Improve the Payment of Utility Services by State Agencies

State agencies could avoid late payment penalties to utility services with consolidated billing and direct deposit.


Background
State government spends approximately $300 million annually for electric, telephone, gas, and water utility services. 1 Most utility bills are due within 10 to 16 days of bill issuance as provided by the utility or as promulgated by the Public Utility Commission (PUC). 2 Even if payment is only one day late, there could be a late payment penalty assessed on the total amount due. Electric utility late payment penalties vary from 2.5 percent to 5 percent. Many investor-owned and cooperative electric utilities regulated by PUC, as well as at least one municipal utility, the City of Austin, do not currently assess late payment penalties on state accounts. Some of this is the result of a dispute currently in litigation.

All telephone utilities regulated by PUC are statutorily prohibited from assessing a late payment penalty on state accounts. 3 Gas utility rates fixed by the Railroad Commission (RRC) do not have a late payment penalty, but may have a 5 percent one-time discount for timely payment. Contract gas sales or transportation rates often contain a one-time late paym ent penalty. Water utility late payment penalties are as high as 10 percent.

PUC s rules, authorizing late payment penalties, were initiated with the belief that state agencies unnecessarily and habitually miss the 10- to 16-day due date, causing additional cost to the utility. The utility s costs are then passed on to private consumers. At first glance, this proposal would appear to be protecting consumers and reimbursing costs to utilities, while holding state agencies accountable.

Part of that theory is flawed. If penalties were assessed on state accounts, Texas taxpayers would be bearing a greater cost than the cost presently absorbed by the utility, particularly since the 3- to 5-percent penalty bears little relation to the actual cost of late paymen ts. 4 The penalties, far in excess of the cost to the utility, constitute a windfall to the utility. Depending on the outcome of the pending litigation, the costs to state agencies could multiply.

State agencies, on the other hand, must adhere to a statutory payment process in handling a large number of utility bills. State agencies may expend appropriated funds only on a warrant drawn by the Comptroller. 5 The Comptroller may not draw a warrant until: (1) the state agency from whose appropriations the warrant is payable has submitted a voucher to the Comptroller; (2) the state agency has approved the voucher in accordance with the statute; and (3) the Comp troller has audited and approved the voucher as required by law. These statutory procedures are intended to ensure accountability in state spending.

State agencies generally take about 26.7 days to complete the entire payment cycle from receipt of invoice to the mailing of a state warrant. 6 The Comptroller s portion of the payment process takes from two to three days. 7 A significant part of the time involved in the average payment period is mail or courier time. The verification process by the state agency is also time-consuming.

The Texas Department of Transportation has in excess of 10,000 electric utility accounts per month. The Texas Department of Criminal Justice Institutional Division, has approximately 592 electric utility accounts per month with 18 different utility vendors. The Texas Department of Mental Health and Mental Retardation has about 300 electric utility accounts per month with 86 different utility vendors. The Texas Department of Public Safety pays approximately 369 electric utility accounts per month; the Texas Parks and Wildlife Department pays 260.

Processing time by state agencies would be improved if utilities consolidated each agency s bills. A utility with many accounts for a particular agency could send either one detailed bill to the agency s central office or one detailed bill per regional office. For example, the Texas Dep artment of Criminal Justice (TDCJ) has 153 accounts with one electric cooperative, which consolidates all its TDCJ bills into one statement containing detail for each account. TDCJ can still verify each account, but it sends only one voucher to the Comptro ller. The consolidated bill is paid in approximately 23 days. 8

The verification process could also be speeded up by mandating that all state utility accounts be set up for direct deposit, crediting payment directly to the utility. This would reduce the payment process by two to four days, eliminating delivery time fro m the Comptroller s office to the agency and then to the vendor. Since May 1992 the Comptroller s office, the General Services Commission and the Department of Information Resources have been working together to speed up and reengineer the procurement process and improve the efficiency and effectiveness of this system.

Texas has an existing statute relating to the prompt payment of state agency bills. The Prompt Payment Act provides that state agency bills are due within 30 days from bill receipt and that a 1 percent per month interest charge may be assessed on bills paid after that period. 9 The Prompt Payment Act has an exception that allows a state agency and a vendor to contract for dif ferent times, interest, and methods of resolving disputes other than that specified in the Act. 10 At least two other states, Iowa and Florida, apply their respective state prompt payment acts to utility bills. The Idaho statute allows state agencies 60 days from bill receipt. The Florida statute provides for a 1 percent charge 45 days after bill pres entation. Most state utility accounts are paid within 30 days from receipt of invoice as authorized in the Texas Prompt Payment Act. 11 The Texas statute was d esigned to hold agencies accountable and to compensate vendors for payments made after a reasonable period of time. Tax dollars should not be wasted on utility late payment penalties that exploit the statutory payment process. At the same time, utilities s hould be fairly compensated for payments made after a reasonable period of time.


Recommendations
A. The Legislature should amend Section 7 of the Prompt Payment Act and other specific statutes regulating electric, telephone, gas and water utilities to s pecify that all state utility accounts are subject to the payment deadlines provided in the Act.

The Prompt Payment Act provides a reasonable due date 30 days from bill receipt and reasonable compensation to vendors for late payment at 1 percent per month interest charge. The Legislature should amend the statute to prohibit PUC from imposing differen t terms and conditions (due dates and late payment penalties) for state utility accounts from those already specified by the Prompt Payment Act. This recommendation should not be construed to include the state s contract with AT&T for long distance services (TEXAN II) which authorizes the state to pay within 120 days.

B. The Legislature should further authorize the Comptroller to pay all utility vendors directly, based on agency approval, by September 1, 1994.

This would speed payment to utilities by avoiding the delay of a check being sent to the agency and then from the agency to the utility company. Additionally, the Legislature should authorize state a gencies to enter into agreements with utility companies to pay average monthly bills and reconcile the differences quarterly or annually. This option, known as a Customer Average Monthly Plan, is already authorized for agencies who buy utilities from Centr al Power and Light in South Texas. The recommendation should take effect September 1, 1994, giving agencies adequate implementation time.

C. State agencies should continue to work toward improving the payment process for utility bills and pay within a reasonable period.

State agencies should continue to work with utilities so that multiple accounts can be consolidated into one bill.


Implications
While the state works on speeding up its payment process, the primary advantage of amending the Prompt Payment Act as recommended is to stop any needless state expenditures on punitive and unreasonable late payment penalties that exploit the statutory paym ent process. The payment process can be improved at no cost to state agencies by adopting the recommendat ions mentioned, such as bill consolidation and direct deposit. The primary disadvantage of clarifying the Prompt Payment Act as recommended is that utility vendors would prefer to assess a 2.5 to 10 percent one-time penalty on state accounts that are not p aid within 10 to 16 days from bill issuance.


Fiscal Impact
It is difficult to quantify the dollar amount of savings associated with applying the Prompt Payment Act. Not all state utility accounts are currently subject to late payment penalties and the ex isting due dates and amounts of charges vary from one utility to another. Costs may increase significantly, depending on the outcome of litigation on this issue. Moreover, as a general rule, a state university paying a utility account from local funds does not usually incur a late payment penalty. But the same university incurs a late payment penalty when paying a utility account from appropriated funds. This is because local funds are held at an agency s immediate disposal and those payments can be made without the statutory payment process required by the issuance of warrants.

Even where the same 5 percent one-time penalty on bills paid after 16 days applies, the variations among agencies in one service area make it difficult to estimate the dollar impact of late payment penalties. In one electric cooperative s service area with a 5 percent penalty after 16 days from bill issuance, the amount of late payment penalties incurred was approximately 0.7 percent of electric sales for state accounts. In one investor-owned electric utility s service area with a 5 percent penalty 16 days after bill issuance, the amount of late payment penalties would have been approximately 2 percent of electric sales.

If the 0.7 percent was applied to the $200 to $300 million annually spent on utility service, utility late payment penalties could account for $1.4 to $2.1 million annually. If the 2 percent penalty was applied to the $200 to $300 million annually spent on utility service, late payment penalties could add up to $4 to $6 million annually. However, since some utilities do not charge a late fee, like the City of Austin, the actual savings of the state would be much smaller and cannot be estimated.

Quantifying the dollar amount of savings from bill consolidation is also difficult. But, for example, if the Texas Department of Transportation could reduce the amount of monthly electric utility accounts from 10,000 to a few hundred, the expenses of proce ssing time and postage would decline appreciably.

The dollar amount of savings from implementing direct deposit on state utility accounts is equally difficult to quantify. Direct deposit would eliminate delivery time of the warrant from the Comptroller s office to the agency, then to the vendor, and save processing expenses without additional administrative costs.



Endnotes
1 Comptroller of Public Accounts, State of Texas Fiscal Year 1991 Utilities Report, Austin, Texas, 1991, p.II-1. This report indicates total spending from utility appropriations amounted to $231 millio n during fiscal year 1991. The $231 million does not take into account spending from local funds or third-party contracts where state agencies pay utility expenses of entities as part of some other service.
2 Pursuant to a 1986 Public Utility Commission order in Docket No. 6765, a rate case for Houston Lighting and Power Company, the due date for state agency bills in that utility s service area was established to be 30 days from bill issuance for state agency utility bills after September 1, 1987.
3 Tex. Rev. Civ. Stat. Ann. art. 1446c, $ 48A (Vernon Supp. 1992).
4 Letter from Billy C. Hamilton, Deputy Comptroller, Comptroller of Public Accounts, to Mr. John Renfrow, Secretary of the Commission, Public Utility Commission, October 26, 1992.
5 Tex. Rev. Civ. Stat., art. 6252-31, sec. 2 (Vernon Supp. 1992).
6 Direct Testimony of Ann L. Fuelberg on behalf of the Comptroller of Public Accounts, June 1986, before the Public Utility Commission of Texas in Docket No. 6765.
7 Ibid.
8 TDCJ has found that the consolid ation of bills improves its payment process, and is in the process of preparing to discuss bill consolidation with electric utilities with which it has multiple accounts. On the other hand, the Texas Department of Transportation (TxDOT) has indicated that because they have so many accounts (in excess of 10,000) one bill per utility for its entire agency would impede the verification process. TxDOT is looking into whether the consolidation of bills per regional office would improve the payment process.
9 Tex. Rev. Civ. Stat. Ann., art. 601f (Vernons Supp. 1992).
10 Tex. Rev. Civ. Stat. Ann., art. 601f, sec. 7.
11 Letter from Hamilton.