SHRINK THE OVERDUE CASELOAD AND ARREARAGES: DEFERRED
PAYMENT PLANS
The offer of deferred payment plans through which to retire arrears is an essential tool for a water utility to use in delivering rate assistance to payment-troubled customers. Through a deferred payment plan, a customer in arrears should make a reasonable down payment toward the arrears and agree to retire the remaining arrears over a reasonable period of time. As can be seen, the two primary elements of a deferred payment plan include:
• The amount of the initial down payment
• The amount which the customer in arrears will pay each month toward the pre-existing arrears
The primary design principle involved with the offer of a deferred payment plan is the determination of “reasonableness” as to these two factors.
Standard State utility commission regulations provide that the reasonableness of a payment plan is to be determined based upon a consideration of a range of factors, such as the amount of the unpaid bill, the time the bill has been outstanding, the reason(s) the bill has been outstanding, and the ability of the customer to pay.
Even though these factors may not lead to an arithmetic determination of a “reasonable” payment, what they do lead to is the conclusion that a water utility should exercise a case-by- case discretion in deciding upon a payment plan, with the reasonableness of the payment plan supportable by fact-specific considerations of the stated factors. When required to consider specific factual circumstances involving the customer and his or her debt, a water utility would be hard-pressed to impose uniform payment plan terms or terms that are dictated “by policy.” Instead, the water utility should be able to justify the payment plan terms it seeks to impose (e.g., down payment amount, monthly payment amounts) by reference to fact-specific determinations relevant to the specific circumstances of the affected customer.
DOWN PAYMENT DECISIONS
Two fundamental approaches exist to assessing the reasonableness of a down payment required prior to the offer of a deferred payment plan. On the one hand, a water utility may ask for a percentage of the bill as a down payment. Down payments based on this approach frequently require the customer to make a payment ranging from 10% up to 50% of the outstanding balance. Precisely where a customer falls within that continuum depends upon the specific factual circumstances of the customer. It may be that a lower-income customer would be required to make a smaller down payment. A customer who has made no payments toward his or her bill for multiple billing periods may be required to make a larger down payment. A customer
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who agrees to enter into an agreement involving an automatic withdrawal from his or her checking account may merit a smaller down payment.
Down payments based on a percentage of income tend to range between 5% and 15% of monthly income. A customer with a monthly income of $700, in other words, might be required to make a down payment of $70 should the utility find that a 10% of income down payment is appropriate. Under this approach, customers with lower incomes are generally entitled to lower percentage of income down payment amounts.
In fact, some utilities combine the two approaches, requiring a down payment of either a percentage of the bill (e.g., 25%) or a percentage of income (e.g., 10%), whichever is less.
Some utilities get into trouble when payment plan negotiations fail because the utility’s customer service representative (CSR) did not offer the customer the minimum terms available. It is not unusual for a utility to ask its CSRs to obtain the largest down payment possible toward a pre-existing arrears as part of the negotiation of a deferred payment plan. However, if by regulation, a customer is entitled to a down payment of no more than 20% of the outstanding bill, the CSR engages in an unfair and deceptive act if he or she informs the customer that anything less than 50% is unacceptable. Indeed, for municipally owned water utilities, providing notice of the full range of payment plan terms options that are available to the customer may be an action that has a constitutional basis.
Under most utility commission regulations, it is the obligation of a utility to “offer” a reasonable payment plan. Under such a regulation, the obligation on the utility is proactive. The utility does not act as a passive spectator in accepting a payment plan proposed by the customer. A customer may not be called upon to reject an unreasonable payment plan prior to the utility’s offer of a reasonable plan.
MONTHLY PAYMENT DECISIONS
Many—perhaps most—utilities offering deferred payment plans base decisions upon an examination of the length of the payment plan (in months), with the monthly payment amount being a result of the plan term as set forth below. Under this approach, the amount of the monthly payment toward the pre-existing arrears is a result of the number of months over which the customer is allowed to spread payments for the arrears.
Monthly payment = Pre-existing arrears / Term in months
$300 pre-existing arrears / 6-month payment plan = $50 payment toward arrears
The better approach is to flip that consideration. Under this alternative approach, the term in months is a result of the affordable payment offered to the customer.
Pre-existing arrears / Affordable monthly payment = Term in months $300 pre-existing arrears / $30 per month = 10-month payment plan
One municipal water utility, for example, offers two types of extended payment plans for customers that document an inability to pay but that do not income-qualify for the utility’s “low- income” program. On the one hand, the utility offers its 10/5 program, through which the utility offers a payment plan consisting of a down payment of 10% of the outstanding arrears plus 5% of the arrears per month. If even that plan is unaffordable, the utility offers its D/I (“disposable
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income”) plan, where the utility works with the customer to document the customer’s D/I and offers a payment plan of up to 60 months.
Other utilities, both water and energy, work with their customers to offer extended payment plan terms when appropriate. These utilities recognize that imposing a deferred payment plan with unaffordable terms not only impedes the ability of the customer to successfully complete the payment plan, but also threatens the ability of the customer to pay the current bill when it comes due. A utility that experiences high default rates on its deferred payment plans should carefully examine the decision-making which underlies the payment plan terms that it offers.
THE MULTIPLE ASPECTS OF ABILITY TO PAY
One basic tenet of negotiating a deferred payment plan is that the phrase “ability to pay” is not synonymous with the word “income.” The level of a household’s income is but one aspect of a household’s ability-to-pay. Consider that ability-to-pay is also a function of:
• The household’s D/I. A low-income household with school-age children, for example, will have lower D/I during the summer months when the household does not have access to the free and reduced school lunch/school breakfast program and possibly increased costs for child day care.
• The household’s fragility of income. Particularly with working poor households, income may widely vary from month to month. Working poor households tend to work lower- quality jobs, with frequent exposure to involuntary part-time employment, as well as to lost wages attributable to the lack of paid family or medical leave or flexible work hours. Deferred payment plans offered by water utilities generally involve immediately beginning the repayment process, though nothing exists in the law requiring that agreements be approached in this manner. Indeed, particularly when a regulatory framework requires the water utility to take into consideration the customer’s “ability-to-pay,” more innovative payment plan structures are merited.
One common approach to delinquent payments in the home mortgage industry, for example, involves offering a period of reprieve during a time in which the customer is experiencing hardship. Such a period of reprieve recognizes that frequently the nonpayment of current bills results from a temporary economic hardship⎯this hardship might be based on unexpected expenses or a temporary loss of income—that impedes the customer’s ability-to-pay. Rather than imposing immediate additional payment responsibilities on customers during such a difficult time, a period of reprieve might involve, for example, offering the customer a prescribed period of time (perhaps one or two months) during which to put his or her affairs in order so that regular payments may begin anew. This approach does not excuse the customer from paying a current bill during the period of reprieve, but merely postpones the start of any repayment obligation for a limited period of time. A water utility operating under a regulatory requirement to take into account the reason that bills have remained unpaid might even face an argument that such a period of reprieve is needed to respond to the cause of the previous nonpayment.
Similarly, deferred payment plans offered by water utilities generally involve the offer of equal monthly payment plans, though nothing exists in the law requiring that agreements be approached in this manner. Consistent with the period of reprieve, for example, a water utility
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might require minimum payments toward pre-existing arrears for the first month or two while the customer repairs the financial circumstances leading to the nonpayment, with higher payments becoming due in later months. Consistent with the requirement that payment plans take into account ability-to-pay, payment amounts might vary by season to respond to seasonal variations in gross or disposable household income.
SECOND PAYMENT PLANS
Whether to offer a second payment plan to a customer that has defaulted on his or her first plan presents a water utility with the need to honestly assess the objectives and functions of the payment plan process. On the one hand, some utilities insist that if an initial payment plan has been breached by the customer, the utility is under no obligation to offer that customer a second opportunity to retire his or her arrears. Other utilities recognize the fragility of the income available to a low-income household. Not only might the income, itself, sharply vary month-by- month, but the ability of the household to cover its complete expenses may vary by month, depending upon whether the children need medical care, the parents need additional child care, the automobile or home needs repairs, or a host of other factors.
One nearly universal attribute of a low-income household, whether it be a working poor household, a fixed-income elderly household, or a disabled household on public assistance, is the lack of financial assets such as a savings or checking account that provides a cushion against reasonably expected financial exigencies. To refuse to exercise any flexibility under such circumstances is a failure to take into account all aspects of a household’s ability-to-pay.
There are three ways in which a deferred payment plan agreement might be modified: • Offering a “second payment plan” after a customer has breached or broken his or her
“first” agreement allows the customer to spread the remaining unpaid balance from the initial plan, plus any subsequent unpaid bills, over a new amortization period.
• Allowing a “renegotiation” of the first payment plan applies only to the initial arrears subject to agreement. A renegotiation generally occurs when the customer has experienced a change of circumstances sufficient to make the terms of the first payment plan unreasonable. Frequently, some utilities require a customer to request a renegotiated payment plan prior to receiving a shutoff notice, while others require a request to occur before an actual disconnection of service.
• Allowing the “reinstatement” of a payment plan maintains the terms of the original payment plan. To the extent that a customer can make-up any missed payments toward the original agreement, the customer is allowed to continue as though each payment were made in a timely fashion with which to begin.
The approach of one Midwestern regulatory commission reflects perhaps the best balancing of a utility’s right to insist on customers maintaining their payment plans while at the same time providing flexibility for a customer to seek a new plan after defaulting on an initial plan. Under regulations promulgated by the Iowa Utilities Board, a utility is required to offer a second payment plan so long as the customer has made a good faith effort to make payments on the previous plan. A “good faith effort” is defined as a customer making at least two consecutive payments on the prior plan.
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Pennsylvania requires different payment plan terms to be offered depending on the income of the customer in order to facilitate customer payments. Wisconsin and Pennsylvania require that customers be allowed to renegotiate payment plans when there was a significant change in household circumstances. Most states allow, but do not require, utilities to permit customers to “cure” missed payment plan payments, although Oregon and Nevada both require cures so long as the customer has not yet had his or her service disconnected for nonpayment, while Vermont bans the disconnection of service so long as there has been “substantial compliance” with a deferred payment agreement.
The offer of payment plans, the design of their terms, and the proffer of cure provisions, are all important components to payment options.
INCENTIVES AND PENALTIES WITH PAYMENT PLANS
While the most effective mechanism to use in supporting the successful completion of a deferred payment plan is ensuring that the payment plan is affordable, water utilities can encourage and reward their customers’ entry into, and maintenance of, deferred payment plans through a variety of proactive mechanisms as well.
The primary incentive for a customer to enter into payment plans involves waiving late payment charges for arrears that are subject to payment plans on which customers are current. Many utilities agree that, so long as the customer maintains his or her current payment toward a payment agreement, the pre-existing arrears will not be subject to a late payment charge. However, if the customer fails to maintain payments on the underlying agreement, the late charge may apply not simply to the missed payments, but to the entire underlying arrears.
In addition to encouraging customers to successfully maintain their payment plans once entered, the task of convincing customers to contact the water utility to negotiate a deferred payment agreement with which to begin is even more daunting. One successful “reward” for entering into a deferred payment plan involves the relaxation of internal policies prohibiting customers from using levelized billing plans so long as the account has an unpaid balance. Despite such a policy, some utilities provide that the policy will be waived for customers entering into a deferred payment agreement for their arrears. While many water bills do not exhibit the same level of seasonality that home energy bills do, the option of having regular, equal bills assists the household budgeting process for customers in arrears.
Not all incentive programs involve the mere act of entering into a deferred payment arrangement. One common practice involves utilities agreeing to postpone further collection processes for some period of time (e.g., 30-days, 60-days) so long as the customer receives a commitment from a public or private crisis funding source to pay the down payment on a deferred payment agreement. One water utility suspends collection processes toward all arrears for income- eligible customers so long as the customer enters its low-income program, receives a benefit payment, and makes current bill payments. The arrears is not “forgiven;” indeed, the utility maintains a lien on the customer’s property so that the utility will be paid from the sale proceeds in the event of a property transfer. The customer, however, is not burdened with the obligation to retire the pre-existing arrears in addition to staying current on bills as they come due.
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ARREARAGE FORGIVENESS
A growing realization exists in the utility industry that circumstances exist under which the best treatment of an arrearage is to write them off and give the customer an opportunity to become a good paying account on a going forward basis. Viewing the arrears in this manner allows the utility to convert what appears to be a liability into an asset that can be used for the benefit of the customer and the utility. The write-off is seen as an opportunity to use a series of credits applied against the pre-existing arrears as an incentive for customers to learn new payment habits under which they make full and complete payment.
The programs are known by a variety of names: arrearage forgiveness, arrearage management, arrears retirement, and arrearage credits. Whatever the name, however, the fundamental predicate of such a program involves an exchange with the customer. The utility will, in exchange for complete payment toward future bills for current usage, offer a series of credits which, over a specified period of time, result in a complete retirement of the pre-existing arrears.
The Prerequisite to Earning Credits
The most significant design decision to make in implementing an arrearage forgiveness program involves the payment behavior the customer must make in order to earn the arrearage credit. While that decision may, at first blush, appear to be easy⎯the payment behavior desired is full and timely payment each month—the actual operation of programs has made clear that there are nuances that must be taken into account.
The most common approach to providing arrearage forgiveness is to apply a credit against the participant’s bill each time that customer makes a full payment toward his or her arrears. The “full payment” requirement has been implemented in three different ways.
• By far the most prevalent is for the utility to grant an arrearage credit upon receipt of a full payment whenever that full payment is made. This approach, in other words, offers