Recently, a colleague posted on LinkedIn about why it’s wrong to set rates by comparing what neighboring utilities charge. The blog post he wrote and referenced goes into great detail about why this isn’t a good idea.
I’ve experienced similar discussions concerning comparing security deposits between utilities. This, too, is fraught with problems and is the wrong way to establish or modify your security deposit.
What is the right way?
An adequate security deposit should protect your utility against write-offs. The most common situation leading to write-offs is a customer who is disconnected for non-payment and skips out without ever paying their bill.
This customer already owes the bill they are being cut off for (and maybe another), plus the usage since their last bill. If your security deposit isn’t sufficient to cover all of this, you may have to write off the difference.
How much this customer owes is dependent upon three things – your policies, your rates, and the customer’s usage.
Your security deposit should be calculated using these factors. You can’t factor in each individual customer’s usage, so the average consumption for your customer base is an acceptable metric to use. Your policies directly impact your Days of Exposure, which is a measure of how many outstanding bills your customer will have by the time they are disconnected.
What is Days of Exposure?
Days of Exposure is a term I coined several years ago to determine a utility’s potential liability if a customer is turned off for non-payment and leaves without paying. It is the sum of the days between the previous reading for the bill your customer is being cut off for up until the day service is terminated. Days of Exposure is the sum of these six components:
- Days between meter readings
- Days until bills are mailed
- Days until due date
- Days until bills are delinquent
- Days until final notice is mailed
- Days until cut-off
Calculate your security deposit
If you would like to check and see if your security deposit is adequate, you can start with the Days of Exposure calculator on my website. If the calculator determines you will have a large write-off, contact me to find out how to remedy this. To use the calculator, you will need to know the six variables described above and how much your average residential utility bill is.
If you have any questions, please email me.
Are your Days of Exposure excessive?
Are you looking for ways to decrease your Days of Exposure? If you are, please give me a call at 919-673-4050 or email me at gary@utilityinformationpipeline.com to see how a business review could help you do just that.
© 2024 Gary Sanders