Arizona Utility Deposit Bonds

What Is the Purpose of the Utility Deposit Bond?

A Utility Deposit Bond is an option of financial assurance for customers of a utility company as a means of guaranteeing payment. The bond is utilized in lieu of a security deposit when it is required. The bond’s limit typically covers one or more monthly payments and indemnifies the utility company should the customer fail to make payment for the service provided.

Who Needs the Utility Deposit Bond?

A Utility Deposit Bond is a financial guarantee that utility companies may require of their customers. In Arizona, the following utility companies may choose to use a deposit bond: Arizona Public Service Company, Southwest Gas Corporation, and the Tucson Electric Power Company, and the City of Safford municipal services. The bond serves to ensure that the utility company will be paid for its services. The City of Safford uses the bond as a final payment advance or guarantee, but the other utility companies only require the bond as a disciplinary action when monthly payments are late or past due. The utility company will enforce the deposit bond requirement if the following circumstances occur: 

Utility CompanyDeposit Bond Requirement
Arizona Public Service CompanyCustomer misses two or more payments within 12 months
Southwest Gas CorporationCustomer is past due on two monthly payments, or
Customer has six late payments within 12 months
Tucson Electric Power CompanyCustomer has three late payments within 12 months
Customer has been disconnected within 12 months
Customer does not meet credit standards

What Do Surety Underwriters Need to Know?

Utility Bonds are considered to have moderate risk due to the nature of claims filed for reimbursement and the chance of being required as an adverse selection bond, meaning it was required as a result of poor payment history. The utility company often enforces a security deposit or bond onto customers when a pattern of missing payments or having late payments occurs. Since the bond or deposit is often a disciplinary response for repeated offenses, it is likely that the principal will repeat the offense again, leading to a claim. In the case of the City of Safford, the bond guarantees final payment and may lead to a claim payout if the customer goes out of business and fails to pay for the last month of service. 

Underwriting for utility bonds is based on credit to account for the principal’s capability to avoid claims by making payment to the obligee or to pay back the surety if there is a bond payout. This bond has a variable limit, adjusted to an amount that would cover missed payments. 

What Do Surety Claims Handlers Need to Know?

Claims filed on a Utility Bond are usually for the same reasons that the bond was enforced by the obligee in the first place — the obligee files claim against the principal when the principal has failed to comply with the agreement of the bond, such as making a timely payment for provided utility service. Once a claim has been filed, the surety company is obligated to make payment up to the full limit of the bond within 60 days, pursuant to the bond agreement. 

Can the Utility Deposit Bond Requirement Be Avoided? 

Yes, the Utility Deposit Bond is often required as a disciplinary bond and can be avoided by making on-time payments to the utility company. Failure to do so may result in the utility company implementing a deposit requirement, which may be fulfilled by a deposit bond in lieu of a deposit. 

How Much Does the Utility Deposit Bond Cost?

The cost of a Utility Deposit Bond ranges from 2% to 10% of the bond limit required. Variance in the bond limit is to account for missed payments that are due to the obligee. Rates are determined through underwriting, with an evaluation of the principal’s credit strength. 

How Is the Utility Deposit Bond Filed?

The Utility Deposit Bond must be completed, signed and sealed by the surety company. The principal must also sign the bond before submitting it to the appropriate utility company. 

Arizona Public Service Company
APS
Commercial Credit Department
PO Box 53933, M.S. 3209
Phoenix, AZ 85072-3933

City of Safford
City of Safford
405 W. Discovery Park Blvd
Safford, AZ 85546

Southwest Gas Corporation
Southwest Gas Corporation
P.O. Box 1498
Victorville, CA 92393

Tucson Electric Power Company
Tucson Electric Power Company
3950 East Irvington Road
Tucson, AZ 85714

Can the Utility Deposit Bond Be Cancelled?

Yes, the Utility Deposit Bond can be cancelled by giving the obligee 60 days’ notice (with the exception of the City of Safford, which has a 30-day cancellation period). Written notice can be sent to the mailing address of the corresponding obligee. A prorated refund can be given to the principal. 

Do Utility Deposit Bonds in Arizona Renew?

Yes, a Utility Deposit Bond can be renewed as long as it is required by the utility company (obligee). The principal’s obligation can be reevaluated by the obligee and can be dropped if the principal has performed to the obligee’s standards in the time period that was evaluated.