to provide discounts to low-income families without raising the rates for non-low income to unsustainable levels. And you see that, for example, with Entergy, it's a utility that covers Arkansas parts of Texas and Louisiana. Very high percentage of low-income families. They're limited in what they can do from their rate base to support the low-income population. And that's where federal funding comes in the end of the day, the federal government backstops a lot of these programs in a sense of providing a national program, provide supplemental funding flow and families.
Roumeen Islam: No, no matter who owns the utility of course weather. Right. But so, this is part of the problem now. That there's been a buildup of Reyes this debt, and you need to recover it with an increase in tariffs, either temporary or permanent or however you do it. But then what about all the maintenance and new investment that, that may be needed?
You know, they're there. There's talk of a lot of green investments happening and there's talk everywhere of how very little maintenance is done in many infrastructure areas. So how will all that be financed when you've got all this debt to deal with as well?
Mark Wolfe: It's a very good question to ask: What happens in utilities that can't recover this debt? They'll have to cut back. They'll have to cut back on greening the system. They'll have to cut back on other investments because there's a limit to how high they can raise rates with lots of people and repayment plans that they might not be able to pay back. So, the situation that starts getting set up is that it becomes a hindrance to recovery. If the concern is how do we recover from the pandemic and delay the recession, we have to deal with these debts. We have to get them paid off, so the utilities can thrive and prosper and also begin to invest in the related green goals of the United States.
Roumeen Islam: Now, one question I wanted to ask is when we look forward about all the options for restructuring. We mentioned raising rates and I was just wondering, you know, there's been some thinking about, is it the consumers who couldn't pay who should be the ones that are going to pay back and see an increase in rates, or should the rates be spread more evenly among all rate payers, or should in general, taxpayers pay? What are the different options and what are the pros and cons of each of these? And do the consumers actually expect to pay back their debt? Because the government has, you know, given them a moratorium.
Mark Wolfe: It's a very good question. We believe that there are some consumers who are on moratorium, but don't believe it's a debt. They haven't had to pay it for a year, and they think it's not real. It sounds hard to believe, but I think that is one problem that there are people that don't understand it's a bill that has to be paid. The traditional method that's been used in the United States has been to put a family on a payment plan and stretch it out over a number of years.
Roumeen Islam: So, it's the same family that hasn't paid has to repay. It's not spread broadly over all taxpayers.
Mark Wolfe: Well, there are a number of ways that it's done. In California, for example, if a family falls behind on their bill, they're put on a repayment plan, but it's a forgivable repayment plan. As long as the family pays their current bills, the amount of debt is reduced by, I think, one-twelfth every month.
Roumeen Islam: And this is for low-income consumers only?
Mark Wolfe: Low-income families. In Connecticut, there's some similar programs for debt forgiveness. That's what we call it. That's the label. So, in a state that uses the rate base, they'll say, look, a family has fallen that far behind. It might never be practical to collect. The family has a low income. They won't be able to pay this back. It's just one more bill they have that they'll be behind on. So, let's find a way to forgive the debt provided they stay current on the bills as they come in. That's a model that's worked relatively well. In other states, families are put on payment plans and also the issue is how long you go before you start collecting. So, before the pandemic, 90 days was about it. Unless there was a winter moratorium. Maybe you go 120 days, but not much more than that. Now we have some families who are a year behind. So, the models that we have in place work well for low-income family if they're a few months behind, not as well, if you're a year behind, because you realize there's no way you could collect that much money from that family. So, what the utilities are facing, especially the ones that have been under these state mandated moratoriums are debts that they know can't be paid back from the families and can't be easily spread across the rest of their rate base. So, the challenge became "who pays" and not surprisingly the focus became the federal government. Of the different stimulus bills that were out there, the question was, well, what can the federal government pay of these amounts? And there was a lot of tension over that because it was not just utility bills. Families were behind on rent bills. There was a federal moratorium on rent evictions.
Roumeen Islam: Now, do you think that there should be different ways of handling consumer and business arrears?
Mark Wolfe: There are different ways of handling it. For businesses, many have had entered into personal guarantees so they're liable for that debt, even if the business goes under. For residential debt, there's no personal guarantee. There's a whole different approach.
Roumeen Islam: So, I mean, when there's a personal guarantee, you mean by the small businesses, right?
Mark Wolfe: Essentially, it's guaranteed, by their other assets, by their house, by their bank accounts for small businesses, mom, and pop, as we call them, three people businesses, four people - four employees, they went under because of the pandemic. What we're learning is that many of them had signed personal guarantees. So, the question for the utility is do they go after these families for collection. On that, the jury is still out. Probably in a lot of cases, they won't, they don't want to force a family to sell their house. They don't want to impoverish your family, but at the end of the day, they'll also be up to the public service commissions because if they don't do that, it comes out of the rate base again. So, you're back to this very difficult situation for rate base structure that's based on a pre pandemic world that worked reasonably well. Then, there have been this many small businesses that went bankrupt, those kinds of things. And so, it puts the utility in a different position they used to be in, again. And that's why the federal government had to step in because utilities aren't debt collectors, not in a major way. They're not here to do long-term payment plans for residential customers. They're not here to provide free energy for families. And so, how do they operate? So that's been the issue over the last four or five months on Capitol Hill, what will be covered, will it be paid back, will small business debt be covered? That became a question for a number of months, because the same concern, we don't want to push lots of small businesses out of debt.
Congress did this paycheck protection program they did for small businesses, largely writ small businesses. And that was a lot to cover utility bills as well, and that's forgiven, provided you meet certain criteria. So that was an indirect way of paying utility bills for small businesses. But those amounts are certainly far less than they've been experiencing. So that's the other concern they've had is they're carrying a lot more debt than they used to, and blanket moratoriums have the problem of building up. And so, at the end of the process, instead of only three months or six months, you might owe a year, 14 months of debt in some states, and that might be difficult to pay back. So, then the utility has to offer a payment plan. You can see how this becomes a multi-year process. So, where the federal government stepped in, as they say, essentially, we'll help pay off these bills so the country can restart their economy.
Roumeen Islam: Okay, so this is a very important point you just made. They want to clear arrears in many of our client countries, in many countries around the world, the pandemic is still playing out. So, I can just see this problem of debt and arrears to electric utilities.
Mark Wolfe: If you start to think about the percent of the population that's low income, both in the United States and other countries, and even if it's 20 or 25 percent, with that large a portion of your rate base behind, or in a potential shutoff situation, it becomes a public health crisis. It's more than just access to electricity. It's a public health situation. People have electric devices that are related to their health. People have to study. They have to have lights on, they have to have refrigeration. All of these things. If you lose access to that, it could create a public health crisis. So, the utilities are put in this position of being part of the public health system. Now, I mean, they've always been part of it.
Roumeen Islam: And education system, you just said they can't study. Yes.
Mark Wolfe: So, if you add all that together, what is the utility supposed to do? What do they do about these bad debts and how do they cover them? So, one solution is, do you make the utility take care of it? You make them raise rates and directly raising taxes, essentially a tax on non-low income. That can work up to a point assuming they have a diversified rate base. For some utilities in the United States, low-income represents 10 percent of their rate base. They have a diversified group of corporations, so they could manage that if they had to. Other utility systems have a much higher rate of low-income families, and a less diversified economic base, primarily as smaller businesses, they're less able to handle this debt without raising rates to a level that would harm the economy of their region. Again, you're back to the federal government has to step in to try to address this. And that's what they've been doing. Now, the US is a wealthy country. So, a poor country couldn't do this. I mean, you're providing so much money! We think it's possible that the amount of money provided by the federal government to pay off residential bad debt plus outstanding rent bills might be more than the bills actually are because the databases that we have are at best soft. You know, we have different numbers. In some states, the data seems pretty reasonable, some states the data seems, at best, estimates, but when you put it all together, it's possible that the three stimulus bills that Congress passed will provide enough money for now. But we really won't know that till the programs roll out.
Roumeen Islam: Okay. And, you did mention some important points about, you know, how it's going to be larger corporations in some cases that will bear the cost if low-income families cannot and if the government does not. But that again, as you said, if corporations take the hit, then you're taxing your business. And if it's the smaller companies that take the hit, well you're taxing the smaller companies. I guess there's good lessons for all of us. And I'm just wondering whether you had anything to add before we end.
Mark Wolfe: I think the thing that I would add is that what we've learned in the United States, I think might be relevant to other countries, is that, in a regulated system, like our electric companies or gas companies, they're set up with good intentions and they're set up looking at historic patterns where are we see, you know, at most 10 percent of low-income families falling down into bills represents maybe 2 percent of the rate base. We've learned how to manage that. And I think that regulated companies are still bringing that same lens to the current situation. And my take on it is that the pandemic has changed all of that. The numbers of people who are low-income has greatly expanded. The number of people unemployed has expanded. And we do need a new model. The model that we've had: if you don't pay your bill, we shut you off and cause you significant harm for a week or so doesn't work that well when you have large numbers of people who are behind, I would imagine in developing countries, that would be the same thing.
You can't have large neighborhoods be impoverished by these bills. And that might be painful to deal with by saying, look, we have to have either raise rates on all other sectors of the rate base or provide straight cash from state governments. If we don't do that, then the neighborhoods that are disproportionately low-income will have an even greater burden to recover.
At the end of the day, we're looking at a situation that is truly different. This is not at all like anything we've ever dealt with and we need solutions that rise to the occasion.
Roumeen Islam: Okay, and solutions that don't worsen inequalities as well. Yes. Thank you very much, Mark. It was a pleasure having you here today.
Mark Wolfe: Thank you.
Roumeen Islam: Well, listeners, let's see what we learned today. Firstly,
Secondly, there are utilities for which the financial situation has deteriorated in an unprecedented manner and some public support will be needed to recover. Thirdly, a number of solutions are possible depending on the magnitude of the problem and the prospects for recovery. For example, allowing customers to pay back their debt over time, or raising rates on all customers to cover the losses, or even by raising money from the general fiscal coffers.
Thank you and bye for now. You can find more information about the podcast on http://www.worldbank.org/tellmehow. If you've got questions or comments, we'd love to hear from you. You can also find us on all popular podcasting platforms. This episode was recorded in August 2021. Don't forget to subscribe and thanks for listening.
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