Utility bonds can help utility cooperatives avoid losses

What happens when a utility cooperative’s largest customer goes belly up? Industrial and commercial customers can be the largest accounts for utility cooperatives, such as electric cooperatives, telephone cooperatives, water cooperatives, etc. When these customers fail to pay their bill, the cooperative can be faced with large losses of current margins, as well as future margins.

This question was posed in a prior guest post, in which one solution offered was utility bonds. Utility bonds are instruments that, in general, cover losses arising from the loss of larger customers. The guest post explained:

Surety bonds are legally binding contracts, so they can be confusing to understand. Each surety bond that’s issued brings three separate entities together. The obligee is the utility company seeking to avoid financial loss. The principal is the client that purchases a surety bond to guarantee future payment. The surety is the insurance company that backs the bond’s guarantee.

If a client fails to pay a utility bill, the utility company can make a legal claim on the bond to ensure it’s paid for all services. If the claim is valid, the insurance company that issued the bond will have to repay the utility company up to the bond’s full amount. However, it’s important to note that surety bonds function as lines of credit rather than traditional insurance policies. That is to say, if a claim is made on a bond, the insurance company will not simply assume the loss. If this were the case, clients could go without paying their bills because they wouldn’t face any sort of accountability. When it comes to surety bonds contracts, an indemnification clause explains that the insurance company will require the principal to reimburse it in full for any claims paid out

As a more recent example, a large customer in Mississippi liquidated, leaving several creditors including an electric cooperative holding large losses. According to this article, the electric cooperative had a utility bond in place. As a result, the electric cooperative’s General Manager explained, “[The cooperative’s other customers] don’t have to worry about footing the bill.  We have a surety bond that can take care of that.”

Because this electric cooperative had a surety bond in place for this particular circumstance, it presumably was able to avoid losses arising from the customer’s unpaid bills.

Sources:

Hancock Creditors Hope to Recover Some Money (Miami Herald, Friday, 8 April 2016)

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