4. Does the True-up Process Constitute Financial Hardship for Certain CLECs? Should the Commission Order Mitigation to Alleviate Possible Negative Effects of True-up Payments?

According to Verizon, in accordance with the Commission's orders and the terms of their interconnection agreements (ICAs), carriers should be required to pay any true-up amounts due to Verizon by the due date of the first Verizon bill that sets out the true-up amounts. Verizon states that since 2003, carriers have known that the Commission's orders and their ICAs will require an adjustment and true-up of the Commission-ordered interim UNE rates when the Commission adopts final UNE rates.

However, Verizon notes that in its opinion resolving billing adjustment issues in the true-up phase of the Pacific Bell case, Docket A.01-02-024 et al., D.05-03-026, the Commission directed that carriers whose cash or cash equivalents indicated they possess cash at least 10 times the amount of their true-up were to make immediate payment, while all others were given 12 months, subject to interest and late payment penalties. While Verizon finds this a reasonable approach, it asserts that the methodology unfairly presumed that only companies AT&T was able to identify as meeting that standard were required to immediately satisfy their obligations, while all others were given 12-month terms as a matter of course.

According to Verizon, an approach which mandates not only that Verizon calculate the debts of its competitors, but also independently determine their ability to satisfy them is inappropriate. Many of the CLECs at issue are privately held and therefore do not publicly release data regarding their cash holdings. Also, all of them are in a far better position to determine their ability to satisfy lawful debts than outsiders, including both Verizon and the Commission.

Assuming that the Commission sees merit in the 10:1 ratio, Verizon proposes the following process by which carriers may self-identify for payment terms other than those specified in their ICAs:

(1) Within 15 days of issuance of the final order in this proceeding finalizing the true-up amount for any carriers, a carrier who demonstrates (a) average cash and/or cash equivalents over the prior 12 months less than ten times the amount of the true-up amount, including interest to the time of the order, and (b) no accrued reserve for this true-up liability, may file a notice with the Commission, authenticated by an officer of the carrier and including as an exhibit financial statements (which need not be audited) reflecting cash and cash equivalents for the prior 12 months. Such notice need only be served on Verizon.

(2) Within 5 days of receipt of such notice, Verizon will identify any carrier whom it believes has not met its burden; if it chooses to contest such notice, the parties will use the dispute resolution procedures set forth in the relevant ICA, with the exception that all costs will be borne by the losing party, and (a) if the competitor's notice is found valid, its interest obligation will be suspended from the date of the decision; but (2) if its notice is found invalid, its payment shall be deemed overdue and subject to late payment penalties from the date of the decision. If Verizon has no objection with respect to a carrier's notice, it will implement the 12-month payment plan for that carrier.

(3) As with the Pacific Bell proceeding, all credits and debits from the same carrier, or from carriers with common parent corporations, should be determined before the net amount is billed, and services or payments that were arranged outside the scope of this proceeding are not subject to the present order or its notice obligations.

According to Verizon, this process removes Verizon from determining both the cash position and the business judgment of its competitors, and respects the privacy of the ICA between the parties.

Telscape notes that in past instances where changes in regulation or unanticipated circumstances would result in potentially harmful impacts on telecommunications carriers or their customers, the Commission has allowed or adopted extensive mitigation measures. This is especially true of small CLECs such as Telscape that focus on the provision of service to residential customers. Telscape points out that while those CLECs have regulatory freedom to increase prices upon appropriate notice to the Commission and their customers, the realities of the marketplace place substantial restrictions on the extent to which CLECs can actually exercise this freedom. CLECs seeking to impose higher rates to cover increased costs are confronted by significant customer sensitivity to price changes and customers who have a far greater tendency to switch carriers than is typical of ILEC customers. As a result, the Commission cannot simply assume that CLECs have the ability to respond to unexpected, radical changes in regulated prices, especially on a retroactive basis. Instead, the Commission must recognize that imposition of true-up obligations may result in severe hardship in some instances and, for that reason, put in place a mechanism that allows true-up obligations to be paid over a reasonable period of time.

Telscape believes that the one-year installment payment plan adopted by D.05-03-026 for the purpose of truing up the UNE rates of Pacific Bell would be appropriate. As in that case, such installment payment plan should be available to any CLEC that does not possess cash equal to or greater than 10 times its true-up obligation.

Clearly, there is a need for mitigation measures to ensure that smaller CLECs are able to meet their obligations to Verizon by giving them time to integrate these costs into their operations. No party has opposed the installment payment plan outlined by Verizon, namely the installment plan will be available to any CLEC that does not possess cash equal to or greater than 10 times its true-up obligation. Verizon or any CLEC that does possess cash equal to or greater than 10 times its true-up obligation is not entitled to installment payments. This is the same plan adopted for Pacific Bell in D.05-03-026.

The only difference is that in the Pacific Bell proceeding, there was information on the record as to which CLECs possessed cash equal to or greater than 10 times their true-up obligation, while we do not have that information before us in the Verizon proceeding. Verizon has presented a proposed plan, and no party has objected to the specifics of Verizon's plan. However, as part of the process, any CLEC that wishes to prove that it does not have cash equal to or greater than 10 times its true-up obligation, must present information to the Commission and to Verizon. Verizon does not explain the Commission's role in this process, since it is Verizon that must review the CLEC's financial information and make a determination, and we do not see a need for the Commission to be involved in the true-up process. Therefore, we adopt Verizon's proposed process, with the exception of that portion which calls for providing the financial information to the Commission.

As was the case with the Pacific Bell proceeding, the Commission will defer to the parties' ICAs to settle any disputes relating to the billing and payment of true-up amounts.

For all carriers that do not meet the cash standard, we find that 12 months is a reasonable time period for true-up payment. 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. 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 rate and carriers should pay any late fees if they fail to make a timely installment during the 12-month deferral period.