Are you charging an application fee?

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Recently, I’ve done sales presentations for several utilities that don’t charge a fee for initiating service.

Excellent source of revenue

Many utilities try to keep rate increases that impact all customers to a minimum, but need to find additional sources of revenue. Charging an application fee is a great example of a fee that can generate additional revenue without impacting your entire customer base.

User fees

An application (or connection) fee is a prime example of the concept of user fees, whereby customers using a service are charged a fee for providing the service. A fair and equitable application fee should recoup the cost of initiating service for a new account.

Past Utility Information Pipeline issues have referenced the Government Finance Officers Association’s (GFOA) Best Practices for Full Cost Accounting for Government Services. That policy states “The full cost of a service encompasses all direct and indirect costs related to that service. Direct costs include the salaries, wages, and benefits of employees while they are exclusively working on the delivery of the service, as well as the materials and supplies, and other associated operating costs such as utilities and rent, training, and travel. Likewise, they include costs that may not be fully funded in the current period such as compensated absences, interest expense, depreciation or a use allowance, and pensions. Indirect costs include shared administrative expenses within the work unit and in one or more support functions outside the work unit (e.g., legal, finance, human resources, facilities, maintenance, technology).”

Costs associated with initiating service

Have you stopped to calculate the cost of initiating service for a new account? Here are some of the obvious direct and indirect costs:

  • Office staff salary and benefits to enter the application in the system
  • Cost of a credit check, if you perform one
  • Field staff salary and benefits to drive to the location and take the initial meter reading
  • Gas and maintenance expenses for the vehicle used by the field staff
  • Updating the turn-on service order and activating the account for billing

If you don’t charge an application fee, your entire customer base ends up paying for the costs associated with activating a new account through your rates. Is that fair to all the rest of your customers?

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© 2014 Gary Sanders

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