Assessing a late fee after the due date serves two purposes for a utility. One is to reimburse the utility for the loss of cash flow, and resulting interest income, because your customer didn’t pay on time. The other is a punitive measure (which is why some utilities call their late fee a penalty), hopefully to encourage your customers to pay on time in the future.
What type of late fee is most popular among utilities – flat amount, percentage, or something else?
Based on the Utility Fee Surveys for 2015 through 2023, percentage is the most popular, followed by flat amounts. In a distant third place each year is percentage with a minimum, also known as a hybrid late fee. The graph above illustrates the type of late fee charged by utilities responding to the 2023 Utility Fee Survey.
Flat amount late fee
A flat amount late fee is the easiest to apply, and simplest for your customers to understand. However, assessing a flat amount means a customer with a minimum bill pays the same late fee as your largest commercial customer. Hopefully, you can understand why I don’t think this is equitable.
Percentage late fee
Charging a percentage of the unpaid balance as a late fee is more equitable, but poses another potential problem. A percentage generates higher late fees from your larger users but, depending on the percentage you charge, may not end up charging your smallest users as much as a flat amount.
What is the solution?
Thankfully, the solution is hybrid late fee – a percentage with a minimum, for example 10% with a $10 minimum. Many times, this will be stated as “10% of the unpaid balance or $10, whichever is more”. Below is a graph of the hybrid late fees charged by utilities responding to the 2023 Utility Fee Survey:
This approach combines the best of both worlds – a percentage to generate higher late fees for larger customers with a flat amount to charge a minimum amount to smaller users.
Why isn’t this more popular?
I’m curious why more utilities don’t charge a hybrid late fee. I pitch this approach every time I present my Improving Revenue Collections for Utilities presentation during speaking engagements and I usually recommend it when doing a business review.
Utility Billing Mailbag
A reminder about the feature I’m calling the Utility Billing Mailbag. Send me your utility billing questions and I’ll take my best shot at answering them.
Does your late fee need reviewing?
Does your late fee, or your delinquency policies in general, need reviewing? If so, please give me a call at 919-673-4050 or e-mail me at email@example.com to find out how a business review could help.
© 2023 Gary Sanders