5. Posting of Security by CLECs

Parties' Positions

Pacific requests that certain CLECs be required to provide security to ensure that they will be able to repay Pacific if it is determined that refunds of Pacific's reciprocal compensation payments are required. According to Pacific's criteria, no security is needed if the CLEC involved is domiciled in the United States with at least an investment grade debt or credit rating (BBB or higher) as determined by a nationally recognized debt or credit rating agency such as Moody's, Standard and Poor's, or Duff and Phelps. For CLECs not meeting that credit rating, Pacific requests that the CLEC post a bond, letter of credit, guarantee, or other security reasonably acceptable in the amount of the payments that Pacific makes to the CLEC for ISP-bound traffic, to be increased periodically as additional amounts are paid. If a CLEC is unable or unwilling to provide security, Pacific seeks authority to deposit the reciprocal compensation payments into an interest-bearing escrow account for the benefit of that CLEC.

Absent these security provisions, Pacific claims it would be at risk that millions of dollars might be lost if a court rules in Pacific's favor, and the CLECs that have obtained payments are unable at some future date to return the payments that the Commission had ordered Pacific to pay.

On June 24, 1999, the Commission approved an interconnection agreement between Pacific and Pac-West (D.99-06-088, the "Pac-West Arbitration Decision"). The Pac-West Arbitration Decision mandates the payment of reciprocal compensation by Pacific to Pac-West for ISP-bound traffic. Pacific filed a timely application for rehearing of this decision on July 6, 1999, arguing that the Commission lacked authority under federal law to mandate reciprocal compensation for ISP-bound traffic. This application is pending. On September 16, 1999, the Commission issued D.99-09-069, approving an interconnection agreement between Pacific and MFSW. That decision also mandates payment of reciprocal compensation for ISP-bound traffic.

Under the Act, Pacific must also make the previously executed Pac-West and MFSW interconnection arrangements available to any other requesting telecommunications carrier on the same terms and conditions as those provided in those agreements. This arrangement is commonly referred to as "most favored nation" or "MFN." In addition, CLECs may elect to "pick and choose" elements of those agreements, including the pricing and reciprocal compensation arrangements. ⁹ Other CLECs may "MFN" into or "pick and choose" the reciprocal compensation provisions of these agreements that the Commission has ruled must include payments for ISP-bound traffic.

Pacific therefore seeks to apply its proposed security requirements to interconnection agreements containing reciprocal compensation provisions that it has previously executed as well as to any subsequent carrier opting into the reciprocal compensation arrangements in the Pac-West and/or MFSW interconnection agreements.

The Coalition argues that Pacific's request for security, as in the case of the request for a refund obligation, is properly directed to a reviewing court in the course of the appeal, and not to this Commission. The Coalition contends there is no basis for this Commission to decide the security issue now based on the chance that Pacific will receive a more favorable ruling on the reciprocal compensation issue and that the CLECs will be required to refund monies previously paid. Since these issues are going to be resolved at the federal court, the Coalition believes the issue of security (if any) should be resolved there as well. ORA argues that to require the CLECs to post security for payments Pacific has already made would violate the ability of the CLECs to freely negotiate interconnection agreements and receive the benefit of their bargains.

Discussion

We decline to approve Pacific's request for an order requiring carriers to post security either for previously executed contracts or for subsequent contracts subject to MFN provisions. Such a request is an attempt to shift the litigation risk associated with its appeal of the reciprocal compensation issue away from itself and onto its competitors. There is no basis for this Commission to make a determination of the shifting of litigation risk in the context of Pacific's motion or to modify previously existing interconnection agreements that contain no provision for the posting of such security. Moreover, we agree with the Coalition that the issue of the posting of security is properly directed to a reviewing court in the context of the appeal process.