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
(503) 645-0716
hgilpeach@scanamerica.net
1
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, LowIncome, Universal Services Program Evaluations, Policy Studies.

First Low-Income Evaluation – 1988.
2
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).
3
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 don’t like to admit it.
4
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…
5
Some Positive Examples
(New Programs)…
6
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%.
7
Three Examples
(Example 3) PECO Energy (Philadelphia) –
Token rate with no penalties and no fees for
customers from 0-25% of poverty
8
PECO Rate “CAP A”
9
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.
10
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
11
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.
12
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.
13
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)
14
Utility Collections Tools that need to Structured for LowIncome Households

Rate Design (PIPP)

Arrearage Management
15
Arrearage Management Can Lower
Cost
16
Bottom Line

Utility loses least money with a well
structured low-income rate that is actually
affordable to customers.
17
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.
18
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.
19
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 utility’s collection function in current
rates.
20
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.
21
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.
22
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 025% of poverty and in special
circumstances needed a token rate.
23
Why is a Special Rate Necessary?

The US is a poor country for most
households. We don’t 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…
24
Pattern of Income Changes
Trends in Real Income: Total U.S. With Children
120%
116.68%
107.43%
100.37%
96.52%
100%
100.00%
95.72%
90%
92.51%
89.17%
Lowest Fifth with
Children
Second Lowest Fifth
with Children
80%
80.39%
Middle Fifth with
Children
78.17%
Second Highest Fifth
with Children
70%
70.90%
Highest Fifth with
Children
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
CBPP data, adjusted. – John Mitchell
60%
1978
Percent of 1978-1980 Average
110%
Year
25
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.
26
Implications of Income Shifts for
Program Evaluations
Roger Colton, The Home Energy Affordability Gap in
Pennsylvania, April 2003
27
Representations of Inequality

Example - The “Income Donut”
28
Poverty & Donuts

This donut is typical of
of the US: the bottom
20% of families receives
3% of community
income.
Community Income by Household
Census 2000
(Each Slice represents 20% of Households)
3%
10%
41%

If this were a
mechanical system, an
engineer would never
put equal stress on
each sector.
16%
30%
29
Poverty & Donuts

If this were a real donut
shared by five children,
we would expect more
equality.
Community Income by Household
Census 2000
(Each Slice represents 20% of Households)
3%
10%

The top 5% receives 18%
of community income.

The top 1.5% receives
8% of community income.
41%
16%
30%
30
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.
31
JOB STRUCTURE
32
Job Structure

The “income donut” that we just
reviewed reflects the underlying
“job structure” of a community.
33
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.
34
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…
35
Globalization & Centralization Effects on Local &
Regional
Job Structures
MOVED
MOVED
DELETED
MOVED
DELETED
RETAINED
RETAINED
MOVED
MOVED
RETAINED
DELETED
DELETED
RETAINED
RETAINED
OUTSOURCED
RETAINED
OTHER LEVELS
36
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
37
Job Structure - Market Income in
Globalized 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.
38
Job Structure - Market Income in
Globalized Markets
•
The long term trend is to continually drop
“job slots” from the job structure.
•
This both eliminates jobs and restrains wages
and benefits.
39
Job Structure - Market Income in
Globalized 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.
40
Market Determination of (Market) Income
with and without Globalization.
S1’
(+)
P
R
I
C
E
S2’
D1
S3’
P
D2
(-)
D1’
G
S1
S2
(-)

S3
D2’
QUANTITY (+)
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).
41
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 can’t fix it.
42
Energy Burden
Reichmuth Sector Maps
1.8
1.8
1.2
1.2
0.9
0.9
0.7
0.7
0.4
50%-60%
40%-50%
30%-40%
20%-30%
10%-20%
0%-10%
50
25
0.4
Usage, Fraction of Mean Usage
Electric Energy Burden - CAP
0

Inc om e , %FP L
43
MISLEADING FEDERAL
STATISTICS
44
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%.
45
Unemployment - 2

Unemployment is a good example of how
government statistics are defined in ways that
diverge substantially from useful information.

They just don’t count people who are beaten
down and give up.

They don’t count people who want full time
work, but don’t have the energy to keep pushing
while still working less than full time.
46
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.
47
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 worker’s
perspective or from a family perspective.
48
Employment - 2

Let’s say the US loses 20,000 manufacturing
jobs in auto plants this year.

Suppose over the same year, Wal Mart plus
Wendy’s hire 22,000 people.

According to the government, that is a net gain
of 2,000 jobs.
49
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.
50
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.
51
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.
52
Consumer Price Index - 2


At about the end of the 1960’s the method
of calculation was changed to permit
“hedonic” adjustments and substitutions.
“Hedonic” adjustment example…
53
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.
54
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.
55
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.
56
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 1990’s 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.
57
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.
58
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
59
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)
60
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.
61
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.
62
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.
63
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.
64
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.
65
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%.
66
SECTOR MAP TOOL
67
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.
68
Sector Map Tool
Reichmuth Sector Maps – For energy burden.
1.8
1.8
1.2
1.2
0.9
0.9
0.7
0.7
0.4
50%-60%
40%-50%
30%-40%
20%-30%
10%-20%
0%-10%
50
25
0.4
Usage, Fraction of Mean Usage
Electric Energy Burden - CAP
0

Inc om e , %FP L
69
Energy Burden
70
Sector Map Tool
Reichmuth Sector Map – for Affordability.
Electric Affordability
Conformance Map - CAP
1.8
1.2
1.2
0.9
0.9
0.7
0.7
0.4
Usage, Fraction of Mean Usage
1.8
0.4
50
25
0

Income, %FPL
71