Security Deposits Protect Against Non-paying CustomersAugust 31, 2016 | Sara M. Donnersbach, Esq.
The Public Utilities Commission ("the Commission") is a state agency that has regulatory authority over certain public utilities. The Commission works to regulate the rates customers pay for electricity and ensure that companies provide quality, safe and reliable electric service.1
When someone requests new electric service, the utility provider will verify credit.
For customers without good credit
With residential service, security deposit decisions must be based only on an individual's credit record. The utility provider cannot require a deposit on the basis of location, race, sex, age if over 18, national origin or marital status.2
If the party requesting service does not meet the requirements for good credit, a deposit may be required. The utility provider may ask for — but cannot require — a Social Security number in order to check credit history. It also may ask for valid identification (ID), which may be a government-issued photo ID or two alternative IDs, as long as one has a photo. The utility provider also may require the names and proof of identity of each adult occupant of the residence.
To establish credit, new customers must meet at least one of the following criteria:
- Be a creditworthy property owner or meet the legally accepted practices to verify credit
- Have had a prior account with the electric company for the same type of service within the past two years, and in the prior year of service not had a late bill more than twice, nor had service disconnected for nonpayment, fraud or tampering
- Furnish a guarantor or someone with good credit who will pay up to 60 days of service if the customer fails to pay the bill
When a spouse's credit history is a factor
That said, understand that a utility company cannot require a deposit simply because previous utility services were in a spouse's name but not in the current applicant's name. However, the spouse's utility credit history may be a factor if:
- The spouse will use the services or will be liable for paying for the account;
- The applicant is relying on a spouse's income to help pay the account; or
- The applicant lives in a community property state — even if the two weren't living together and didn't share the account while it was open.
Under the Equal Credit Opportunity Act (ECOA), if the above apply, the following needs to be proven in order to establish service:
- The applicant did not live with the non-paying spouse when the account was overdue;
- The applicant never saw the prior bills; or
- The applicant paid the bills once he or she discovered they were overdue.
If unable to prove any of the above, the utility provider may ask for payment of the spouse's old debts, for a deposit, or for a letter of guarantee before new service is connected. In this case, the utility provider's right to take such action is governed by state law, not the ECOA.
How much should the security deposit be?
In some states, the electric company may not charge a deposit of more than 130% of the estimated average monthly bill for regulated services. The deposit may be increased or lowered after three consecutive billing periods if the deposit differs by 20% or more of the amount that would have been required based on actual usage (while considering possible seasonal changes in usage).
If the utility provider keeps a deposit for more than six months, the utility provider may have to pay at least 3% interest on the deposit, depending on the applicable state law. After 12 months, the utility provider may review the account and determine if the deposit should be returned.
Security deposits from commercial customers
With commercial service, security deposit decisions are a little more complicated. Utility providers may request a deposit based on several factors3:
- The customer has an unpaid delinquent bill for utility service;
- The business has an unfavorable credit rating; or
- The customer has engaged in unauthorized use of utility service within the past six years.
If service is already being provided, but the commercial customer is not timely in paying the charges as incurred, a utility provider may require an adjusted deposit if:
- The business receives two or more final disconnect notices within a 12-month period;
- Service is disconnected for nonpayment;
- The customer has engaged in unauthorized use of electric or gas utility service; or
- The customer exhibits an unsatisfactory record of bill payment within the first six months of service.
If a deposit is required, alternate means can be used to provide security in some circumstances. For example, some state laws and some utility providers allow the following in lieu of a monetary deposit:
- Letter of Credit from a Bank. This option is most common where large deposit amounts are required. Customers must contact a bank that will lend the required amount, usually based on collateral.
- Surety Bond from an Insurance Company. This option is also most often used when large deposit amounts are required. Customers contact a bond/insurance company to complete, notarize and mail an original surety bond form to the utility provider.
Waiving security deposits
The requirement of a security deposit can be waived, for both residential and commercial accounts, if good credit is established. Utility providers must apply all credit reviewing procedures uniformly to all customers. A utility provider may waive a deposit if the customer:
- Enrolls in a pre-pay program;
- Provides a Social Security/Tax ID number and gives permission to check prior credit history (finding, for example, that the customer's potential delinquency risk is 1–10% for residential accounts, or 90–100% for commercial accounts);
- Provides documentation from a previous or current energy supplier for at least the previous 12 consecutive months that indicates an excellent payment history with no late payment penalty fees or disconnect notices;
- Provides a credit report run by another business within the last 90 days that indicates an excellent payment history; or
- Has another active account with the current utility provider within the past two years, for a minimum of six consecutive months, which has an excellent credit history with no late payment penalties or disconnect notices.
The Commission and utility providers recognize that some customers, residential and commercial, will experience difficulties in paying their bills. There also will be customers who intentionally avoid payment. As a result, every utility provider will have a number of customers that do not pay for the products and services provided. Security deposits protect against the losses that utility providers otherwise face.
1 For example, Ohio Revised Code, Section 4901.02.
2 The Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691 et seq.
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