USA : March 15, 2009

One recurring theme of the world’s current economic crisis is the lack of available credit. Banks are unwilling to lend money thereby hampering many business activities or, in those cases wherein they are willing to extend credit, one’s credit rating must be beyond superior in order to obtain a loan. While this storyline usually revolves around the housing market, auto industry, or student loans, it is also having a direct effect on the energy markets.

In years past, businesses normally only needed to show up in order to receive electricity or natural gas service from their local utility company. Utilities were more than eager to provide service as it provided the utility company with the means of increasing their revenue base. However, with more businesses either going into bankruptcy or being forced to reduce their production, utilities are demanding hefty deposits from their customers as a means of guaranteeing future payments. Utilities are closely monitoring various credit agencies such as Moody’s or Dun & Bradstreet to determine whether any of their customers may be headed for financial trouble. Upon the slightest whiff of trouble, utilities are demanding deposits averaging one month of service and in some instances much more. Once a business is provided with the dreaded security deposit notice, they generally have thirty days to make payment or risk having their utility service disconnected.

The situation is even more severe in deregulated markets. Many companies who could benefit from receiving their electricity or natural gas service from a third-party vendor are often confronted with not being able to obtain this more cost-effective energy source as no supplier will provide service without either a hefty deposit or a letter of credit. For many this means of business survival is currently just out of their reach as they do not have the capital on hand or no financial institution is willing to underwrite a letter of credit for them. The irony is that those struggling businesses who could most benefit from lower cost energy are often the ones who cannot receive it.

Utility companies and energy suppliers defend their deposit requests by pointing out that it is they who assume the financial risk in providing service. Should any of their customers go out of business they are the ones who would likely be saddled with a significant credit obligation forcing them to pass their losses onto other customers or their shareholders. Deposits and letters of credit minimize their risk thus not allowing others to suffer.

We agree that the utility companies and suppliers need to protect their financial interests especially in these troubled times. However, we would also point out that our energy markets need to be flexible should we wish to grow our economy.