4. General Terms and Conditions
4.1. GT&C 3
SBC-CA seeks cost recovery for processing MCIm name changes. In support, SBC-CA asserts that it incurs such costs, such name change decisions are not those of SBC-CA but of the competitive local exchange carrier (CLEC), and changing codes is an industry-wide problem for which SBC-CA has recently developed this solution.
MCIm seeks ICA provisions allowing one name change per year at no cost, asserting that this has been standard practice between the companies. According to MCIm, additional name changes would be subject to recovery of reasonable and demonstrable costs.
SBC-CA's language is adopted.
At issue here are changes to the Operating Company Name (OCN) and Access Carrier Name Abbreviations (ACNA). These codes are assigned by industry agencies, and are used throughout the industry to ensure accurate provisioning and billing. When a CLEC changes its OCN and/or ACNA, every SBC-CA database and downstream system that identifies the CLEC by its OCN and/or ACNA must be updated, including every end-user account and circuit in multiple systems. This process is very labor intensive. SBC-CA organizes this work through either a service order or a record order. The work related to the name change is similar whether a customer is transferred from Company A to Company B by merger of two companies or CLEC-to-CLEC migration initiated by the customer.
An essential and guiding ratemaking principle is that the person or entity causing a utility to incur non-trivial, identifiable costs should pay those costs. In SBC-CA's case, this includes not only retail end-use customers, but interconnecting carriers such as MCIm. Such costs should generally neither be averaged into other rates, nor subsidized by other customers or SBC shareholders.
As SBC-CA says, CLECs in general, and MCIm in particular-not SBC-CA-make the business decision whether or not to change their name. SBC-CA points out that the number of name changes within the industry has been a challenging problem, and it now proposes language here to address cost and responsibility concerns. No evidence is presented that the name change problem will abate over the life of this ICA (e.g., by an end to mergers and/or acquisitions within the industry; by no company changing its name). It is reasonable to address this concern here, and adopt an approach which requires the entity making the business decision to be responsible for the resulting costs.
SBC-CA's proposed language is reasonable since it is specific regarding process and cost. For example, name changes require a record order, and company code changes require a service order. MCIm pays the related fees for each order. Moreover, it is reasonable for the CLEC to initiate the orders since the CLEC is usually the only party with the information necessary to submit the record or service orders, and SBC-CA is not a party to most CLEC transactions involving name or company code changes. Even if SBC-CA were able to issue the service orders, doing so could place SBC-CA at risk for violating anti-slamming rules prohibiting changing carriers without the affected end user's consent.
In contrast, MCIm's proposed language may lead to future disputes because it only permits an entity to "seek" recovery rather than stating there will be recovery. Additionally, disputes are likely with MCIm's language regarding which costs are "reasonable and demonstrable" and which systems are "applicable." Further, MCIm's language does not address company code changes, branding changes, and collocation-related changes to locks and stenciling. On the other hand, SBC-CA's language specifies the detailed process, and provides for clear and specific cost recovery in a way that will likely minimize future disputes.
SBC-CA's language also provides other reasonable conditions. It specifies that MCIm give SBC-CA 90 calendar days advance notice of assignment or transfer. Absent an "emergency" name change, MCIm can reasonably be expected to know of an upcoming name change 90 days in advance. This period before the transfer allows parties to resolve outstanding accounts, determine if a deposit is required of the new entity, amend the ICA to reflect new names and/or codes, and to modify affected records. This will facilitate a smooth transition for each entity's customers.1
SBC-CA's language reasonably requires consent for the transfer, but such consent cannot be unreasonably withheld. This allows SBC-CA to ensure that outstanding charges owed by MCIm are paid. It permits SBC-CA to ensure that the new entity is a certificated carrier in California (so that SBC-CA does not provide UNEs and other telecommunications services to an entity not permitted to engage in such activities). It also permits SBC-CA to secure deposits concurrently with assignment or transfer, as appropriate. Again, these terms will facilitate a smooth transition.
MCIm argues that the cost of one name change per year is a normal cost of an incumbent local exchange carrier (ILEC) doing business. To the contrary, it may be an ordinary cost of doing business, but that does not mean those costs should not be directly paid by the entity causing the cost rather than "bundled" in other charges. In fact, each ordinary cost of doing business should be charged, where reasonable and appropriate, to the entity causing that cost. In this case, the entity is MCIm.
MCIm argues that this type of cost is generally absorbed by vendors in a competitive marketplace. Vendors in a competitive marketplace, however, do not typically provide any product or service for free. Rather, the cost of each product or service is recovered in the firm's total revenues. The only issue is whether the cost is absorbed (i.e., folded, blended, bundled) into other prices, or is individually charged. It is, on balance, more reasonable here to unbundled the cost and charge it to the entity causing the cost to be incurred.
MCIm asserts that just because costs are incurred does not warrant their being charged to MCIm, as long as the number of changes is not excessive (i.e., not more than one per year). To the contrary, the standard is not whether a cost is excessive before it is reasonably charged.
MCIm asserts that its language is particularly appropriate because SBC-CA's language works only one-way, and does not permit MCIm reciprocity to assess charges for costs it incurs due to SBC-CA's ACNA name changes. SBC-CA reports that MCIm has little reason to be concerned, however, because MCIm does not provide service to SBC-CA. As a result, a change in SBC-CA's name or ACNA, for example, would require few or no changes to MCIm's records. While MCIm's proposed clause would provide reciprocity, on balance SBC-CA's proposed clause is more reasonable than MCIm's, and is adopted.
MCIm contends that SBC-CA has failed to meet its burden of proof by failing to produce evidence that the charges are cost-based. UNE rates, however, have been reviewed and approved by the Commission as meeting all applicable tests. SBC-CA's record order and service order charges have been reviewed and established in the Commission's OANAD proceedings, and are not subject to dispute here.
MCIm also says these costs are already recovered in UNE rates but that:
"this is not the proceeding in which to establish a new charge for UNEs, whether this is characterized as a new charge for Operations and Support Systems (OSS) UNE or some other UNE. Instead, SBC CA should...[seek] to establish a new charge...in a future [proceeding] (which it may still do)." (MCIm Reply Brief, page 1.)
Arbitrations rely on specific, final costs to be determined in other proceedings.2 SBC-CA should raise this issue as necessary in other proceedings, and those outcomes incorporated as appropriate.3 The principle raised by SBC-CA has merit, however, and SBC-CA's proposed solution to this problem should be adopted here. The rates are subject to further adjustment as necessary, consistent with Commission practice ordered by Resolution ALJ-181.
Thus, on balance, SBC-CA's language is superior and is adopted.
4.2. GT&C 5
Issue:
SBC-CA: What terms and conditions should apply to the contract after expiration, but before a successor ICA has become effective?
MCIm: If the parties are negotiating a successor agreement, should either party be entitled to terminate this agreement before the successor agreement becomes effective?
Agreement Reference: GT&C §§ 7.2, 7.7-7.10
SBC-CA contends that its proposed language adds clarity about parties' rights and responsibilities after expiration of the current ICA but before commencement of a replacement ICA. SBC-CA claims without this language MCIm could unilaterally force SBC-CA to continue operating under this ICA forever. MCIm seeks continuation of existing "evergreen" language, arguing there is no evidence that a change is needed, and SBC-CA's language is likely to create confusion and cause future conflicts.
Discussion
MCIm's language is adopted for the following reasons. MCIm's proposal essentially continues existing ICA language, while SBC-CA proposes a substantial departure from current language. Current ICA language, however, has already been found to meet the tests under the law, and change is generally unreasonable unless justified. Indeed, parties are successfully operating under the "evergreen" provisions in the existing ICA.4 SBC-CA neither shows difficulties in currently operating under these provisions, nor difficulties with this language in other jurisdictions. Neither does SBC-CA show a change in law or fact that justifies modification.
Moreover, SBC-CA's proposed language (GT&C §§ 7.2 and 7.7-7.10) creates a substantial likelihood of conflict with agreed-to language in GT&C § 7.6. In particular, SBC-CA's new sections address several conditions for termination, while § 7.6 addresses continuation. SBC-CA says it seeks to draw clear lines and distinctions, applying the principle that "good fences make good neighbors." This is not necessary here, however. Nothing could be clearer than for parties to continue operating under terms and conditions of the existing ICA, which parties have been successfully using the last several years. On the other hand, new requirements and provisions offer the opportunity, and are likely, to create more uncertainty, confusion and conflict than they avoid.
SBC-CA contends none of its proposed severability clauses (§§ 7.7-7.10) apply unless MCIm acts to make them apply (e.g., by withdrawing a request for negotiations) but that they are nonetheless needed to protect SBC-CA. For example, SBC-CA asserts § 7.7 provides a mechanism for SBC-CA to force MCIm to decide whether or not MCIm wants to pursue a successor ICA. This is not a compelling argument. MCIm already has adequate incentive to decide whether or not it wants a successor ICA. That is, MCIm needs a successor ICA if it wants to continue in business. The existing evergreen provision continues the ICA, but only during negotiations or arbitrations. MCIm must either negotiate or arbitrate a successor ICA, or it will be unable to continue normal business operations.
Absent SBC-CA's proposed severability clauses, SBC-CA is concerned that MCIm will "attempt to `game the system.'" (SBC-CA Opening Brief, page 16.) No example is given of such action having occurred, and no compelling evidence is presented supporting this concern.
Without its proposed clauses, SBC-CA argues that MCIm might delay action to avoid an undesirable change of law otherwise in SBC-CA's favor. This is not convincing. Other ICA provisions adequately deal with change in law and dispute resolution. Further, the evergreen provision does not apply if MCIm is not actively engaged in negotiation or arbitration. If negotiations for a successor ICA have begun but SBC-CA believes MCIm is not negotiating in good faith, SBC-CA may apply for arbitration. Therefore, SBC-CA has adequate avenues for relief without its proposed additional ICA language.
SBC-CA is also concerned that MCIm may withdraw its statutory request to negotiate. In that case, SBC-CA seeks protection via §§ 7.9 and 7.9.1. SBC-CA makes no convincing case, however, that once MCIm makes a statutory request to negotiate that MCIm would have any realistic incentive to then withdraw. SBC-CA's concern is unreasonably speculative.
SBC-CA says its language provides reasonable and necessary finality by resulting in termination of the ICA if certain events do not occur. To the contrary, this is essentially in conflict with an ILEC's obligation under TA 96 to interconnect and provide service. If MCIm truly does not want to remain in business, SBC-CA will have little trouble finally terminating the ICA. If MCIm is not exiting the business, however, current ICA language provides sufficient protection for SBC-CA with continuation of the ICA only pending negotiation and/or arbitration.
Finally, SBC-CA is concerned that without its proposed language SBC-CA could be placed "in a situation of theoretically having to comply with the old ICA forever, no matter how the law may have changed, without any means arguably of triggering a §§ 251/252 arbitration to replace it." (SBC-CA Opening Brief, page 19.) Even if theoretically possible in some extreme case, it is not a plausible concern for the reasons stated above. SBC-CA overstates the need, and fails to present convincing arguments in favor of its language. MCIm's language is adopted.
4.3. GT&C 6
Issue:
SBC-CA: With the instability of the current telecommunications industry is it reasonable for SBC CALIFORNIA to require a deposit from parties with a proven history of late payments?
MCIm: Which Party's Deposit clause should be included in the Agreement?
Agreement Reference: GT&C §§ 9 et seq.
Positions
SBC-CA proposes financial protection requirements (e.g., deposits, letters of credit) intended to shield SBC-CA from losses due to nonpayment, including a CLEC's bankruptcy. SBC-CA asserts its proposed protections are sized in relation to total exposure. SBC-CA proposes deposit triggers that include tests of financial health from independent credit rating agencies, such as Standard and Poor (S&P). SBC-CA contends its proposed triggers are reasonable, objective and measurable.
MCIm proposes deposit requirements that tie the deposit to the purchasing party's actual payment history. MCIm asserts the deposit is sized in relation to individual account exposure. MCIm claims its proposed deposit requirement is narrowly tailored to provide parties with proper incentives to make timely payments, but without onerous or punitive terms, and without becoming a barrier to competition.
Discussion
Neither party's proposed language is adopted for the reasons stated below. Rather, existing language from the current ICA (GT&C § 3 Deposits) shall continue, updated as necessary to refer to the correct ICA section (e.g., references to GT&C § 3 corrected to refer to GT&C § 9.)
As explained by parties, deposits serve at least two functions: (a) an incentive to provide timely payment, and (b) protection from losses due to nonpayment, including bankruptcy. SBC-CA's proposal would seek to increase incentives and protections.
No evidence demonstrates a compelling need to increase incentives or protections. To the contrary, SBC-CA admits that MCIm is currently paying its bills on time. No evidence convincingly demonstrates any continuing pattern of late payment, nor the need to increase incentives.
SBC-CA's evidence regarding nonpayment focuses on losses suffered from the WorldCom bankruptcy. SBC-CA does not deny that MCIm, then WorldCom, paid undisputed bill amounts on time until two months prior to WorldCom's filing for bankruptcy in July 2002 (i.e., paid timely until May 2002). SBC-CA states that it was unable to request a deposit from WorldCom until approximately one month (i.e., June 2002) prior to WorldCom's bankruptcy filing, since the then-current ICA limited deposit requests until WorldCom was actually late in paying undisputed amounts. WorldCom failed to pay the requested deposit before filing for bankruptcy, according to SBC-CA.
SBC-CA reports that WorldCom lost investment grade status in April 2002. Had SBC-CA been able to demand a deposit based on WorldCom's loss of investment grade status, SBC-CA says its financial losses would have been mitigated. SBC-CA fails to show, however, that WorldCom would have paid, or been able to pay, the deposit requested in April or May 2002 that it was unable or unwilling to pay when requested in June 2002. SBC-CA fails to show that SBC-CA's claim in bankruptcy court would have been any different, or resulted in a superior outcome. SBC-CA fails to clearly and precisely state the amount of those losses, and fails to report the extent to which those losses were recovered in part or whole through the bankruptcy proceeding. Protection from losses due to bankruptcy may be a meritorious goal, but the evidence is not convincing that SBC-CA's proposal would have materially affected the outcome, nor that bankruptcy law does not reasonably and adequately protect creditors in this unfortunate situation.
On the other hand, MCIm's proposal would unreasonably reduce incentives and protections relative to the current ICA, as discussed more below. There is no compelling evidence that incentives and protections should be reduced.
Specifically regarding SBC-CA's proposal, MCIm convincingly shows that it would be onerous. For example, it would permit a deposit in the amount of three months (or in some cases four months) of MCIm's total company charges in California, and allow SBC-CA to keep the deposit for up to one year. According to MCIm, three months of MCIm's charges represent tens of millions of dollars. A deposit of this amount is substantial, and denial of access to the funds for up to one year is unreasonable.
MCIm also convincingly shows SBC-CA's proposal would be punitive. That is, under SBC-CA's proposal, the deposit requirement would be triggered under at least two of the four criteria immediately upon the 2006 ICA taking effect. 5 There is no evidence, however, that MCIm failed to make timely payments before May 2002, or after July 2002. SBC-CA's potential exposure to an MCIm bankruptcy in or about April 2006 (and the need for tens of millions of dollars in deposits to be held by SBC-CA for up to one year) does not to merit this type, amount or duration of deposit. Rather, this would be punitive result.
SBC-CA also asserts that approximately 180 CLECs have ceased operations in SBC's 13-state ILEC region since 2000. Since any CLEC can adopt the SBC-CA/MCIm ICA arbitrated here as its own (under § 252(i) of TA 96), SBC-CA argues that these triggers and provisions are needed for its general protection in the industry at large. To the contrary, SBC-CA fails to show the amount of losses, if any, it incurred from these approximately 180 events. It fails to show that these losses, if any, were significant, how many of the 180 were bankruptcy related (as opposed to other reasons to "cease" operations, such as mergers), or that bankruptcy court failed to provide SBC-CA (as a creditor) with adequate relief. Protection from losses is important, but SBC-CA fails to show that the provisions in the current ICA (effective in 2001 and under which parties now operate) are inadequate, or that the amount of additional protection it seeks here tips the balance in its favor compared to the arguably onerous and punitive nature of its proposal.
Specifically regarding MCIm's proposal, SBC-CA convincingly shows that MCIm's "super-minimalist deposit language" does not contain adequate protections. For example, MCIm proposes deposits be assessed on an individual account basis. This requires administrative changes from current practice, and will likely introduce complications and errors. Further, it provides MCIm (or another CLEC adopting this ICA) with an unnecessary and unreasonable incentive to move services between accounts to avoid payments.
MCIm proposes allowing 30 days after the invoice due date before deeming a payment late. This is 30 days after the bill already becomes overdue, and fails to provide SBC-CA with reasonable protection. Invoices are due 30 days from the invoice date, and should be treated as late if payments are not made when due.
MCIm proposes deposits not be triggered until (a) the other party, two times during a year, has been more than thirty days late in making timely payments of undisputed amounts, and (b) the past due amount accumulates to more than 2 months of average monthly billing. This requires multiple events combined with accumulated debts. This reduces the incentive for timely payment, and means deposits would potentially not be triggered for 90 days from the invoice date. Again, this is inadequate protection for SBC-CA.
MCIm proposes limiting the deposit to the average bill for one month (e.g., 30 days). This is inadequate protection given the length of time before the deposit can be triggered (e.g., 90 days).
MCIm proposes a permanent interest rate of 6%. This rate may be unreasonably low or high. Rather, it should be the rate set in the intrastate access services tariff, as in the existing ICA. This rate is set by the Commission, applies generally to all CLECs, and can be reasonably adjusted through the tariff process.6 Fixing 6% for MCIm but paying varying interest rates for other CLEC's deposits would impose an unnecessary and unreasonable administrative burden on SBC-CA.
Terms and conditions in the 2001 ICA should continue unless there is compelling reason to justify departure, such as a new material fact or a change in law. No new fact or law justifies a change. Rather, the language in the 2001 ICA was found to meet relevant tests for adoption. It contains specific triggers, timeframes, amounts and interest rates, and has worked reasonably well since its adoption.
The only significant exception to its reasonable operation might arguably have been during WorldCom's bankruptcy. The evidence presented here, however, does not convincingly show that SBC-CA's proposal would necessarily have led to a significantly improved outcome. Each party fails to present convincing evidence regarding change in material fact, or argument regarding change in law, to justify making the deposit requirements either more strict or more lenient than in the existing ICA. Therefore, the language in the current ICA will continue. Parties shall make reference changes within the section as necessary for accuracy.
4.4. GT&C 7
SBC-CA asserts its proposed nonpayment and disconnection process incorporates reasonable amounts of time for notice followed by payment or dispute. If unpaid or undisputed, however, SBC-CA proposes the process be concluded "'with some teeth in it'" by SBC-CA's discontinuing services to MCIm under the ICA. (SBC-CA Opening Brief, page 28.)
MCIm argues its proposal sets forth a notice and response process that balances the need for the billing party to receive payment while protecting the paying party from onerous, punitive measures. MCIm's proposal ties the scope of the parties' actions directly to the billing account number (BAN) for which there has been non-payment, according to MCIm. MCIm's proposal ends with the billing party remedy being to: (a) require a deposit or increase in deposit specific to that BAN, and/or (b) refuse to accept new, or complete pending, orders for that BAN. It does not include discontinuation of service under the ICA.
This issue is limited to charges that the non-paying party does not dispute it owes but nonetheless has failed or refused to pay. It does not apply to disputed charges which are treated, as necessary, under other provisions of the ICA (e.g., Dispute Resolution process).
SBC-CA's proposed language is adopted.
SBC-CA's language provides a reasonable amount of time for notice followed by payment or dispute. It ends with a consequence. It makes payment a top priority for each party to the ICA, minimizing unpaid amounts that can be subject to problems exacerbated by delay. The language is very similar to that in the 2001 ICA.7
MCIm complains that SBC-CA's language should be rejected because it includes the ultimate step of disconnection. Disconnection, however, is already a consequence in the 2001 ICA, and no compelling reason is presented to justify departure. Moreover, this issue is with respect to charges the non-paying party does not dispute. No convincing explanation is presented by MCIm why it is reasonable to allow undisputed charges to remain unpaid beyond the due date, or why the same provision for disconnection now permitted is not reasonably continued in the replacement ICA.
Even if disconnection was permitted in 2001, MCIm argues that the replacement ICA provides a more draconian disconnection provision which should be rejected. To the contrary, both the 2001 ICA and the language adopted for the replacement ICA provide an escalating series of notices and opportunities to pay or dispute amounts. Specifically regarding termination, the 2001 ICA provides:
"Failure to pay charges may be grounds for termination of this Agreement." (§ 35.2)
"If any Unpaid Charges for Resale Services or Network Elements remain unpaid and undisputed twenty-nine (235 [sic]) calendar days past the Bill Due Date of such Unpaid Charges, PACIFIC shall notify MCIm and the Commission in writing that unless...paid within sixteen (16) calendar days...the Resale Services and/or Network Elements furnished to MCIm under this Agreement for which Unpaid Charges are outstanding (i.e., delinquent and undisputed) shall be disconnected." (§ 35.6.1.)
"If any Unpaid Charges for Resale Services or Network Elements furnished to MCIm under this Agreement remain unpaid and undisputed forty-five (45) calendar days past the Bill Due Date for such Unpaid Charges, PACIFIC shall disconnect such Resale Services and/or Network Elements." (§ 35.6.3.)
SBC-CA's proposed language adopted here is:
"Failure to pay all or any portion of any amount required to be paid may be grounds for suspension or disconnection of Resale Services, Network Elements and Collocation as provided for in this section." (§ 10.1.)
"If the Non-Paying Party fails to pay the Billing Party on or before the date specified in the demand letter...the Billing Party may...discontinue providing any Interconnection, Resale... or services furnished under this Agreement." § 10.8.2.)
The 2001 ICA is arguably more draconian in stating that certain services "shall" be disconnected. By contrast, SBC-CA's proposed replacement language adopted here states "may," and is therefore discretionary. Nonetheless, while the language is somewhat different, the results are essentially the same. On balance, MCIm's concern is overstated and without substantial merit.
4.5. GT&C 8
Issue: Which Party's audit requirements should be included in the Agreement?
Agreement Reference: GT&C §§ 13 et seq.
Parties agree to most audit requirements and terms. The disputes involve audit (a) scope, (b) personnel, and (c) costs. SBC-CA recommends a broader scope, the opportunity to use its own employees, and cost-sharing with the audited party. MCIm seeks a narrower scope, the requirement to use independent auditors, and each party paying its own costs.
SBC-CA's language is adopted for the following reasons.
The dispute is largely encapsulated in one sentence:
"Any audit under this Section shall be for the purpose of evaluating (i) the accuracy of Audited Party's billing and invoicing of the services provided hereunder and (ii) verification of compliance with any provision of this Agreement that affects the accuracy of Auditing Party's billing and invoicing of the services provided to Audited Party hereunder." (GT&C § 13.2; emphasis added.)
MCIm does not object to an audit under clause (i), but objects to clause (ii), claiming it constitutes a "fishing expedition," and could compromise confidentiality. These objections are without merit.
Not only must SBC-CA be able to audit the accuracy of MCIm's bills to SBC-CA (a clause (i) audit), but SBC-CA must be able to audit the accuracy of the records sent by MCIm upon which SBC-CA's bills to MCIm are based (a clause (ii) audit). This includes SBC-CA being able to ensure that MCIm is properly recording calls and routing calls. If not, SBC-CA may be underbilling MCIm. Clause (ii) is the audit provision that permits SBC-CA to conduct such an audit. Without the right to conduct a clause (ii) audit, SBC-CA has no way to check the accuracy of records sent to it by MCIm and upon which SBC-CA must rely to do accurate billing. The reverse may also be true with respect to MCIm. It is simply good business and regulatory practice to permit each party to conduct a reasonable audit of the other business partner in this ICA, thereby ensuring the validity of information and bills sent to, and received from, the other party.
The 2001 ICA permitted audits of records used for bills both to and from the other party, and that provision should continue. In particular, the 2001 ICA allowed either party to conduct an audit "of any records, accounts and processes which contain information related to the services provided under...this Agreement." (2001 ICA, GT&C § 29.11.2.) SBC-CA correctly states that this language would permit an audit of MCIm's records that MCIm sends to SBC-CA and that SBC-CA relies on in billing MCIm (i.e., a clause (ii) audit) since those would be records containing "information related to the services provided under...this Agreement." It is reasonable to continue this approach in the replacement ICA.
Agreed-upon language for the 2006 ICA already permits both type of audits. Parties agree to language requiring each to cooperate fully and provide access to any and all appropriate employees, books, records and other documents. (GT&C § 13.4.) Parties further agree that the:
"scope of any audit under this Section shall be limited to the services provided and purchased by the Parties and the associated charges, books, records, data and other documents relating thereto..." (GT&C § 13.2, emphasis added.)
That is, parties agree that the audit scope is services "provided by" and "purchased by" the parties. Thus, agreed upon language already permits audits of transactions going both ways (i.e., both clause (i) and (ii) audits). SBC-CA's proposed language simply makes that clear. The fact that MCIm seeks here to narrow the scope of this language makes including SBC-CA's language all the more important.8
MCIm is concerned that SBC-CA proposes "audits to encompass materials and subjects not directly related to an invoice believed to contain errors." (MCIm Opening Brief, page 32.) MCIm suggests more limited audits that are focused on specific questionable invoices. This limitation is too narrow. Audits might periodically be undertaken to verify accuracy, whether or not there is a believed error. Random, periodic checks might provide a separate ongoing incentive for accuracy. In fact, it might demonstrate and corroborate ongoing honesty which could lessen the mistrustful attitude of which each party is concerned.9
MCIm also expresses concern that SBC-CA will "embark on a fishing expedition into MCIm's sensitive business records under the guise of `verifying' compliance with the ICA's billing and invoicing provisions." (MCIm's Opening Brief, pages 34-5.) To the contrary, the 2001 ICA contained confidentiality provisions, and no evidence shows those provisions were or are inadequate. The replacement ICA contains similarly reasonable confidentiality provisions.
SBC-CA seeks to allow the use of its own employees, but proposes that either party may request a third party auditor. MCIm proposes that auditors be limited to independent third parties, thereby ensuring an unbiased audit. SBC-CA's language is adopted.
The 2001 ICA does not require the use of third party auditors. In fact, it says either party may perform audits. (2001 ICA, GT&C § 29.11.1.) There is no credible evidence that audits under the 2001 ICA have been biased or created unreasonable problems. Therefore, the approach in the 2001 ICA should continue.
Either party may request an audit and the other party may not unreasonably prevent such audit. When either party requests an audit, each party incurs costs. Under both the 2001 ICA and the replacement ICA, "each party shall bear its own expenses in connection with the conduct of the audit." (2001 ICA, GT&C § 29.11.3; Replacement ICA, GT&C § 13.4.)
For the 2006 ICA, SBC-CA also proposes limited cost-sharing. That is, in exchange for providing the right to the audited party to request a third party auditor, SBC-CA proposes the audited party pay 25% of the cost. This is reasonable. This will discourage either party from abusing the right to require audits to be performed by what could be more expensive outside auditors rather than a party's own employees. It will make the decision to request an outside auditor slightly more than a trivial matter, but not be an unreasonable burden if legitimate concerns exist. MCIm argues that it would create a substantial financial disincentive for MCIm to seek third party auditors, but presents no credible evidence that the cost would be "substantial."
MCIm says SBC-CA's language would require MCIm (the party being audited) to incur 25% of the costs of an independent auditor employed by SBC-CA (the auditing party). MCIm argues such approach is contrary to standard practice of placing costs on the party causing them, which in this case is SBC-CA, according to MCIm.
To the contrary, if the cause-causation approach is adopted here, MCIm (not SBC-CA) should pay the cost. That is, it is established above that SBC-CA should be allowed to use its own employees, along with employing proper confidentiality provisions. MCIm, however, may still wish an independent auditor. If so, MCIm is the party requiring, and causing the cost of, the third party auditor. In this case MCIm should perhaps pay 100% not 25%. SBC-CA does not propose the audited party, upon requesting a third party auditor, pay 100%, however, and 100% is not adopted.
MCIm argues that paying 25% of the cost subjects the audited party to costs over which it has no control. Under the same logic, subjecting SBC-CA to 75% of the cost if MCIm demands the use of an independent auditor arguably requires SBC-CA to incur costs over which it has no control. The fact is that both parties incur costs if the other party demands an audit under either the 2001 or the 2006 ICA. Since SBC-CA still pays 75% of the cost of the third party auditor, SBC-CA maintains an incentive for the costs to be reasonable. Requiring the audited party, upon its request for a third party auditor, to pay 25% of the third party auditor's cost does not subject the audited party to unreasonable costs in any way that is substantially different than current practice, but provides a necessary balance for the opportunity to request an outside auditor.
Finally, SBC-CA proposes that the 25% cost-sharing provision apply only in two instances: (a) if the audited party requires the use of an independent auditor (discussed above) or (b) regardless of who decides to use the independent auditor, if the audit reveals, and the parties subsequently verify, a net adjustment against the audited party of greater than 5% of the charges audited. (GT&C § 13.6.) This is a reduction from 50% cost-sharing by the audited party based on a 3% adjustment in the 2001 ICA. (2001 ICA, GT&C § 29.11.3.)
The concept is that when the audit turns up a confirmed adjustment against the audited party of a non-trivial magnitude, the audited party should pay some of the cost. In fact, SBC-CA persuasively says "it is hard to justify why the Audited Party should not pay 100% of the independent auditor costs, not just the 25% compromise that SBC-CA proposes." (SBC-CA Opening Brief, page 34.) Nonetheless, the concept was reasonable in 2001 and it continues to be reasonable. SBC-CA's proposal is adopted here.
4.6. GT&C 9
Issue: Which Party's Intervening Law clause should be included in the Agreement?
Agreement Reference: GT&C § 23
SBC-CA proposes language which it argues more clearly defines a party's right to invoke the change of law clause, the process to be used, and the timeframe.10 According to SBC-CA, this is will prevent disputes and result in fewer complaints before the Commission.
MCIm proposes language it says is consistent with TA 96 and has been used successfully elsewhere. MCIm contends its language avoids confusing and repetitive language proposed by SBC-CA, as well as objectionable unilateral action by SBC-CA.
SBC-CA's proposal is adopted.
SBC-CA's proposal more clearly defines the rights, processes and timeframes. Further, it provides that failure to negotiate for a continuous period of 15 business days moves the matter from negotiation to the dispute resolution procedure. This ensures against inaction by either party unreasonably delaying implementation of a change in law.
SBC-CA's final proposed language removes the largest objection raised by MCIm (regarding SBC-CA's alleged ability, without first negotiating with MCIm, to make unilateral and immediate changes to the ICA based on its interpretation of a change in law). MCIm continues to express concern about unilateral action by SBC-CA, but the adopted language contains no such provision. In support, MCIm cites to offending language in Issues UNE 2 and UNE 3. If objectionable, that language will be addressed with those issues.
To complete this section of the ICA, the date of May 26, 2005 will be inserted into adopted § 23 (e.g., at sentences 2, 3, and 5), as proposed by SBC-CA. MCIm expresses concern, and proposes its own alternative. That alternative, however, accomplishes the same objective. Change of law events may have occurred, but not yet been successfully incorporated in the ICA proposed by parties, since the proposed ICA was submitted for arbitration on May 26, 2005. As such, it is reasonable to recognize this date to clarify the terms of this clause.
4.7. GT&C 10
Issue: Should MCIm be permitted to purchase the same service from either an approved tariff or the interconnection agreement?
Agreement Reference: GT&C § 51
SBC-CA argues no. MCIm argues yes.
MCIm's position is adopted.
MCIm proposes one simple, direct sentence that clearly states the option. This should eliminate questions or disputes.
MCIm's proposal advances the TA 96 public policy goal of increasing local telecommunications competition. ICAs and tariffs become powerful competitive tools when used in concert, mimicking the vigorous give and take in a competitive market. In those markets, for example, buyers chose between many sellers to obtain the desired product or service at the least cost.
Tariffs offer products or services to all eligible customers on a basis that is just, reasonable, equitable, and non-discriminatory. A CLEC should always have a right to select a product or service offered by tariff. This is an important way to level the field during negotiations. An ILEC might negotiate for the CLEC to give up availability of an item by tariff, but nothing about the negotiation process is known to automatically take away availability of an item via tariff. MCIm did not here negotiate away its option to use otherwise available tariffs.
SBC-CA argues that MCIm's proposed right to pick and choose violates the FCC's most recent rejection of the pick and choose rule under § 252(i) of the Act.11 To the contrary, the FCC was considering the matter with respect to selecting individual elements of an ICA versus the entire ICA. The matter here is between an item in an ICA versus that same item in a generally available tariff.
SBC-CA argues that MCIm's pick and choose proposal violates the public policy and spirit underlying the FCC's rejection of pick and choose. To the contrary, the controlling public policy and spirit is to promote and encourage competition. Competition is increased by permitting purchase of an item from either the ICA or tariff, more nearly emulating the competitive market. This promotes good economic and public policy.
SBC-CA is concerned that this approach violates the give and take inherent in the ICA negotiation process. To the contrary, as MCIm points out, the ILEC generally has superior bargaining power, and the CLEC comes to the negotiation with little or nothing the ILEC wants or needs. TA 96 addresses this problem by creating a negotiation and arbitration process in which the CLEC may assert certain rights not otherwise available. The arbitration provides relief from unreasonable negotiation (should that occur), and tends to level the field during those negotiations.
SBC-CA says MCIm's approach will diminish the incentive to give and take in ICA negotiations because the ILEC will never give if it cannot take. Even if arguably true, the public policy goal of increasing competition outweighs the narrower interest of the ILEC.
SBC-CA asserts that allowing MCIm to pick and choose between items in the ICA or tariff would be administratively burdensome and confusing for both SBC-CA and MCIm. SBC-CA fails to quantify the incremental burden and confusion, however, and does not persuasively show it would occur.12
The industry is already relatively complex. It is simply not credible that the incremental burden and confusion, if any, would be great given the current level of administrative burden in this complex industry. In fact, the option is simply to allow the use of tariffs, a matter with which ILECs are already familiar. SBC-CA's arguments regarding the remote possibility of confusion pale in comparison to the important pro-competitive effect gained by allowing CLECs the incremental leverage here by leveling the field. MCIm expresses no concern about incremental administrative burden or confusion.
MCIm convincingly points out that incremental burden and confusion, if any, can be addressed via changes to SBC-CA's Universal Service Ordering Codes (USOCs).13 Adding or modifying a USOC is a relatively simple process that involves updating a table in SBC-CA's provisioning systems. This will give MCIm the alternative of purchasing a service at the rates, terms and conditions specified in SBC-CA's tariff without amending the rates, terms and conditions in the ICA.
Finally, SBC-CA argues that MCIm should not be permitted to "'mix and match' ICA terms and conditions with tariffs terms and conditions." (SBC-CA Opening Brief, page 207, and page 48.) On this, SBC-CA is correct. MCIm agrees saying: "MCIm is not proposing to `mix and match' terms and conditions (i.e. purchasing a service or UNE under a hybrid set of rates, terms and conditions." (MCIm Reply Brief, page 7, emphasis in original.)
1 The closing date of a merger is subject to the resolution of many details, including shareholder, regulatory and other approvals. As a result, the final closing date might not be known, but the target closing date will almost certainly be known, at least 90 days in advance.
2 The Commission has specifically said: "Therefore, we order that all agreements arrived at by arbitration include the provision that all arbitrated rates for unbundled elements will be subject to change in order to mirror the rates adopted in OANAD." (Resolution ALJ-181, page 3.)
3 The issue for the two parties in this matter has perhaps lost some of its urgency since both the SBC/AT&T merger and the Verizon/MCI merger will close before the ICA being arbitrated here becomes effective. Name change costs, if any, as a result of those mergers will be subject to treatment and recovery under the 2001 ICA. Nonetheless, SBC-CA's treatment is reasonable for cost recovery going forward, including for other CLECs who might take the arbitrated ICA here under the MFN provision of TA 96 (§ 252(i)).
4 The existing ICA expired on September 25, 2004.
5 The evidence shows MCIm now fails two of the four tests: (a) MCIm's credit is below S&P's BBB rating for long term debt, and (b) WorldCom/MCIm is in a "winding-up" or "adjustment of debts or the like" phase of bankruptcy.
6 The tariff process provides parties with necessary and reasonable protections (e.g., protests to advice letters or applications, which may be set for formal hearing if material facts are in dispute).
7 The 2001 ICA allows the non-paying party 14 calendar days after receipt of a notice that charges are unpaid as of the bill due date to either pay undisputed amounts or to dispute the amounts. SBC-CA's proposed language here provides 10 business days for the same events to occur. While not exactly the same, it is substantially similar. Both the 2001 ICA (§ 35.3.3) and SBC-CA's adopted replacement language (§ 10.3.3) provide for use of an interest bearing escrow account for disputed charges.
8 While the agreed upon language in the replacement ICA also says the audit is "limited to" the services in the ICA, this is understood to mean that an audit cannot generally explore business activities unrelated to the ICA (e.g., cannot audit corporate profits, taxes, dividends, personnel practices, executive compensation, philanthropic contributions, unless somehow related to the ICA).
9 SBC-CA is distrustful of MCIm, as evidenced by SBC-CA's concern that MCIm might abuse the use of third party auditors absent being required to pay 25% of the cost: "...such right [to use third party auditors] will not be abused (as Mr. Hurter's and MCIm's proclivities suggest it might well be)." (SBC-CA Opening Brief, page 33.) MCIm also points out apparent SBC-CA mistrust related to concerns about MCIm "gaming" the system, circumventing deposit requirements, doing creative things to avoid paying bills, and disputing bills for illegitimate reasons. (MCIm Reply Brief, pages 5-6.) Similarly, MCIm is distrustful of SBC-CA given "SBC-CA's intensely negative view of MCIm's motives and conduct." (MCIm Opening Brief, page 36.)
10 SBC-CA originally proposed language that included certain changes to the ICA potentially happening "immediately." MCIm objected, saying that this allowed SBC-CA to unilaterally impose certain outcomes, even absent a "bright-line" application or interpretation of the initiating event. Rather, MCIm argued that TA 96 required negotiations. In the Joint Revised Statement of Unresolved Issues filed on October 11, 2005, SBC-CA included alternative language it believed addressed MCIm's concern. SBC-CA adopted the alternative language as its proposal in its Opening Brief, which SBC-CA said "is expected to be more to MCIm's liking." (SBC-CA Opening Brief, page 37.) MCIm still objects. (MCIm Reply Brief, page 6.)
11 According to SBC-CA, in 2004 the FCC found that a CLEC adopting another CLEC's ICA under this provision of TA 96 must take the entire ICA, and cannot "pick and choose" selected parts. (Opening Brief, page 209, citing Second Report and Order, Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket No. 01-338, 19 F.C.C. Rcd. 13,494, ¶11 (rel. July 13, 2004 ("Second Report and Order")).
12 For example, the burden and confusion, if any, could be one-time, and resolved with training and system programming. Further, the claim runs counter to MCIm's actual experience with SBC-CA.
13 A USOC is a three-to-six digit alphanumeric code that is used to specify services, features or options, and their associated rates, for a feature or function to be provided to an end user customer. USOCs are not unique to wholesale services sold to CLECs. (MCIm Opening Brief, page 51; Exhibit 106, pages 17-20.)
