In one of the listservs I subscribe to, a question was recently asked about what other utilities’ deposit policies are, including deposit amounts. While I think inquiring about other utilities’ policies is worthwhile, comparing the amount of their deposit without knowing their rates and business practices can be futile.
How much is an adequate deposit?
A sufficient deposit should protect your utility against bad debt customers who leave and never pay their final bill. How much that is depends on your average utility bill and your business practices.
Worst case scenario
The worst case scenario for a security deposit is that customer who ends up on the cut-off list and skips out without paying. Your utility is owed the original bill which caused the customer to be on the cut-off list, the next bill (if one has been issued) and any usage since the most recent bill. To illustrate this, let’s look at a hypothetical situation…
Days of exposure
I’ve written before about days of exposure, the total number of days of service you would be owed for by the worst case scenario customer described above. For our hypothetical customer, let’s assume:
meters are read on the 10th of the month
bills are mailed the last day of the month
bills are due on the 25th of the month
bills are considered delinquent 5 days after the due date
a final notice is mailed 5 days after the delinquent date
cut-off occurs 5 days after the final notice is mailed
Here is how that looks in a timeline (clicking on the graphic will open a larger image in a new window):
This adds up to 90 days of exposure (admittedly, this is a bit extreme, but it’s only for illustration purposes):
Assuming you bill each customer monthly, 90 days of exposure equates to three months of bills. You would then have to multiply your average monthly utility bill times three to determine how much an adequate deposit is.
If your deposit is less than this, then you are at risk for write-offs from bad debt customers.
I will be concluding the 2015 Utility Fee Survey soon, so if you haven’t yet participated, please take a few minutes to do so. Please click here to complete the survey. It should take less than five minutes to complete.
The poll results overwhelmingly confirmed my observation that most utilities do one of two things to let a customer know they have been cut off – leave a door hangar or do nothing at all. If you missed it, you can still participate in the poll by clicking here.
Here are the results of the poll (clicking on the chart will open a larger image in a new window):
Contact by phone or e-mail
Three responses indicated they contact customers by phone or e-mail. (Although, based on one of the comments, I suspect one of the phone call responses misunderstood the poll and indicated how they contact customers before being cut off).
I was initially surprised that some utilities take the time to phone or e-mail accounts that have been disconnected for non-payment. After discussing this with a customer, I realized some utilities have good reason to do so. Utilities that serve customers who aren’t year round residents (for example, beach communities) might want to let non-resident customers know their service has been terminated.
Another year is almost behind us
This issue marks the fourth anniversary of the Utility Information Pipeline. Subscribers continue to increase, by over 10% this year.
If you have co-workers or colleagues from other utilities who you feel would benefit from reading this newsletter, please take a minute and forward this to them.
This year also marked a milestone with the 100th issue!
If you haven’t checked out my blog recently, I encourage you to do so. Each Utility Information Pipeline newsletter article is also posted to my blog as an archive. So if you can’t find an old newsletter e-mail that you wish you still had, try searching for it on my blog.
April of this year was the busiest month ever for my blog with 894 page views and November 26 was the most active day ever with 235 hits.
Most popular blog posts
For the third year in a row, convenience fees was the most popular blog post topic. Here are the five most popular blog posts in terms of page views for the past year:
After four years, topics to write about aren’t as easy to come up with as they were when I first started! If you have an idea or suggestion of a topic that you would like to learn more about, please give me a call at 919-232-2320 or e-mail me at firstname.lastname@example.org.
Happy New Year!
I wish you and yours all the best for a happy, healthy, and prosperous 2015!
Recently, in one of the listservs I subscribe to, the question was asked about how other utilities notify customers after they have been disconnected for non-payment. I found that to be an intriguing question, because it’s not one I’ve heard asked before.
A few responses answered how they notify accounts that are subject to being cut off, but only one other response directly addressed notifying customers after they have been cut off.
My observation has been that utilities do one of two things to let a customer know they have been cut off – leave a door hangar or do nothing at all.
Do you have a legal obligation?
Some states require a utility to leave a door hangar, or other notice, alerting a customer that their service has been disconnected. Other utilities feel that it’s a good customer service policy to leave a door hangar.
If you do leave a door hangar and it can be distinguished from a door hangar you would leave for any other reason, you may want to consult with your attorney. I know of one utility that used a brightly colored door hangar for disconnects and a white one for all others. They were sued for a privacy act violation and, as part of the settlement, agreed to use a white door hangar for all situations.
In the other camp are utilities trying to avoid potential confrontations with angry customers. These utilities simply have the service technician terminate the service and move on to the next account on the cut-off list without any further notification.
After all, you’ve let the customer know they are in jeopardy of being cut off, either with a second notice or on the original bill, so what more notice should you provide them?
How do you notify customers after they have been cut off for non-payment? Please take this quick poll.
What date do your customers think is your due date?
If the answer to these two questions isn’t the same, you have a problem.
Conflicting due dates
In a sales presentation with a prospect last week, I asked, “when is your due date?” The two billing clerks contradicted each other – one stating their due date is the tenth of the month, the other insisting it is the first of the month.
The reason the second billing clerk insisted it is the first is because this is the due date printed on the bills. However, they don’t consider the bills to be late until the tenth, which explains the first clerk’s answer.
I can assure you, if you publish one due date but don’t charge a late fee until a later date, your customers will quickly catch on and, in their minds, they consider the “due date” to be the later date. Sure, your very best customers will pay their bills by the published due date, but as far as all the rest are concerned, the due date is the very last day they can pay without being penalized.
What purpose is served by offering a grace period between the due date and delinquent date? Absolutely none. Once your customers realize you won’t charge a late fee until the second date, you might as well publish the delinquent date as your due date.
If you offer a grace period, abolishing it is one of the easiest ways to reduce your days of exposure.
This same prospect, in addition to offering a grace period of 10 days, doesn’t charge penalty until two days after the delinquent date. They do this to allow payments postmarked by the tenth to be processed without being charged a late fee.
Verifying postmarks, or delaying charging late fees to accommodate them, is an antiquated process that few utilities take the time to do. Unless you are governed by state law or local ordinance that requires you to check postmarks, there is no reason to do so.
Is your office still following outdated procedures?
Is your office still following practices that have outlived their usefulness? Could your office benefit from operating more efficiently? If the answer to either question is “yes”, or if you’re not sure, please give me a call at 919-232-2320 or e-mail me at email@example.com to learn how a business review could benefit your utility.
Have you seen any of the negative publicity that Detroit is getting for cutting off water to delinquent customers?
I read this story online over the weekend and wasn’t surprised to read that Detroit was finally starting to cut off customers for non-payment.
I had occasion to speak with the CFO of the Detroit Water and Sewerage Department last year. At that time, nearly 82% of their receivables were 60 days or older. On top of that, they hadn’t done cut-offs for non-payment in three years. Yes, you read that correctly – three years, not three months!
Could your utility remain solvent if over 80% of your receivables were seriously delinquent and you weren’t doing anything to tackle the problem? Of course not!
As Tom Curtis, deputy executive director of AWWA, stated in the article “If you never shut the water off for anybody, those people who continue to pay have to shoulder the entire cost of a system that is servicing a lot of customers that aren’t paying. That’s not a sustainable business model.”
There is no excuse, other than poor management, for a utility going three years without cutting customers off for non-payment.
Most of the public outcry is over the fact that, suddenly in the heat of summer, some customers who can least afford to pay are without water.
I believe for-profit and investor owned utilities have a responsibility to set aside some of their profits to offer assistance programs for customers who have legitimate hardships.
I don’t feel the same way about municipal utilities or utility districts whose priority is to provide the best service at the lowest rates for their customers. Most utilities I’m familiar with have a working relationship with local social service agencies, church groups, or other charities that provide assistance with utility bills and refer customers with economic hardships to those agencies.
An effective policy is the best way
The article goes on to highlight the case of Hamtramck, Michigan – another financially strapped city – that shut off customers as a way of stepping up their collection efforts. In a year, the city went from a $350,000 deficit to a $2 million fund balance in the water fund.
The article cites an impressive statistic – cutting off 150 customers caused 390 delinquent customers to pay. This bears out what I’ve always believed – adopting and enforcing an effective cut-off policy as part of an overall customer service policy the best way to reduce delinquent accounts.
Have you reviewed your cut-off policy lately?
Is your cut-off policy up-to-date and as effective as it should be? If you’re not sure, please give me a call at 919-232-2320 or e-mail me at firstname.lastname@example.org to learn how a business review could benefit your organization.
Which is the better method of assessing a late payment penalty – a flat amount or a percentage of the past due amount?
Purpose of a late fee
Charging a late fee serves two purposes – to compensate the utility for the loss of operating cash and potential interest income because your customer didn’t pay on time and, secondly, to serve as a punitive measure (which is why some utilities call the late fee a penalty) to entice your customer to pay on time.
Flat amount late fees
A flat amount is the most straightforward and easiest way to charge late fees. It’s easy for your customers to remember, if they don’t pay their bill on time, to add $5 when they do pay.
However, flat amount late fees disproportionately impact your customers with low bills. A senior citizen living alone who receives a minimum bill every month pays the same late penalty as a large industrial user.
Percentage late fees
Charging a late fee as a percentage of the unpaid balance is a more equitable approach, insuring that customers with lower bills are assessed a lower penalty. However, if the late fee is too low, it may not serve the purpose of motivating your customers to pay on time.
Back to the original question – which is better, flat amount or percentage? What if the answer to that question is “neither”?
The most creative solution to the flat amount vs. percentage dilemma is a hybrid of the two options. In this case the utility charges a percentage with a minimum amount, for example 10% with a minimum of $5.
Many times this is expressed as “10% of the balance due or $5, whichever is greater” or “$5 on balances of $50 or less, 10% on balances of more than $50”.
The advantage of the hybrid method is it maintains the punitive aspect of the late penalty for customers with low bills while insuring that customers with larger bills pay a larger late fee.
If you haven’t reviewed your late fee policy recently, now might be a good time to do so. If you have questions about your late payment penalty or would like assistance implementing a revised late fee policy, please give me a call at 919-232-2320 or e-mail me at email@example.com.
I am the Senior Consultant with Edmunds GovTech | Logics in Raleigh, North Carolina. I have over 35 years experience developing and implementing utility billing and financial software and consulting with utilities and municipalities. My bi-weekly email newsletter draws from my experience in working with over 200 utilities and local governments to offer insight into how utilities can improve operations and better serve their customers. If you have a comment or a suggestion for a future email, please contact me by calling 919-673-4050 or sending an email to firstname.lastname@example.org