Security deposits – is yours sufficient?

How much is an adequate security deposit?

As we saw in my last issue (if you missed it, you can read it here), 60 days of exposure is about the best a utility can hope for, so a sufficient security deposit needs to be at least two times the average monthly bill. If your minimum security deposit isn’t at least twice your average bill, you run the risk of being stuck with unpaid final bills that you will end up writing off.

Many utilities, especially those that bill for electric or natural gas, find that charging a deposit equal to two month’s average bill is excessive. One solution to this dilemma is to charge a variable deposit where customers with good credit pay a minimum deposit and those with bad credit pay a much higher deposit. While this isn’t a perfect solution, it does alleviate the burden of a high deposit for those customers who have demonstrated that they pay their bills in a timely manner.

One way to determine your customer’s credit score is to contract with one of the three nationwide credit reporting agencies – Equifax, Experian or TransUnion.

Another option is to use the ONLINE Utility Exchange which also runs a credit check, but goes even further. In addition to reporting your customer’s credit score, the ONLINE Utility Exchange also protects against fraud by verifying that the applicant’s name and social security number match. It will also alert you if the applicant owes a past due bill to another utility for previous service elsewhere.

A huge advantage of running a credit check on new applicants is that the potential new customer must provide his or her social security number, because it is required to perform a credit check. This solves the problem of those customers who won’t willingly provide their social security number. Once you have the customer’s social security number, you have the most valuable piece of information you need if you end up having to turn the customer over to a collection agency or file a set-off debt claim against them.

Some utilities refund deposits for good credit after a certain amount of time. While I am not a proponent of refunding deposits for good credit, if you have a policy that requires you to, I recommend that you do so only for the very best paying customers. Even it means going before your board to update your policies, I would suggest not refunding a deposit until your customer has paid on time for two years with no late fees and definitely not if they have been cut off for non-payment in the past two years.

Finally, let’s look at a couple best practices regarding deposits…

If you don’t already do so, I strongly encourage you to revise your minimum deposit every time you adopt a rate increase. This keeps your deposit amount aligned with the amount of two month’s average bill.

I also suggest a policy if you have customers with older deposits that are less than your current minimum deposit. If one of these customers ends up on the cut-off list, I recommend that you require them to bring their deposit up to the current minimum deposit amount along with paying their outstanding bill and the cut-off fee. This insures that your utility is protected if this customer ends up being cut off for non-payment again and skips out without paying.

If you have any questions about your deposit policies or would like assistance in reviewing them, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders

Minimizing days of exposure

One of the most popular classes that I teach at utility conferences is entitled “Improving Revenue Collections for Utilities”. Part of this presentation addresses minimizing what I call “days of exposure” – the number of days of service that a customer ends up owing for if they skip out and never restore their service after being cut off for non-payment. The days of exposure is the number of elapsed days of service, starting with the previous reading date for the bill they are being cut off for failing to pay and ending with the date they are cut off for non-payment. Obviously, as the number of days of exposure increases, so does the amount you end up having to write off if the customer never pays.

How confident are you that your utility isn’t incurring needless days of exposure…?

Let’s take a look a three different timelines that highlight scenarios with varying days of exposure:

This first timeline is pretty much the best case scenario – bills are mailed within five days of meters being read, they are due 15 days after being mailed and delinquent accounts are cut off for non-payment 10 days after the due date, resulting in 60 days of exposure.

In the second timeline, bills are still mailed within five days of meters being read, but the utility is a little more lenient with due dates and delinquent dates, extending the due date to 25 days after bills are mailed and the cut off for non-payment to 15 days after the due date, resulting in 75 days of exposure.

Finally, the third timeline illustrates the worst case scenario – the utility reads meters early in the month but still waits until the end of the month to mail bills and their delinquent policies are more lenient, as in the second scenario, resulting in 90 days of exposure.

From the three timelines, you can see that policies and procedures at both ends of the billing process can impact the number of days of exposure. On the front end, mailing bills as soon as possible after reading meters limits needless days of exposure.

Many utilities have moved to automated meter reading systems, either drive-by or fixed base systems, significantly reducing the time required to read meters. A trend that I have seen with some of these utilities is to continue starting the meter reading process at the same time of the month as before automation, finishing the earlier in the month. If they do so without closing the gap between reading and billing dates, they have missed a prime opportunity to minimize the days of exposure. And without closing the gap, I don’t believe they end up reaping the full benefit of automating the meter reading process.

Requiring your customers to pay within a reasonable number of days from the billing date, and then promptly initiating the cut off for non-payment process, insures that you don’t needlessly incur additional days of exposure at the end of the process.

If you have any questions about how to reduce your days of exposure, or would like my assistance in developing a plan to do so, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders