Unfortunately, in today’s economy, many electric membership corporations (EMCs) are faced with the question of how to deal with members who appear to be financially unstable or have filed for bankruptcy protection. Security deposits have long played an important role in protecting EMCs from customer defaults. Given the unique challenges posed by the current economy, however, it may be worthwhile for EMCs to revisit their bylaws, service rules and regulations and contract provisions regarding security deposits. EMCs should consider two questions in particular:
1. Do company documents permit the EMC to assess or increase a security deposit based on changed circumstances? For example:
- No security deposit was required initially, but the consumer has started missing payments or making late payments.
- The consumer’s load—and monthly bills—have increased significantly since service was extended.
- The consumer’s credit rating has declined because of business pressures.
- A corporate consumer has merged with another corporation with a lower credit rating.
2. What rights apply when a member files for bankruptcy?
EMCs Have the Right to Require a Security Deposit
When a member fails to pay its bills, the EMC faces the risk of nonpayment from the time of a missed payment though the earliest date that the member’s service can be disconnected (usually two months at a minimum). Enforceable security deposit provisions are needed to fill this gap. Case law is clear that utilities have a right to demand a reasonable amount of security as a condition of service.1
Can the Initial Security Deposit Be Increased?
While most EMC security deposit provisions adequately address the requirement of an initial security deposit, most do not address whether the EMC can increase the security deposit if the customer’s circumstances change. For example, if a commercial or industrial customer’s load doubles in size over time, the initial security deposit may no longer be adequate to protect the EMC fully. Likewise, if the initial security deposit was based on a customer’s strong credit rating, and that rating has declined because of a corporate merger2 or for other reasons, the amount of the initial security deposit may leave the EMC at risk.
To determine whether your EMC has the right to increase a security deposit, the following company documents should be reviewed:
- Service rules and regulations
- Applications for service
- Customer contracts
Depending on the language in these documents, an EMC may want to consider amending the security deposit provisions to grant the express right to require an increase in the amount of security deposit if circumstances warrant.
There is authority supporting an EMC’s right to demand additional security if such requirement is authorized by a pre-existing rule, regulation or contract of the utility.3 For this reason, an EMC should not wait until an additional security deposit is needed from a customer before amending its company documents. As long as the additional deposit is authorized by EMC rules or contract, is of a reasonable amount, and is not intended to coerce payment of a balance arising out of a different customer account, Georgia courts should uphold an EMC’s right to disconnect service if the deposit goes unpaid.4
Security Deposits Must Be Reasonable and Nondiscriminatory
A security deposit, whether required as part of initial service or at a later date, must be “reasonable.” While not binding on EMCs, a good indication of reasonableness can be gleaned from Georgia Public Service Commission Rule 515-3-1-.10(e), which provides that a utility may require a cash deposit “to establish or reestablish credit” in an amount not exceeding the customer’s estimated charges for 2½ months of service.5 EMCs should assess security deposits in a manner that comports with O.C.G.A. § 46-3-11(a), which provides that EMCs and other electric suppliers in Georgia may not have or apply any rate, charge, or service rule or regulation that unreasonably discriminates against or in favor of similarly situated consumers.
Security Deposits Under the Bankruptcy Laws
Another question that unfortunately may be facing more EMCs is what obligations and rights they have when a member files for bankruptcy protection. Section 366 of the Bankruptcy Code allows a utility to recover or set-off amounts owed against a security deposit provided to the EMC before the date of the filing of bankruptcy petition. If the deposit was made within 90 days of the filing of the bankruptcy petiton, however, the debtor may seek to recover the deposit as a “voidable preference.”
The Bankruptcy Code provides that a utility may not refuse or discontinue service to a customer solely on the basis that the customer files for bankruptcy or based on an unpaid pre-bankruptcy debt. 11 U.S.C. § 366(a). However, the Code allows a utility to discontinue or refuse service if it demands adequate assurance to secure post-bankruptcy debts—in the form of a deposit or other security instrument—and neither the debtor nor the bankruptcy trustee furnishes adequate assurance within 20 days. Id. § 366(b). The utility can demand security from a bankrupt customer under § 366(b) even if it does not demand security from similarly situated customers not in bankruptcy. Hanratty v. Philadelphia Electric Co., 107 B.R. 55 (E.D. Pa. 1989).
What constitutes adequate assurance is a case-by-case determination; the standard is what level of security is necessary to protect the utility against an unreasonable risk of future loss. In re Keydata Corp., 12 B.R. 156 (1st Cir. 1981). However, security covering two months of utility bills has been upheld as a reasonable level of assurance. See In re Spencer, 218 B.R. 290 (Bankr. W.D.N.Y. 1998) (absent extraordinary circumstances, security equaling customer’s highest two previous monthly statements during the last 12 months was reasonable level of assurance); see also In re Smith, Richardson & Conroy, Inc., 50 B.R. 5 (Bankr. S.D. Fla. 1985) (upholding utility’s demand for deposit from bankrupt customer equaling three months’ average consumption based on preceding 12 months).
So long as the amount of the security is reasonable and demands for security deposits are made in a nondiscriminatory manner, courts and commissions generally uphold security deposit requirements of utilities. In these distressed economic times, EMCs may want to consider reviewing their company documents to make sure that the security deposit provisions protect the EMC to the fullest extent possible.