Ofgem considers tweaks to debt allowances after PPM pause

Ofgem has issued a call for evidence concerning potential adjustments to the price cap allowances for debt-related costs to account for the impacts of the energy crisis and the recent moratorium on forced prepayment meter (PPM) installations.

Suppliers have been banned from conducting forced PPM installations since the beginning of February when an undercover investigation by The Times found contractors working on behalf of British Gas were regularly flouting rules on the treatment of vulnerable customers.

On Tuesday (18 April), Ofgem released new voluntary code of practice for suppliers, which stipulated that companies must visit customers in their homes to assess their welfare before carrying out a forced PPM installation. Although all suppliers have signed up to the code of practice, the regulator said companies must also meet a series of conditions before resuming forced installations, including conducting an independent audit to identify any instances in which they have wrongly installed a prepayment meter.

Energy UK, the trade body for the sector, welcomed the code of practice as “necessary” but warned that bad debt levels are growing to “unsustainable” levels and must be addressed.

In its call for evidence, Ofgem said it is seeking views on potential adjustments to price cap allowances to reflect the impacts of both the energy crisis and the ongoing ban on forced PPM installations on suppliers’ actual debt-related costs during 2022/23 as well as their anticipated costs during 2023/24.

In the case of actual costs during 2022/23, Ofgem noted that it has already issued two requests for information on suppliers’ cost during the year, the first of these in January. The second was issued more recently to include the initial effects of the moratorium on forced PPM installations.

Regarding anticipated costs during 2023/24, the regulator said it is still too early to determine the ongoing impact of the moratorium on suppliers’ costs and suggested several ways this could be calculated once data becomes available.

Ofgem said these include comparing the rate of PPM installations in the first quarters of 2022 and 2023 and then estimating the amount of debt that would have been accrued had the ban not come into force.

Alternatively, Ofgem has suggested that it could use the Covid-19 period as a proxy given there was also a significant reduction in PPM installations at that time. Ofgem’s call for evidence document adds: “This would mean determining what level of increased debt there was during a defined period of Covid-19, relative to a more recent period when Covid-19 restrictions were not place, and adjusting to account for the different macroeconomic context (cost of living and gas price crisis as well as the absence of the Covid-19 impact on consumer incomes) and the specific factors affecting PPM installation rates now.”

A third proposed method suggested by Ofgem would be to evaluate the latest stress test forecasts from suppliers for 2023/24. This could include comparing these latest forecasts, provided after the moratorium announcement, with previous 2023/24 forecasts which were provided before the moratorium commenced, to estimate the change in expected bad debt between the two forecasts for affected customers.

Ofgem warned that this third option “would come with some analytical complexity, as between the two forecasts, the level of EPG discount was also increased”.

Looking ahead, Ofgem conceded that the adoption and implementation of the new Code of Practice on involuntary PPMs will likely lead to fewer installations.

Ofgem’s call for evidence document adds: “The Code of Practice largely codifies and clarifies existing good practice in relation to PPM installations, but it is reasonable to expect it, and any resulting licence or guidance changes, may lead to fewer PPM installations than would otherwise have been the case.

“This is therefore likely to have a consequential impact on debt-related costs. That said, we would expect an efficient supplier would use other mitigations in line with debt management best practice to try to reduce the likelihood of bad debt for customers who would otherwise have a PPM installed, rather than there being a presumption that all of the debt would automatically become unrecoverable.”

A consumer attitudes document published alongside the new Code of Practice revealed that the British public believe increasing levels of bad debt should be absorbed by the suppliers themselves.