IV. Petition to Modify Regarding Customer Notification of Price Floor Changes

In D.03-03-033, the Commission adopted a mechanism for Verizon to calculate interim price floors, using the interim rates adopted in that same order, until permanent UNE rates and price floors are set later in this proceeding. At the same time, the Commission conditioned Verizon's ability to calculate interim price floors on a requirement that Verizon "make clear in any contracts that it enters into with customers based on these interim Category II price floors that the prices in the contract are subject to change upon adoption of final price floors by the Commission in the later phase of this case." (D.03-03-033, mimeo. at 52.) This condition was articulated in Ordering Paragraph 9 of the order.

Verizon requests that the Commission eliminate Ordering Paragraph 9 from D.03-03-033 for three reasons. First, Verizon maintains that this notification requirement is unnecessary given the existing notice required by GO 96-A.³ Verizon states that the customer notification requirement is superfluous because :

The ability of the Commission to regulate utility prices is unquestioned, and the courts have long held that the Commission may override private pre-existing contracts between utilities and customers in the proper exercise of its police power. [Footnote omitted.] (Reply of Verizon, 6/23/03, p. 5.)

Second, Verizon maintains that the additional notice requirement is anti-competitive because no other carriers are required to notify customers that prices may change. For example, CLCs may adjust their customer rates once final UNE prices are set, but they are not required to notice this to their customers. Third, Verizon contends that Commission precedent, particularly in D.94-09-065 (the "IRD Decision"), strongly favors honoring approved contracts.⁴ Verizon states that reopening fixed term contracts "flies in the face of common-sense notions of business stability" and that term contracts entered into under Commission rules should be honored. (Verizon Petition on Customer Notification, 5/12/03, p. 5.) Verizon states that the notice requirement will cause customer uncertainty and impair its ability to enter into contracts because Verizon will be unable to tell customers whether, when or how a new price might take effect.

The ORA Parties oppose Verizon's request. They contend that Verizon is not only asking to eliminate the customer notification requirement, but is also seeking to overturn the condition that price floors in contracts will be adjusted upon the adoption of permanent price floors. The ORA Parties maintain that the notice requirement is warranted because Verizon is in the unique situation of being allowed to enter long-term contracts with customers based on interim price floors. Further, they contend that Verizon's citation to the IRD Decision involves a completely different set of circumstances and has nothing to do with the customer notification required in D.03-03-033.

Discussion

On first blush, Verizon appears to ask merely for relief from notifying customers that contract prices may change when permanent price floors are adopted. On closer examination, however, Verizon clearly opposes disruption of any customer contracts when permanent price floors are adopted. Thus, it appears that Verizon wants removal of the notice requirement as well as removal of any language suggesting that interim price floors will be changed when permanent price floors are set.

We agree with Verizon that any notice to customers beyond that contained in GO 96-A is unnecessary. As Verizon points out, the Commission's authority to change rates is unquestioned. That being said, we cannot agree to eliminate Ordering Paragraph 9 in its entirety, as Verizon proposes, because this would raise ambiguity about whether interim price floors are subject to change upon adoption of final price floors. Although we will drop additional customer notification requirements beyond those in GO 96-A, we will not modify the language in D.03-03-033 that specified that prices in customer contracts are subject to change upon adoption of final price floors.

We agree with the ORA Parties that this is a unique circumstance wherein the Commission is allowing Verizon to enter long-term contracts based on interim price floors, in advance of a determination of the correct level for these price floors. In D.03-03-033, the Commission clearly stated that interim price floors will be replaced with new ones when they are adopted. (D.03-03-033, p. 52.) Although the Commission denied a proposal to "true-up," or retroactively adjust price floors, the Commission was quite clear that prices in customer contracts would be subject to change upon adoption of final price floors. (Id.) We will not modify this language because we are unwilling to allow Verizon to lock in contract rates before we have determined Verizon's actual price floors. This is distinguishable from the circumstances discussed in the IRD Decision, which did not allow customers out of contracts so they could opt into cheaper tariff rates. Here, it is not reasonable to allow Verizon to sustain potentially anti-competitive contracts by charging below cost prices if later price floors are found to be higher.

Therefore, we will grant Verizon's petition for modification in part in that we will modify the second full paragraph on p. 52 of D.03-03-033 as follows (new language is underlined):

Joint Commenters suggest that some sort of true-up mechanism is necessary if these interim price floors are too low. In D.99-12-018, the Commission did not establish a true-up mechanism for interim price floors. Clearly, in the final phase of this case when the Commission sets final UNE rates for Verizon, new prices floors will be adopted. At that time, any interim price floors will be replaced with new ones, but we will not institute any kind of true-up mechanism. In other words, Verizon is not required to modify contracts retroactively to charge new price floors. We will, however, require Verizon to make prospective adjustments to the prices in any of its customer contracts upon the adoption of final price floors by the Commission if contract prices are below the new price floors. Verizon should ensure that its contracts adhere to the existing requirements of General Order 96-A to notify customers that agreements are subject to change or modification by the Commission.

COL 30 should be modified to read:

Verizon should make prospective adjustments to the prices in any of its customer contracts upon the adoption of final price floors by the Commission and should adhere to GO 96-A requirements to notify customers that contracts are subject to change or modification.

Ordering Paragraph 9 of D.03-03-033 is modified to state:

Verizon shall make prospective adjustments to the prices in any of its customer contracts upon the adoption of final price floors by the Commission if contract prices are below the newly adopted price floors.