5.1. ERMUSR 03-09-2010Elk River -~
Municipal Utilities
13069 Orono Parkway • P.O. Box 430
Elk River, MN 55330-0430
March 5, 2010
To: Elk River Municipal Utilities Commission
John Dietz
Jerry Gumphrey
Daryl Thompson
From: Troy Adams
Subject: Review and Consider Customer Deposit Policy and Practice
Phone: 763.441.2020
Fax: 763.441.8099
At the February 9th Commission meeting, Staff was direct to re~~iew the Customer Gep~sit P~li,;y
and related practices. Also, staff was to bring back to the commission an analysis cif th:.~t pulic~-
and practices for Commission review.
In July 2007, ERMU adopted a Customer Deposit Policy (attached for reference). One of the
common utlities industry challenges is collecting on services already provided. To heip
minimize the risk of non-payment, this policy established criteria for determining •wh~tl~~er car not
a customer would be required to make a deposit prior to providing services. Also, the policy
established the amount and timeline for that deposit.
In recent months, there has been question of this practice. Specifically-, the commercial a~.p_ct of
this policy has been questioned. In addition to the policy, the practice has been to collect ou past
due commercial accounts when within ERMU's legal right. For commercial and industrial
customers, the policy requires that a signed service agreement identifying a guarantor and that
guarantor's social security number be required. Also, a deposit of 2 times the estimated monthly
bill is required. There are three options for this deposit: cash deposit, personal guarantee, o=•
irrevocable letter of credit.
In addition to the requirements of this policy, ERMU has also utilized legal counsel to minimize
the risk of collecting payments from commercial and industrial customers. Based on this,
ERMU has required a copy of a lease when a new commercial customer calls to set up a new
account at an existing service where the existing account is delinquent. Also, ERMU has
required court documentation in the case of a court ordered receiver. These examples reflect
ERMU's efforts to minimize preventable write-offs.
In the process of reviewing this policy and related practices, staff worked with Minnesota
Municipal Utilities Association (MMUA) to gather information to use as a local industry
reference point on this subject. MMUA conducted a 10 question survey on electric commercial
customer deposits. (This survey is attached for reference.) There were 38 Minnesota municipal
utilities that participated in this survey, including Elk River Municipal Utilities.
The second question of the survey asks the amount of deposit required. The responses range
from $0 to 2 '/Z times peak usage. As noted, ERMU's deposit is 2 time the estimated monthly
usage. Depending on the customer, this may be a significant amount, possible as much as
$400,000. There are a number of utilities that responded with a deposit set at a fixed amount.
For ERMU with our diverse commercial/industrial customers, this method doesn't work well.
The deposit for a data center should be different than the deposit for an equipment rental place.
Most responding utilities required the deposit prior to providing service. ERMU connects
service and add the deposit to the bill.
Question 6 asks when the deposits are returned. Our policy allows for the deposit to be returned
after 3 years of good payment history. This doesn't protect ERMU against losses when a
commercial/industrial customer that has had good payment history and already had been returned
the deposit falls under difficult economic times and closes their doors. This is a current reality as
ERMU has recently seen long time commercial customers go out of business. To better protect
ERMU and the rate payers against these risks, the deposit would need to be held until the
account is terminated. Of the responding utilities, 22% hold the deposit until the account is
terminated.
Questions 9 and 10 pertain to receiverships. The survey notes that 8% of the responding utilities
require the documentation of the court order prior to establishing service. In ERMU's case, this
is done to verify the obligations of the receiver which may include a requirement to pay all prior
obligations if deemed necessary for the continued operation of the property. Although 8% is a
small percentage, it does represent more that just one utility. There were 8 utilities, including
ERMU, that require this documentation. There is also 12% that require the receiver to become
the customer of record. This establishes that the receiver is the responsible party for future
utility charges. These are signs of the state of the economy and utilities working to lessen the
impact to the paying customers by proactively controlling the risks associated with non-payment
of commercial/industrial accounts.
Based on information collected through MMUA's survey, ERMU's policy is in line with other
Minnesota municipal utilities. The legal efforts made by ERMU that extend beyond the policy
are also being made by other utilities. Because each situation is often unique, many times these
issues are handled case by case with legal counsel. To strengthen the policy and help to define
the intentions of the ERMU, an additional language should be added to clearly state that ERMU
will make every effort to collect on past due accounts. And as ERMU has seen with recent
trends that the current policy timeline for returning deposits doesn't always protect our
ratepayers from customers who default on their accounts. Staff recommends holding the deposit
until the account is closed in good standing. Also, Staff recommends that the amount of the
deposit for commercial and industrial customers have some flexibility. There is a difference in
risk between a commercial customer renting space and a commercial customer owning and
operating a data center. Staff has worked Gray Plant Mooty to incorporate these proposed
revisions. This proposed Customer Deposit Policy is attached for Commission review and
consideration.
Elk River Municipal Utilities
Customer Deposit Policy
In order to minimize the risk of collecting payments from customers who default on their accounts, the
Elk River Municipal Utilities (ERMU) has adopted this Customer Deposit Policy. The amount of deposit
required will depend on the risk identified with the customer. To assess this risk, the ERMU will utilize
available known credit history through on -line resources and their applicable nationally recognized
scoring methods (such as FICO or Beacon) and/or ERMU past experience with the customer.
For residential customers, the risk of nonpayment will be assessed as follows:
A: If credit score falls above 68% probability of non default and no negative history (disconnection for
non- payment or late payment 2 times in 12 months) with the ERMU, no deposit is required. Failure to
provide a social security number will result in the required deposit.
B: For all others, a deposit of 2 times estimated average monthly utility bill (electric, water, sewer) will
be required before utility service will be extended. With good credit history for a period of 3 years, the
deposit will be credited to the customer's utility account. The appropriate interest will be applied to the
monetary deposit per State statutes
For commercial and industrial customers, a service agreement would need to be signed that identifies
the guarantor of their business and the guarantor's social security number. A deposit of 2 times the
estimated monthly bill will be required. The deposit shall be in the form of a cash deposit, personal
payment guarantee, or an irrevocable letter of credit. The irrevocable letter of credit will be renewed as
required and failure to do so will result in a charge equal to the amount of the letter of credit applied to the
monthly utility bill. With good payment history for a period of 3 years, the deposit will be credited to the
customer's account or personal guarantee/ letter of credit will be returned to customer.
For residential, commercial or industrial customers who are disconnected for non-payment, a 2 month
estimated utility bill deposit will be required before reconnection.
Adopted 07/09/2007
MMUA Electric Commercial Deposit Survey
2/23/2010
Q.1 Please enter the name of your city/utility.
People who answered question: 33 (87%)
People who skipped question: 5 (13%)
Q.2 Please enter the amount of deposit required for a commercial
customer: (See Attached Sheet For Data)
People who answered question: 34 (89%)
People who skipped question: 4 (11 %)
Q.3 Time allowed for a new commercial customer to make a deposit:
(See Attached Sheet For Data)
People who answered question: 33 (87%)
People who skipped question: 5 (13%)
Q.4 Deposit is waived if:
Answer Count
Good credit reference 7 (37%)
Current customer;/good credit 5 (26%)
Former customer/good credit 5 (26%)
Third party guarantee 2 (11 %)
People who answered question: 19 (50%)
People who skipped question: 19 (50%)
Q.5 Is unpaid deposit cause for disconnect?
Count
Answer
Yes 14 (52%)
Depends on circumstances 9 (33%)
No 4 (15%)
People who answered question: 27 (71 %)
People who skipped question: 11 (29%)
Q.6 When are deposits returned?
Count
Answer
After one year 10 (31 %)
Other 7 (22%)
When account terminates 7 (22%)
After two years 6 (19%)
When credit is established 2 (6%)
People who answered question: 32 (84%)
People who skipped question: 6 (16%)
Q.7 In the case of a commercial customer, do you require copy of a lease
contract to establish service?
Answer Count
No 29 (94%)
Yes 2 (6%)
People who answered question: 31 (82%)
People who skipped question: 7 (18%)
Q.8 In the case of a commercial customer, do you require the social security number
and a service agreement signed by the guarantor?
Answer Count
No 18 (58%)
13 (42%)
Yes
People who answered question: 31 (82%)
People who skipped question: 7 (18%)
Q.9 If a receiver is appointed, do you require a copy of the court order prior to
establishing service?
Answer
No
Yes
People who answered question:
People who skipped question:
Count
20 (71 %)
8 (29%)
28 (74%)
10 (26%)
Q.10 If a receiver is, appointed, do you require the receiver to become your
customer of record?
Answer Count
No 14 (54%)
Yes 12 (46%)
26 (68%)
People who answered question:
12 (32%)
People who skipped question:
MMUA Electric Commercial Deposit Survey - Q2 Data
2/23/2010
Respondent ID Amount of deposit required for a commercial customer
4883671 $150
4883744 2 times the hi nest revious bill
4883778 $100
4883918 $150.00
4883938 Renters Onl :Based on estimated two months total Utilit bill.
4883967 2.5x the month) bill
4883979 two times the avera a month) bill
4884044 - 0 -
4884071 $0.00
4884230 Unless the com an has a record of not a in ,none. Percenta a otherwise.
4884326 hi hest month) bill in a 12 month eriod
4884353 2 hi hest months bills last 12 months added to ether
4884360 2 1/2 months ex ected eak usa e
4884584 15% of 1 ears bill -leased, rented or contract for deed onl
4885019 E uivalent to lar est bill in revious 12 months
4885103 $130 Electric / $300 total Electric, Water, Natural Gas
4885241 $100 FOR EACH SERVICE, ELECTRIC, GAS 8~ WATER
4893274 We call ours advance a ments/$300.00
4894081 150
4895233 250
4895574 250
4896479 $200.00
4896545 Avera a one month bill; if new buildin /business $250.00
4897074 $150 minimum-1.5 times their avera a bill
4897235 $700.00
4900246 0
4907002 2 X Avera a month bill
4908215 none re wired for commercial
4911740 2x extimated month) bill
4911744 $200.00
4911792 $180.00 ELECTRIC $45.00 WATER
4949919 $150.00
4952830 $50.00 Pre-Pa not a de osit. Amount is a lied to accout.
4954210 $250.00 Small Commercial $500.00 Lar a Commercial
MMUA Electric Commercial Deposit Survey - Q3 Data
2/23/2010
Respondent ID Time allowed for a new commercial customer to make a deposit:
4883671 Same da as a lication or set u arran ements
4883744 When service is turned on
4883778 Before service is rovided
4883918 ri ht awa
4883938 De osit re uired u front.
4883967 none
4883979 before the recieve service
4884071 n/a
4884230 60 da s
4884326 It is billed with their first billin , if not aid u front
4884353 Before service is ut into there name
4884360 30 da s
4884584 immediatel
4884720 Before account in ut in there name
4885019 Do not re uire a de osit of new customers
4885103 30 da s
4885241 BEFORE SERVICE IS STARTED SEE QUESTION # 5
4893274 We reauire it before the bill can be put in their name
4894081 none
4895233 Before Service is connected
4895574 When The si n up for their new service
4896479 NEEDS TO BE PAID BEFORE READ INTO THEIR NAME
4896545 3 months
4897074 5 business da s
4897235 A rox 60 da s
4900246 0
4907002 1 month after de osit amount is determined
4911740 connected then billed for the de osit
4911744 rior to hooku
4911792 30 DAYS
4949919 1 week
4952830 At A lication for service.
4954210 Must be received at time of sevice a lication
Elk River Municipal Utilities
PROPOSED Customer Deposit Policy
In order to protect its ratepayers from customers who default on their accounts, the Elk
River Municipal Utilities (ERMU) has adopted this Customer Deposit Policy.
Deposit Required: All residential, commercial and industrial customers of ERMU will
be required to submit a deposit in the form set forth below subject to the exceptions set
forth below. In addition, customers who have been disconnected by ERMU for non-
payment of amounts due shall be required to submit a deposit before service will be
reconnected. Failure to submit the required deposit when due shall be cause for ERMU
to immediately terminate service.
Amount of Deposit: The amount required to be deposited shall be equal to two times
ERMU's estimate of the customer's average monthly utility bill for electric service, and
$100 for water and sewer service.
Form of Deposit: The deposit shall be in the form of a cash deposit or an irrevocable
letter of credit. If in the form of an irrevocable letter of credit, the letter of credit shall be
renewed at least 30 days prior to its expiration. Failure to renew a letter of credit will
result in the letter of credit being drawn on and the cash recovered from the letter of
credit being held by ERMU as a cash deposit. If ERMU is not able to draw on the letter
of credit, the customer shall submit a cash deposit prior to expiration of the letter of
credit. Failure to submit the required deposit shall be cause for immediate termination of
service by ERMU.
Receipt for Deposit: ERMU shall furnish the customer with a written receipt at the time
a deposit is made. The receipt shall specify the conditions pursuant to which the amount
of the deposit will be diminished upon return of the deposit to the customer.
Return of Deposit: Any deposit received by ERMU shall be returned to the customer
within 45 days of termination of service, provided that the customer has paid in full all
amounts due on the account. If the customer has not paid in full within 30 days of the
termination of service, the deposit will be applied to any outstanding amounts owed by
the customer to ERMU. If the deposit exceeds the amount due, the balance will be
returned to the customer. If the deposit is not sufficient to cover the amount due, the
customer shall remain liable to ERMU for the balance and shall pay the balance due
within 15 days of notice from ERMU. ERMU reserves the right to use reasonable legal
means to collect amounts due.
Interest on Deposits: Interest shall be paid on all deposits in excess of $20 at the rate
established by Minnesota Statutes. ERMU may, at its option, pay the interest at intervals
it chooses, but at least annually, by direct payment or as a credit on the customer's
account.
Submission of and Exceptions to Deposit Requirement:
A. Residential Customers.
Residential customers may submit the required deposit at the time service is
requested, or have the deposit billed with the customer's first bill for services provided.
Failure to pay a deposit when billed shall be cause for ERMU to immediately terminate
service. ERMU may, in its discretion, waive the required deposit for residential
customers if the customer consents to ERMU's collection of credit history data on the
customer, the customer's credit score falls above 68 percent probability of non default,
and the customer has no history of disconnection for non payment to ERMU, and no
history of late payments to ERMU two times in 12 months.
B. Commercial and Industrial Customers.
All commercial and industrial customers shall submit the required deposit and
enter into a service agreement with ERMU at the time service is requested. The
customer's application for service shall identify the individual or business entity entering
into the service agreement. The service agreement shall be an agreement on the part of
this individual or business entity to make payment of all amounts billed by ERMU for
electric, water and sewer services, and to be liable for any default or non-payment of
amounts billed by ERMU. ERMU may, in its discretion, waive or reduce the required
deposit for commercial and industrial customers if a service agreement is executed by the
customer, the customer has provided ERMU with sufficient information to allow ERMU
to analyze the credit risk of the individual or business entity executing the service
agreement, and ERMU, in its sole discretion, determines to waive or reduce the deposit
required based on its analysis of credit risk. Waivers and/or reductions in the deposit
requirement shall be reserved for rare exceptions when the risk of default is minimal.
GP:2740880 v3
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