III. Financial Hardship Concerns and Payment Options

SBC-CA maintains that publicly available financial data indicates that several carriers who owe true-up payments possess ten times more cash or cash equivalents than their payment obligation. Therefore, SBC-CA suggests the following 11 carriers are not financially challenged by immediate payment of their true-up obligations: SBC-CA, AT&T, MCI, Sprint, MPower, Cox Communications Inc., Covad, RCN, Talk America, XO/Allegiance, and Z-Tel.⁵

For all other carriers, SBC-CA proposes they pay their true-up obligations, including interest accrued, in six equal payments over six months. Interest would continue to accrue on all unpaid balances and late payment charges would apply if a carrier fails to make a timely payment of an installment. According to SBC-CA, interest on true-up payments should not be waived because SBC-CA should not be required to give free loans to its competitors.

In addition, SBC-CA contends that all credits and debits from the same carrier, or from carriers with common parents, must first be determined before the net amount is paid. For example, SBC-CA owes XO for lower DS-1 rates, while XO's affiliate Allegiance owes SBC-CA true-up payments for UNE rate increases. Under SBC-CA's proposal, these amounts would be offset before true-up payments are finalized.

Pac-West supports SBC-CA's proposal whereby carriers that are financially capable, based on cash on hand, would make true-up payments immediately. Pac-West contends that delay of the true-up payment it is owed by SBC-CA causes financial hardship for Pac-West.

In contrast to SBC-CA's proposal, AT&T recommends extending monthly true-up payments over 12 months rather than six, without interest or late fees. According to AT&T, this would limit competitive harm to carriers in keeping with Public Utilities Code Section 709 and its goals of promoting competition and consumer choice and avoiding anticompetitive conduct.⁶ AT&T urges the Commission to consider the effects of the true-up on carriers' financial condition and ability to compete and highlights that review of publicly available financial information for SBC-CA's parent company, SBC Communications, Inc. (SBC) indicates SBC would not experience any material financial impact if true-up payments were deferred, since the entire true-up amount is, by AT&T's rough calculations, only 0.1% of SBC's annual revenue. AT&T asks the Commission to consider relative financial strength and market share of competitors when evaluating financial hardship from true-up payments. Applying these criteria, AT&T proposes all competitors should be allowed to use a 12-month payment plan.

Similar to AT&T, CALTEL and TURN/ORA propose a 12-month deferral of payment obligations for carriers that have a financial hardship. CALTEL contends this allows carriers sufficient time to raise the necessary funds and integrate the costs into their business operations, with a single lump sum payment due at the end of the deferral period. For the carriers from which SBC-CA seeks immediate true-up payments, CALTEL requests a hearing to examine several measures of financial hardship such as "revenue flows, debt ratings, market share decreases, entire market declines, and industry guidance." (CALTEL, 11/19/04, p. 3.) Finally, CALTEL suggests a further mitigation for financial hardship wherein SBC-CA would waive the first $1 million of the amount it is owed from all carriers.

Another CLC, Arrival, requests a payment period longer than six months because of the extraordinarily long two and half year period that interim rates were in effect. Arrival opposes SBC-CA's suggestion to use cash on hand as a measure of financial hardship and argues that SBC-CA's proposal does not address the competitive harm to CLCs from large true-up payments.

XO/Allegiance state they are willing to waive any deferred payment plans and make true-up payments immediately subject to verification of the proper amount and to SBC-CA making the payments it owes to XO and Allegiance at the same time. Based on interconnection agreement amendments (ICAs), SBC-CA owes XO/Allegiance payment related to a contractually agreed upon true-up of DS-1 and DS-3 UNE loop prices. XO contends that payment of this contractual true-up has not been stayed and there is no reason this true-up should not occur immediately. TURN/ORA echo the position of XO that true-ups related to contractual arrangements between SBC-CA and CLCs are not the subject of this proceeding and should be settled separate and apart from the true-ups covered by this decision.

RCN disagrees that it can make an immediate true-up payment, as suggested by SBC-CA, because its parent company, RCN Corporation, filed for reorganization under Chapter 11 of the Bankruptcy Code in May 2004. According to RCN, it cannot rely on its parent company's cash to make payments of pre-petition debt, such as the true-up, without Bankruptcy Court approval. Therefore, RCN contends it should be categorized as a carrier facing financial hardship.

Discussion. First, we will address whether true-up payments constitute a financial hardship. SBC-CA does not dispute that the true-up payments are a financial hardship for many carriers. The issue is whether we should require immediate true-up payment by those carriers that SBC-CA defines as not facing a financial hardship, or whether to apply mitigations to all carriers, as suggested by AT&T, CALTEL and others.

We find that SBC-CA has proposed an objective standard, based on public information, for measuring whether individual carriers have the financial ability to pay. SBC-CA has identified 11 carriers, including itself, that possess cash or cash equivalents at least ten times the amount of their true-up obligation. This is a reasonable financial standard for determining who can pay and no further inquiry into each carriers' financial situation is necessary. The CLCs have known since a proposed decision issued in May 2004 that a true-up was inevitable. Nevertheless, we will exclude two carriers from SBC-CA's list, as explained below. The following carriers with cash available should now pay their obligation: SBC-CA, AT&T, MCI, Sprint, Mpower, Cox, Covad, Talk America, and XO/Allegiance. All other carriers are assumed to have a financial hardship requiring mitigation.

We exclude RCN from the list of carriers required to pay immediately because, as RCN has noted, its parent corporation has filed for bankruptcy and its cash cannot be used to pay the true-up obligation. SBC-CA does not object to RCN receiving the same payment terms as those extended to other carriers. (SBC, 12/8, p. 5.) We also exclude Z-Tel/Trinsic from the list, based on its comments that recent financial information shows the company has less cash on hand than SBC-CA earlier believed. Thus, Z-Tel/Trinsic no longer meets the "10 times cash" standard. SBC-CA does not dispute this new financial information.

Despite our immediate payment requirement, the nine carriers listed above will still have the bulk of their cash left intact, since they possess cash at least 10 times the amount of their true-up debt. We agree with SBC-CA that competition is unlikely to be harmed when the amount owed by a CLC is minimal, i.e., 10% or less, compared to the cash they have available.

Moreover, there is limited value in further inquiry into the relative financial position and market share of SBC-CA versus its competitors, or other market trends, as suggested by AT&T and CALTEL. We agree with SBC-CA that these proposed criteria for determining hardship fail to establish a link between SBC-CA's cash position and market share and the ability of other carriers to make their payments. The fact that SBC has more cash or market share than other carriers does not mean other carriers are harmed by true-up payments. Further, the carriers identified by SBC-CA, other than RCN and Z-Tel/Trinsic, do not dispute their cash position. Therefore, we find the nine carriers we have identified can make their true-up payments and still retain reasonable financial resources. In sum, the further review that AT&T and CALTEL promote would be of limited value because it would consume resources with limited benefit and needlessly delay true-up payments.

The second critical issue is the payment period for those carriers that are not required to pay immediately. For all carriers that do not meet the SBC-CA cash standard, we find that 12 months is a reasonable time period for true-up payment. Although SBC-CA initially proposes a six-month payment period, it later concedes it does not object to a 12-month payment period for carriers facing hardship. (SBC-CA, 12/8/04, p. 12.) We will require carriers to pay in 12 equal installments because this is an obligation that carriers have anticipated, and they should work to gradually decrease it rather than defer it for another year. A 12-month payment period should mitigate competitive harm to smaller carriers by giving them time to integrate these costs into their operations. During the 12-month period, the unpaid balance will continue to accrue interest at the three-month commercial paper rate⁷ and carriers should pay any late fees if they fail to make a timely installment during the 12-month deferral period. We decline to waive the interest and late fee obligations because we agree with SBC-CA that it should not have to give free loans to competitors.

We agree with SBC-CA that all credits and debits from the same carrier, or from carriers with common parents, should be determined before the net amount is paid. Moreover, we find that true-up payments regarding DS-1 and DS-3 UNEs that carriers may have contractually arranged are outside the scope of today's order. The stay we ordered in D.04-09-063 was not intended to apply to contractual true-up obligations. Those payments should proceed according to the terms and conditions of applicable interconnection agreements.

We reject CALTEL's proposal that SBC-CA waive $1 million from each carrier's true-up obligation. We will not order any waiver of true-up amounts because we made clear when we adopted interim rates that they were subject to true-up. (D.02-05-042, p. 50.) Waiving a portion of true-up obligations now would not fully compensate SBC-CA for what we have determined are its forward-looking costs. In our view, a 12-month payment period for carriers with financial hardship is sufficient mitigation because carriers generally requested this time frame when proposing mitigations.