Utilities are a part of many aspects of our lives; they power our homes and businesses, and are used as the source of basic necessities such as water and heating. However, our increasing demand for limited resources like electricity, water, and natural gas are driving utility prices higher. In effect, some consumers are having trouble managing their utility expenses, and ultimately, default on paying their utility bills. This blog shares some insight on how to better manage payment of utility costs, and particularly explains what consumers can do about the security deposits of their utility bills.
Why does a utility collect security deposits?
A security deposit is the utilities’ way of protecting themselves from the annual volume of customer default on the payment of their utility billings. This lost revenue turns into a cost of doing business. What costs all ratepayers is that this revenue loss will be included in the next rate case that utilities will file to enable them to recover these losses. Managing this uncollectable revenue protects all rate payers from rate increases due to customer default. In the 1990’s, some utilities had uncollected revenue as high as 10% of their gross sales. The 90’s were a time of many bankruptcies, including retail giant Macy’s. Since then, utilities nationwide have become more aggressive in their security deposit collection practices, regardless of their customers’ credit worthiness.
How much is the security deposit?
The amount of the security deposit will change from state to state and utility to utility. Private utilities follow a set of rules that are approved by the respective state commissions. In most states, the deposit collected is somewhere between two to three months of projected billings based on historical usage. In Ohio, for example, the state commission restricts the amount of the deposit to only 130% of a typical billing. For utilities that are not privately owned, such as utility cooperatives (also known as co-ops) or municipal utilities, the rules for the security deposit amount are not regulated and depend on what the utilities decide.
How does one pay for the security deposit? Is interest paid when the utility holds the consumer’s money?
The primary method of paying for a security deposit is cash. As consumers sign up to avail of utility services, the utility identifies the amount of the deposit before providing electricity, natural gas, or water. Cash deposits are paid an annual interest amount determined by the state regulators if the deposit is with a private utility and is often tied to the Federal Reserve interest rate on commercial paper. Ohio is once again the exception where the commission requires interest to be paid at 3% annually when the deposit is held more than six months. Non-private utilities are not required to pay interest on cash deposits and often do not.
Using the surety bond instead of cash
The alternative method of payment of the deposit is by the issuance of a “surety bond”. A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. A surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. The customer purchases the surety bond from a bonding company for a fee. Using a surety bond to pay a security deposit is a way to free up cash with the utility. No interest is paid if the customer uses a surety bond to satisfy the utilities security deposit requirement. On the other hand, a surety bond is also a financial obligation that can limit the customer’s ability to borrow money as it is a debt. Therefore, customers must carefully plan their decision to purchase surety bonds when using them as payment for utility security deposits.
Managing security deposits and reducing financial exposure
- Utility subscribers must therefore examine the security deposits that utilities charge them.
- Consumers can review utilities’ fine print to study the terms of their security deposits and surety bonds.
- Utility consumers for businesses and other large establishments can have security deposit and surety bond audits.
An effective audit process must include identifying the customer’s current cash and surety bond exposure by utility, reviewing the rules and regulations of each respective utility, and finally matching the current deposit exposure to the utilities’ rules to see where benefits can be realized based on current spending levels.
The benefits of the audits include:
- Discovery of over payment of cash deposits resulting in cash refunds. This is often found in older accounts where consumers have availed of utility generation from third party suppliers.
- Discovery of surety bond levels being too high or that can be eliminated altogether; reducing fees paid to the bonding companies.
- Identification of areas in utility bills where cash deposits can be replaced by surety bonds.
- Identification of security deposits that can be eliminated altogether based on utility rules.
- Updating security deposit accounting by identifying current security deposit levels in the account after the audit results are implemented.
For businesses, utility bills are one of the largest costs of production. For those who use utilities for their home, utility bills take up a large part of the family budget, and sometimes reduce funds for other necessities. To prevent overpaying for utility costs, consumers must continue to review and understand what goes into their bill before they pay for it.
Effective management of your utility expenses stems from an understanding of your utility bills. FirstCarbon Solutions (FCS) offers a security deposit and surety bond audit that has many benefits. Contact FCS today to get assistance in managing your security deposit obligations.