Bad-debt forecasting

✍ Scribed by Lonshteyn, Alexander

• Publisher: John Wiley and Sons
• Year: 2007
• Weight: 451 KB
• Volume: 12
• Category: Article
• ISSN: 0743-5665
• DOI: 10.1002/gas.3410120103

✦ Synopsis

Bad-Debt Forecasting

ad debt is a painful line in a balance B sheet. It speaks about millions of dollars lost by a public utility. Bad debt reduces eamings and frustrates shareholders. Utilities are trying to fight that "unavoidable evil." However, complete victory probably lies far ahead.

Bad debt reduces earnings and frustrates

shareholders.

The bad-debt level is not a stable indicator. This level moves significantly up and down. For instance, from 1984 to 1994 Boston Gas's bad debt fluctuated about 50 percent around its median level. Such large swings make it difficult to predict the bad-debt level.

Accuracy of bad-debt projections is important for utilities. Errors could create an extra volatility in utility stock prices. The market could push the prices down if a reported bad debt is higher than expected. Overly pessimistic projections could also be damaging for shareholders. Therefore, Boston Gas performs an analytical study designed to improve the quality of its bad-debt forecasting models. One of the following two events usually triggers the baddebt situation.

First, a customer requests termination of the service (straight-off). Relocation of a tenant is a typical example of such an event. In numerous cases, former tenants do not pay their final gas bills after moving out of apartments or houses. These nonpayments account for the largest portion of the company's bad debt (60-80 percent).

Second, the company turns a gas meter off for nonpayment (MOFP). A large portion of customers pay to have their gas back.