Sale of Bad Debt by Utility Companies: Proceed with Care

Hannah Singerman

Selling uncollectable or “bad” debt has become a new and exciting prospect for many utility companies.  Sale of such debt can free-up workers, provide instant income for the company, and create more financial certainty.  It could also, in theory, alleviate the need for controversial rules like Texas’ “Switch-Hold Rule”, because the utilities and the State would be unburdened by the collection costs.¹  Further, it may simplify the work needed for utilities in tracking bad debt expenses in states which require such record keeping and analysis.²

Additionally, if done correctly, and in states with a Public Utility Commission (PUC) which allows for such write-offs, the tax consequences can be advantageous. For example, the portion of the debt owed by the debtor below the sale price can still be taken as a write-off.³  Further, if previously written-off debt is later sold, the sale price is generally treated as ordinary income.  See id.

However, there can be pitfalls and issues when selling bad debt.  Purchased debt is highly regulated under the Fair Debt Collection Practices Act (FDCPA) and will not be highly scrutinized by the CFPB.  Utility companies are not experienced in selling debt and debt-buyers are not experienced in collecting debt at this point which may lead to issues.  From a public relations stand-point, perceived bad acts, whether intentional or not, by a debt-buyer could be imputed back onto the utility.  Lack of experience and lack of familiarity with the product (utility debts) could greatly increase the potential for problems.

Further, utility companies lack of knowledge and lack of regulation in the debt-collection arena could lead to problems for potential debt-buyer partners.  Miss-communications regarding the content of records could lead to FDCPA violations on the debt-buyer end.  FDCPA liability does not require intent, just incorrect information communicated to debtors.⁴  Since utility companies have not been subject to the regulations; there is a possibility for issues in this arena when debts are sold.  Sale of debts with troublesome information from an FDCPA stand-point can damage relationships between the utility and their buyers as well.

To avoid such issues, a true partnership between the two entities needs to be developed.  Both need to be specific about their needs and concerns when contracting and need to develop procedures together which comply with existing laws so both are comfortable.  For example, the utility can contract to ensure the debt-buyer’s collection activities not only meet legal standards under PUC for its specific state but meet the utility’s standards in treatment of its former customers to help guarantee the utility’s reputation.  The debt-buyer may in turn require the utility to make sure its collection activities, pre-sale meet certain standards so it feels comfortable buying the debt.

There will not necessarily be a uniform way different states’ PUCs will treat sale of bad debts as there is currently no uniform way State and local PUCs treat the problem of bad debt now.  Each state has their own Public Utility Commission with their own rules.  Some States factor bad debt write-offs into their tariffs, while others allow utilities to factor them into their rates.⁵  Some local PUCs have found other ways to properly collect their debts.  For example, the city of New Ulm, MN has authorized the city finance director to negotiate debt settlements on its local PUC’s behalf.⁶

It has not been fully explored what would happen if the industry made it a regular practice to sell bad debt to debt-buyers.  It could have the result in decreasing tariffs as the costs associated with bad debt would be, in theory decreased, but that remains to be seen.  Further, it is unclear, especially if consumers began to complain about debt-buyers and their debts being sold, if new regulations would proliferate to address the complaints or if the CFPB would look to enter this market to regulate debt collection practices as it has with banks.

At the moment however, if done properly, with the proper safeguards and an eye towards the general federal debt collecting regulations, sale of bad debt could be advantageous to utility companies. Caution is just necessary for anyone beginning the practice.

¹ See Texas PUC Project No. 37291.  The Rule is designed to stop Texan’s with over-due electric bills from buying power from another provider until the previous bill is paid.
² See, i.e. Pennsylvania; No. 1914 C.D. 2007, (Pa. Cmwlth. 2009) (filed February 4, 2009).
³ See IRS Publication 533, Chapter 10.
⁴ See 15 U.S.C. 1601 §807(2)(A).  There are safe-harbors for liability for such issues, however, any mistake exposes a debt collector to liability and additional expense.  It should also be noted that the CFPB is highly scrutinizing the accuracy of the amount, character and nature of debts being collected as it continues to report it as its highest category of complaints from debtors: http://files.consumerfinance.gov/f/201303_cfpb_March_FDCPA_Report1.pdf.
⁵ I.e., see DG 07-050 of the New Hampshire Public Utilities Commissions (regarding controversies in methodology for calculating additional tariffs for bad debt); also see PUC E-002/GR-12-961: “In the Matter of Northern States Power Company for Authority to Increase Rates for Electric Service in the State of Minnesota” (Minnesota allows for rate hikes to cover bad debt for utilities but is able to demand long amortization schedules).  
⁶ See http://www.nujournal.com/page/content.detail/id/523872.html.

Hannah Singerman, attorney with Weltman, Weinberg, & Reis Co., practices in Commercial Collections, with a focus on the Commercial Banking, Commercial Business, Special Collections and Commercial/Agency Services Groups. She is based in Weltman’s Cleveland office. Hannah earned a B.A. in English and Medieval & Renaissance Studies from Washington University in St. Louis in 2003 and a J.D. from Emory University School of Law in 2006. A member of the Georgia and Cleveland Metropolitan Bar Associations, Hannah is licensed in Georgia and Ohio.