FCC: Phone Companies Have Limited Protection

The telecommunications industry is unusual in that companies like the LECs that sell essential services to other telecom companies, eg, long- distance companies, also compete with their customers of those essential services, both in local and long-distance markets. Thus, LECs have incentives to impose requirements on their 'customers,' which disadvantages those customers who are also their competitors. Further, while the FCC has a role to play in the bankruptcy proceedings involving companies that have filed under Chapter 11, the FCC's primary obligation is to enforce the Communications Act of 1934. Section 201(b) of the Communications Act requires that all charges, practices, classifications, and regulations of communications carriers must be 'just and reasonable.' Section 202(a) prohibits 'unjust or unreasonable discrimination' in such charges, practices, classifications, and regulations. 'In considering the LECs' concerns about risk of nonpayment as well as its statutory obligations, the FCC was required by statute to evaluate the LECs' request based on the 'just and reasonable' and 'no unreasonable discrimination' standards of the Communications Act. In making that evaluation, the FCC sought to balance the risk of enabling the LECs to protect themselves with the desire of their exchange-access customers to avoid unreasonably burdensome deposit requirements ' which could impede their ability to attract capital needed to compete in telecom markets against other service providers, including the LECs themselves.

In a December 2002 policy statement, the FCC turned down the LECs' request to demand additional deposits. Instead, it offered several guidelines for LECs to protect themselves against defaulting exchange access customers. These guidelines include the following:

• Revise their tariffs [schedules of charges filed with the FCC] to define the 'proven history of late payment' trigger for requiring a deposit to include a failure to pay the undisputed amount of a monthly bill in any two of the most recent twelve months;
• Reduce the notice period to customers for discontinuance of service for nonpayment from 30 days to a shorter period (perhaps 15 days), provided that customers receive their access bills in time to review and dispute those bills;
• Accelerate LECs' billing cycles from 30 days to a shorter period (perhaps 2 weeks) to reduce exposure to pre-bankruptcy petition debt and possible nonpayment;
• Bill in advance for usage-based services currently billed in arrears.

In rejecting the LECs' requests to be allowed to demand substantial security deposits based on their 'gut feel' about their customers' creditworthiness, the FCC concluded that the LECs' claims about uncollectibles were overblown. Although LEC uncollectible amounts have risen in recent years, according to FCC data, for 2001 (the most recent year for which data are available), uncollectibles as a percentage of access revenue ranged from a low of .49% (Qwest) to a high of 1.43% (BellSouth).

Blame for the Great Telecom Meltdown has been placed at the feet of Congress (which enacted the Telecommunications Act of 1996); the FCC (which established rules to implement the goals of the 1996 Act); and on the failing companies themselves (who often operated with inadequate capital and flawed business plans). By its December policy statement, the FCC indicated that it would not allow LECs to further hasten the failure of emerging telecom companies through overly protective credit policies.

Mitchell F. Brecher is a Shareholder in the Washington, DC, office of Greenberg Traurig, LLP, and is a member of its Telecommunications Practice Group.

When companies like AT&T, MCI, WorldCom and Sprint provide long-distance services, they almost always use the telephone networks of local exchange carriers, or 'LECs' (eg, Verizon, BellSouth, Qwest, and SBC) to originate and terminate those calls. This use of local networks is a service generally referred to as exchange access, which is subject to regulation by the Federal Communications Commission (FCC). Exchange access is a major component of the cost of providing long-distance service, and is a major source of revenue to the LECs. Moreover, as result of FCC policy, exchange access has long subsidized other LEC services, such as residential phone service.

Therefore, when WorldCom filed its bankruptcy petition in July 2002, LECs faced potential default on huge amounts owed to them ' amounts they claim would impede their ability to maintain their networks and provide services to their end-user customers. While the WorldCom bankruptcy is by far the largest telecom bankruptcy, it is not alone. During the past year, numerous competitive telecom companies have filed for bankruptcy; some have ceased operations. Each of those companies purchased facilities and services from LECs.

In July, one of the LECs ' Verizon ' asked the FCC to allow it and the other LECs to protect themselves from the risk of substantial uncollectible debts incurred by bankrupt and other financially precarious carriers. Verizon wanted permission to demand hefty security deposits based on any perceived decline in its access customers' creditworthiness; to demand advance payment for services; and to reduce the notice period before terminating service to customers in default. It also wanted the FCC (which often appears in bankruptcy proceedings involving communications companies) to support its efforts to obtain adequate assurance of payment for services rendered to bankrupt companies, and to ensure that purchasers of bankrupt carriers assets 'cure' any amounts owed to the LECs before asking them to transfer existing service arrangements to the purchasers of the bankrupt companies' assets.

The telecommunications industry is unusual in that companies like the LECs that sell essential services to other telecom companies, eg, long- distance companies, also compete with their customers of those essential services, both in local and long-distance markets. Thus, LECs have incentives to impose requirements on their 'customers,' which disadvantages those customers who are also their competitors. Further, while the FCC has a role to play in the bankruptcy proceedings involving companies that have filed under Chapter 11, the FCC's primary obligation is to enforce the Communications Act of 1934. Section 201(b) of the Communications Act requires that all charges, practices, classifications, and regulations of communications carriers must be 'just and reasonable.' Section 202(a) prohibits 'unjust or unreasonable discrimination' in such charges, practices, classifications, and regulations. 'In considering the LECs' concerns about risk of nonpayment as well as its statutory obligations, the FCC was required by statute to evaluate the LECs' request based on the 'just and reasonable' and 'no unreasonable discrimination' standards of the Communications Act. In making that evaluation, the FCC sought to balance the risk of enabling the LECs to protect themselves with the desire of their exchange-access customers to avoid unreasonably burdensome deposit requirements ' which could impede their ability to attract capital needed to compete in telecom markets against other service providers, including the LECs themselves.

In a December 2002 policy statement, the FCC turned down the LECs' request to demand additional deposits. Instead, it offered several guidelines for LECs to protect themselves against defaulting exchange access customers. These guidelines include the following:

• Revise their tariffs [schedules of charges filed with the FCC] to define the 'proven history of late payment' trigger for requiring a deposit to include a failure to pay the undisputed amount of a monthly bill in any two of the most recent twelve months;
• Reduce the notice period to customers for discontinuance of service for nonpayment from 30 days to a shorter period (perhaps 15 days), provided that customers receive their access bills in time to review and dispute those bills;
• Accelerate LECs' billing cycles from 30 days to a shorter period (perhaps 2 weeks) to reduce exposure to pre-bankruptcy petition debt and possible nonpayment;
• Bill in advance for usage-based services currently billed in arrears.

In rejecting the LECs' requests to be allowed to demand substantial security deposits based on their 'gut feel' about their customers' creditworthiness, the FCC concluded that the LECs' claims about uncollectibles were overblown. Although LEC uncollectible amounts have risen in recent years, according to FCC data, for 2001 (the most recent year for which data are available), uncollectibles as a percentage of access revenue ranged from a low of .49% (Qwest) to a high of 1.43% (BellSouth).

Blame for the Great Telecom Meltdown has been placed at the feet of Congress (which enacted the Telecommunications Act of 1996); the FCC (which established rules to implement the goals of the 1996 Act); and on the failing companies themselves (who often operated with inadequate capital and flawed business plans). By its December policy statement, the FCC indicated that it would not allow LECs to further hasten the failure of emerging telecom companies through overly protective credit policies.

Mitchell F. Brecher is a Shareholder in the Washington, DC, office of Greenberg Traurig, LLP, and is a member of its Telecommunications Practice Group.