Utilities in Michigan require tens of thousands of residential customers to provide financial deposits. Most commonly, utilities require a deposit from customers whose electricity or gas has been shut off for nonpayment, as a condition of service restoration. Almost always, utilities require customers to provide two months of average billings as a deposit, and hold the deposit for 12 calendar months. If the customer misses a payment, the utility restarts the 12-month counter.

MI-MAUI believes deposits are generally not justified as a financial measure, that they create undue hardship for customers and drive up rates because utilities must pay interest on deposits. The basic justification offered for deposit requirements is to make sure that a customer’s account does not become uncollectible if they fail to pay again and have their service shutoff. This security is not necessary because, to get their service turned back on, customers must pay a significant part of their arrearage and agree to abide by a payment plan; if the customer fails to pay again, the utility can shut them off again, a much stronger motivator than provision of a deposit.

Utilities are not required to report how many deposits they collect, how long they hold them, what their interest expenses are, or to provide any data that would reveal whether deposits help to prevent uncollectible costs that get passed on to other ratepayers. MI-MAUI supports reform to MPSC rules that allow utilities to collect deposits, and utility reporting requirements that would support greater accountability for utilities’ deposit programs.

Following is an excerpt that MI-MAUI filed with the MPSC in June, 2023 following a workshop on deposit rules and practices:

Overall in our estimation, the current deposit rules are not fair and equitable and may not be cost-effective. We see several indicators that give rise to this concern, but the evidence currently available is not dispositive. To resolve this matter fairly and expeditiously, we recommend that the Commission direct staff to gather additional data from regulated utilities that would allow a more rigorous evaluation of deposit programs.

Our top concerns with security deposits are:

• Lack of data and reporting to evaluate whether deposits are a cost-effective and equitable way to reduce uncollectibles;
• Arbitrary and inequitable emphasis on preventing uncollectibles from customers who represent a small share of total uncollectibles;
• Lack of guidance for utilities on how to exercise their discretion under the Billing Rules regarding deposits.

Little or no data are available showing that security deposits are a cost-effective way to reduce bad debt. Without regular or standardized reporting by utilities, we cannot evaluate how effectively or fairly deposits reduce bad debt. We have requested via rate case discovery that DTE document the value of uncollectibles prevented by deposits, without receiving useful data in reply. Our first recommendation is that you recommend that the Commission direct staff to gather data from regulated utilities to help evaluate fairness and cost-effectiveness of deposit programs.

Fairness demands that utilities pursue with equal measure all customers whose accounts become uncollectible. Utilities appear to secure themselves more vigorously and comprehensively against bad debt from customers covered by deposit rules than from other customers who become uncollectible, even though they represent a small slice of the population of customers who become uncollectible. Although we have not been able to discover exact figures, it appears likely that in 2021 DTE secured itself against no more than $5 million in bad debt from customers covered by deposit rules, whereas write-offs that year for DTE totaled almost $77 million. We do not fundamentally object to a utility striving to prevent bad debt, but it should be done equitably. The estimates we share here strongly suggest to us, for one thing, that the rules governing who may be asked to provide a deposit do not constitute an effective screen for identifying risk.

We believe an empirical investigation of the sources and predictors of bad debt would go a long ways toward creating a more equitable framework for utilities to secure themselves against bad debt than the current overemphasis on collection of deposits.  As part of the research we recommend above, investigators should use actual customer data to empirically identify and quantify predictive risk factors that could be used to design more effective and equitable approaches to securing against bad debt.

Further, a deposit is not the only nor necessarily the most effective form of security against bad debt. For example, most customers that DTE asks to provide a deposit have been disconnected for non-payment, and the Company asks them to provide a deposit as a condition of restoration of service. This practice makes sense on its face but does not hold up to more thoughtful scrutiny. With these customers, the Company is securing itself in three other ways that are arguably more effective and equitable than deposits by:

• Requiring customers to make a substantial payment toward their arrears before restoring service;
• Requiring these customers to agree to a payment plan; and
• Maintaining the option to disconnect service again if the customer falls behind again on their payment plan or their current bills.

Whether yet another form of security – a deposit – is truly necessary should not be assumed, and is a question open to empirical investigation.

A multifaceted approach to securing against bad debt must also be risk-conscious. DTE, for example, apparently asks for a deposit from any customer who meets the Rules criteria; seeks the maximum amount allowable under the Rules; and holds that deposit as long as the Rules allow. It is an axiom of good utility ratemaking that treating everybody equally is not equitable, because people are not all the same. It cannot be that every customer from whom DTE requests a deposit represents the maximum risk of bad debt to the utility; and yet in the interest of equal treatment, DTE treats them all the same by asking them all to deposit the maximum amount for the longest time. This is not equitable treatment. Furthermore, it is a recipe for maximizing the cost of deposits, which may sharply reduce the net revenue realized from the deposit program and drive up cost of service for other customers from whom the interest payments are recovered.

In sum, our second recommendation is that you ask the Commission to authorize a broader staff investigation of the sources and predictors of uncollectibles, equitable treatment of all customers who generate uncollectibles, examination of best practices for a portfolio approach to securing against bad debt, and best practices for using risk factors in administration of deposit programs.

Our third concern, listed above, is that utilities are not exercising the discretion granted them under the Billing Rules to operate deposit programs that are equitable, just and cost-effective. Nothing in the Billing Rules requires DTE to seek deposits from everybody who qualifies, in the maximum allowed amount for the longest time permitted. If the Commission grants utilities discretion in how they implement the Rules, the Commission should make sure that the utilities use that discretion to optimize overall cost-effectiveness and equity. Failure to exercise that discretion is, itself, an abuse of discretion. To that end, we recommend that you ask the Commission either to instruct utilities to exercise the discretion they are granted, or to narrow or revoke that discretion by authorizing a process to develop more prescriptive deposit rules.

Finally, building off the observations and recommendations above, we recommend that the Commission instruct staff to commence working group proceedings, informed by the data and analysis described above, to develop reporting or filing standards for deposit programs. Both may be appropriate, as reporting under Billing Rules can examine compliance with equity standards and inform policy making, while filing of standard information in rate cases can inform cost-recovery decisions.