**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

+----------------------------------+----+------------------------------+
| In the matter of                 | *  | WC Docket No. 02-356         |
|                                  | *) |                              |
| National Exchange Carrier        | ** |                              |
| Association, Inc.                |    |                              |
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| Tariff FCC No. 5, Transmittal    | *) |                              |
| No. 952                          | ** |                              |
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+----------------------------------+----+------------------------------+

**ORDER**

**Adopted: November 8, 2002 Released: November 8, 2002**

**Direct Case Due by:** December 2, 2002

**Oppositions to Direct Case Due by:** December 16, 2002

**Rebuttal Due by:** December 23, 2002

By the Chief, Pricing Policy Division:

# INTRODUCTION

1.  In this order, we designate for investigation, pursuant to sections
    204 and 205 of the Communications Act of 1934, as amended (the
    Act),[^1] certain issues regarding the rates, terms, and conditions
    in tariff Transmittal No. 952 that the National Exchange Carrier
    Association, Inc., (NECA) filed to become effective September 14,
    2002.[^2] We suspended Transmittal No. 952 for five months on
    September 13, 2002, and initiated this investigation.[^3]
    Transmittal No. 952 increases NECA's interstate revenue requirement
    to reflect provision for higher uncollectibles, resulting in higher
    traffic sensitive switched and special access recurring rates. As
    discussed below, we designate for investigation issues relating to
    the increased rates proposed in tariff Transmittal No. 952 to ensure
    that they are not unjust or unreasonable in violation of section 201
    of the Act.[^4]

# Background 

2.  A brief overview of the Commission's policies concerning security
    deposits and treatment of uncollectibles would be useful to the
    discussion of the issues presented by the present tariff revisions.
    Existing incumbent local exchange carrier (LEC) interstate access
    tariffs contain protections for uncollectibles. In 1984, the
    Commission rejected incumbent LECs' proposed security deposit tariff
    language and instead permitted dominant LECs to require security
    deposits from: (1) those carriers that have a proven history of late
    payments to the LEC; and (2) those carriers that have no established
    credit.[^5] These provisions since have become a standard term in
    interstate access tariffs.[^6] In 1987, the Commission addressed a
    BellSouth proposal to reduce the notice it must give to terminate
    service for nonpayment to 15 days from 30 days. The Commission
    allowed a 15-day notice period only if the customer received its
    bill within three days after the billing date.[^7]

3.  The Commission's ratemaking policies for incumbent LECs also account
    for interstate uncollectibles and provide for their recovery through
    interstate access charges. For rate-of-return carriers,
    uncollectibles are reflected in the rate base that they use to
    calculate the 11.25 percent allowed rate of return. An increase in
    uncollectibles will result in higher rates the following year. Upon
    a proper showing of an extraordinary rise in uncollectibles,
    rate-of-return carriers may file mid-term corrections to raise their
    rates to target an 11.25 percent rate of return.[^8]

4.  In this filing, NECA is increasing the uncollectible portion of the
    traffic sensitive test period revenue requirement in its 2002 Annual
    Access Tariff filing to \$15 million.[^9] This would increase the
    traffic sensitive switched and special access recurring rate
    elements in its interstate access tariff by 2.13 percent.[^10] NECA
    states that it has observed an increase in uncollectibles in the
    first half of 2001 that is unprecedented in its history.[^11] NECA
    adds that the \$15,000 amount included in the traffic sensitive
    revenue requirement underlying its 2002 Annual Access Tariff Filing
    is "grossly inadequate" to cover increasing uncollectibles.[^12] On
    September 6, 2002, Sprint Corporation (Sprint), AT&T Corp. (AT&T),
    and General Communication, Inc. (GCI), filed petitions to reject,
    or, in the alternative, to suspend and investigate NECA's
    tariff.[^13] On September 12, 2002, NECA filed its reply.[^14]

# issue designated for investigation 

## Reasonableness of the Proposed Increased Allowance for Uncollectibles

### Background

5.  Petitioners question whether NECA has provided sufficient cost
    support for its proposed increase and satisfied the requirements of
    section 61.38 of the Commission's rules.[^15] They further question
    whether NECA's revision is reasonable in light of existing
    protections against uncollectibles in its current tariff, its record
    of earning in excess of its established rate of return, and the
    possibility that some or all of any uncollectible amounts may be
    recovered under bankruptcy law.[^16] Finally, GCI questions whether
    NECA's revisions constitute impermissible retroactive
    ratemaking.[^17]

### Discussion 

6.  The issue designated for investigation is whether the increased
    allowance for uncollectibles and the resulting increase in
    interstate access rates are just and reasonable within the meaning
    of section 201(b) of the Act. The interstate access market has two
    distinct characteristics -- carriers participating in the NECA
    tariff must provide access services to interexchange carriers (IXCs)
    and competitive LECs requesting such service, and those carriers
    must use access services provided by carriers participating in the
    NECA tariff to originate or terminate many of their interstate
    calls. The revisions raise the question whether circumstances have
    changed so as to warrant increasing the allowance for uncollectibles
    in establishing interstate access charges. We therefore direct NECA
    to respond to the matters discussed below and provide the requested
    information in its direct case.[^18] Nonetheless, NECA may, as part
    of its direct case, seek to justify its increase in the allowance
    for uncollectibles and the resulting higher interstate access
    charges.

7.  The increased security deposits proposed by NECA in Transmittal No.
    951 appear to address the same risk as the increase in
    traffic-sensitive and special access rates proposed in the present
    transmittal to reflect a higher allowance for uncollectibles. NECA
    shall address why both forms of relief are necessary, or what
    modifications to either form of relief could be made if the other
    proposed tariff revision were allowed to take effect.

8.  As part of its direct case, NECA shall explain the derivation of the
    \$15 million projection of uncollectible interstate access revenues
    for the NECA traffic-sensitive pool for the current tariff period.
    NECA shall provide a quantitative economic analysis of uncollectible
    amounts from an historical perspective, as well as an analysis of
    current telecommunications market conditions. NECA shall provide all
    internal and external studies created or relied upon to make the
    estimates or evaluation of risk assessment. NECA should explain its
    analysis of the risk of default among its customers -- is the \$15
    million designed to cover the default of several smaller customers
    or one or two bigger ones? NECA should also address the factors that
    lead it to believe that \$15 million is the appropriate allowance
    for uncollectibles for the current tariff period. NECA shall, in
    particular, explain how the two bankruptcies it cites, Global
    Crossing and WorldCom, can provide a basis for determining any
    future uncollectible levels.

9.  As part of its direct case, NECA shall explain why it believes that
    its current rates, filed in June, do not adequately compensate its
    carrier participants for the risk of uncollectibles. Those rates
    included a \$15,000 revenue requirement component for uncollectible
    debts.[^19] As we did in the investigation of Transmittal No. 951,
    we direct NECA to submit the level of uncollectible debts from
    interstate access services and the actual return on investment for
    the years 1990 to the present. For the period from January 2000 to
    July 31, 2002, NECA shall also provide the totals of each of the
    individual defaults grouped into the following ranges: less than
    \$100,000; \$100,001-250,000; \$250,001-\$500,000;
    \$500,001-\$1,000,000; and more than \$1,000,000. For each range,
    NECA shall indicate the number of defaulting entities. NECA shall
    then address whether the variation in uncollectible levels for 2000
    and 2001 is merely a normal fluctuation in uncollectibles, which
    would be covered by the business risks anticipated in the 11.25
    percent authorized rate of return, or whether it reflects some long
    term trend that warrants increasing the allowance for uncollectibles
    in the calculation of NECA's interstate revenue requirement. NECA
    shall also indicate the total dollar amount of security deposits
    held by its carrier participants that are attributable to interstate
    access services and the percentage relationship of that amount to
    average monthly interstate access billings.

10. To assist us in evaluating the market, NECA shall provide the
    following data on the distribution of its revenues for calendar
    year 2001. NECA shall indicate the share of its revenues that come
    from each of the following types of customers: IXCs, competitive
    LECs, other incumbent LECs through arrangements such as meet-point
    billing, and businesses. NECA shall also indicate the extent to
    which carriers participating in the NECA tariff have a debtor
    relationship with their customers and how that may affect those
    carriers' credit risk, *e.g.*, through offset in a bankruptcy
    proceeding.

11. Because uncollectibles can be affected by whether services are
    billed in advance or in arrears, NECA shall indicate which services
    in its interstate access tariff, including the subscriber line
    charge and other common line services, are billed in advance and
    those that are billed in arrears. It shall indicate the percentage
    of interstate billings that are billed in advance, how this level
    has changed over the past five years, and how this change has
    affected the risk faced by carriers participating in the NECA
    tariff. NECA shall also provide data covering the period from
    January 1, 2001, to June 30, 2002, on the percentage of revenues in
    default that are attributable to services billed in arrears and the
    percentage attributable to special access services. Using its
    current tariff provisions, NECA shall describe the number of days of
    billings that would be at risk when a NECA carrier terminates
    service for failure to pay for services that are billed in arrears
    and for services that are billed in advance. NECA should indicate
    the amount of unpaid bills of defaulting customers that have gone
    into bankruptcy since January 2000 and the percentage of that amount
    that has been recovered through bankruptcy proceedings.

12. If NECA believes that the risk of uncollectible debts has increased
    permanently, it should explain what accounts for this change,
    *e.g.*, the general economic climate or some structural change in
    the market. If the change is a structural one, are there methods
    other than the NECA proposal to increase the allowance for
    uncollectibles that would adequately address this additional risk,
    *e.g.*, is there a subset of carriers that can be identified that
    are the major cause of the increased risk? NECA should also discuss
    any other steps, other than those proposed in Transmittal Nos. 951
    and 952, it might take to mitigate the risk. For example, could it
    adopt some form of advance payment for services currently billed in
    arrears and, if so, what modifications to its tariff and billing
    programs would be necessary? How difficult would it be to implement
    such changes? Finally, we direct NECA to address whether there are
    means other than including an allowance for uncollectibles in its
    revenue requirement calculation that might address the concern that
    NECA might overearn because its realized rate of return would
    increase by the difference between the allowance and the amount of
    the actual uncollectibles if the uncollectibles do not occur.[^20]

13. We direct NECA to describe how the timing of reporting
    uncollectibles to the pool is handled, especially in light of the
    two-year window within which a participating LEC may file revised
    cost data with the pool. NECA shall describe how it addresses
    defaults occurring before the effectiveness of any tariff to ensure
    that any tariff revisions are not designed to recover retroactively
    losses due to earlier nonpayment events (*i.e.*, how does NECA avoid
    retroactive ratemaking?).

# PROCEDURAL MATTERS

## Filing Schedules

14. This investigation is designated WC Docket No. 02-356. The National
    Exchange Carrier Association, Inc., is designated a party to this
    investigation. NECA shall file its direct case no later than
    December 2, 2002. The direct case must present NECA's position with
    respect to the issues described in this Order. Pleadings responding
    to the direct case may be filed no later than December 16, 2002, and
    must be captioned "Oppositions to Direct Case" or "Comments on
    Direct Case." NECA may file a "Rebuttal" to oppositions or comments
    no later than December 23, 2002.

15. An original and four copies of all pleadings shall be filed with the
    Secretary of the Commission. In addition, parties shall serve with
    three copies: Pricing Policy Division, Wireline Competition Bureau,
    445 12th Street, S.W., Room 5-A104, Washington, D.C. 20554, Attn:
    Julie Saulnier. Parties shall also serve with one copy: Qualex
    International, Portals II, 445 12th Street, S.W., Room CY-B402,
    Washington, D.C. 20554, (202) 863-2893. Members of the general
    public who wish to express their views in an informal manner
    regarding the issues in this investigation may do so by submitting
    one copy of their comments to the Office of the Secretary, Federal
    Communications Commission, 445 12th Street, S.W., Room TW-A325,
    Washington, D.C. 20554. Such comments should specify the docket
    number of this investigation, WC Docket No. 02‑356. Parties are also
    strongly encouraged to submit their pleadings via the Internet
    through the Electronic Comment Filing System at
    \<http://www.fcc.gov/e-file/ecfs.html\>. Generally, only one copy of
    an electronic submission must be filed. In completing the
    transmittal screen, commenters should include their full name,
    Postal Service mailing address, and the applicable docket number,
    which in this instance is WC Docket No. 02‑356. Parties may also
    submit an electronic comment via Internet e-mail. To get filing
    instructions for e-mail comments, commenters should send an e-mail
    to \<ecfs@fcc.gov\>, and should include the following words in the
    body of the message: "get form \<your e-mail address\>." A sample
    form and directions will be sent in reply. Finally, an e-mail of the
    direct case, oppositions/comments, and replies should be sent to
    parties to the proceeding and to Julie Saulnier at jsaulnie@fcc.gov.
    For this purpose, NECA shall treat the parties petitioning against
    Transmittal No. 952 as parties to whom an e-mail should be sent.

16. Interested parties who wish to file comments via hand-delivery are
    also notified that effective December 18, 2001, the Commission will
    only receive such deliveries weekdays from 8:00 a.m. to 7:00 p.m.,
    via its contractor, Vistronix, Inc., located at 236 Massachusetts
    Avenue, NE, Suite 110, Washington, DC 20002. **The Commission no
    longer accepts these filings at 9300 East Hampton Drive, Capitol
    Heights, MD 20743.** Please note that all hand deliveries must be
    held together with rubber bands or fasteners, and envelopes must be
    disposed of before entering the building. In addition, this is a
    reminder that as of October 18, 2001, the Commission no longer
    accepts hand-delivered or messenger-delivered filings at its
    headquarters at 445 12th Street, SW, Washington, DC 20554.
    Messenger-delivered documents (*e.g.*, FedEx), including documents
    sent by overnight mail (other than United States Postal Service
    (USPS) Express and Priority Mail), must be addressed to 9300 East
    Hampton Drive, Capitol Heights, MD 20743. This location is open
    weekdays from 8:00 a.m. to 5:30 p.m. USPS First-Class, Express, and
    Priority Mail should be addressed to the Commission's headquarters
    at 445 12th Street, SW, Washington, DC 20554. The following chart
    summarizes this information:

+-----------------------------------+----------------------------------+
| **TYPE OF DELIVERY**              | > **PROPER DELIVERY ADDRESS**    |
+-----------------------------------+----------------------------------+
| Hand-delivered paper filings      | > 236 Massachusetts Avenue, NE,  |
|                                   | >                                |
|                                   | > Suite 110, Washington, DC      |
|                                   | > 20002 (Weekdays - 8:00 a.m. to |
|                                   | > 7:00 p.m.)                     |
+-----------------------------------+----------------------------------+
| Messenger-delivered documents     | > 9300 East Hampton Drive,       |
| (*e.g.*, FedEx), including        | >                                |
| documents sent by overnight mail  | > Capitol Heights, MD 20743      |
| (this type excludes USPS Express  | >                                |
| and Priority Mail)                | > (Weekdays - 8:00 a.m. to 5:30  |
|                                   | > p.m.)                          |
+-----------------------------------+----------------------------------+
| USPS First-Class, Express, and    | > 445 12^th^ Street, SW          |
| Priority Mail                     | >                                |
|                                   | > Washington, DC 20554           |
+-----------------------------------+----------------------------------+

17. All relevant and timely pleadings will be considered by the
    Commission. In reaching a decision, the Commission may take into
    account information and ideas not contained in pleadings, provided
    that such information, or a writing containing the nature and source
    of such information, is placed in the public file, and provided that
    the fact of reliance on such information is noted in the order.

## *Ex Parte* Requirements {#ex-parte-requirements .unnumbered}

18. This investigation is a permit-but-disclose proceeding and is
    subject to the requirements of section 1.1206(b) of the Commission's
    rules, 47 C.F.R. § 1.1206(b), as revised. Persons making oral *ex
    parte* presentations are reminded that memoranda summarizing the
    presentations must contain a summary of the substance of the
    presentation and not merely a listing of the subjects discussed.
    More than a one- or two-sentence description of the views and
    arguments presented is generally required.[^21] Other rules
    pertaining to oral and written presentations are also set forth in
    section 1.1206(b).

19. Interested parties are to file any written *ex parte* presentations
    in this proceeding with the Commission's Secretary, Marlene Dortch,
    445 12th Street, S.W., TW-B204, Washington, D.C. 20554, and serve
    with three copies: Pricing Policy Division, Wireline Competition
    Bureau, 445 12th Street, S.W., Room 5-A104, Washington, D.C. 20554,
    Attn: Julie Saulnier. Parties shall also serve with one copy: Qualex
    International, Portals II, 445 12th Street, S.W., Room CY-B402,
    Washington, D.C. 20554, (202) 863-2893.

## Paperwork Reduction Act {#paperwork-reduction-act .unnumbered}

20. This order designating issues for investigation contains no new or
    modified information collections subject to the Paperwork Reduction
    Act of 1995, Pub. Law 104-13.

# ORDERING CLAUSES {#ordering-clauses .unnumbered}

21. ACCORDINGLY, IT IS ORDERED that, pursuant to sections 4(i), 4(j),
    201-205, and 403 of the Communications Act, 47 U.S.C. §§ 154(i),
    154(j), 201-205, and 403, and pursuant to the authority delegated by
    sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. §§
    0.91, 0.291, the issues set forth in this Order ARE DESIGNATED FOR
    INVESTIGATION.

22. IT IS FURTHER ORDERED that the National Exchange Carrier
    Association, Inc., SHALL BE a party to this proceeding.

23. IT IS FURTHER ORDERED that the National Exchange Carrier
    Association, Inc., SHALL INCLUDE, in its direct case, a response to
    each request for information that it is required to answer by
    this Order.

    FEDERAL COMMUNICATIONS COMMISSION

    Tamara L. Preiss

    Chief, Pricing Policy Division

    Wireline Competition Bureau

[^1]: 47 U.S.C. §§ 204 and 205.

[^2]: National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952 (Aug. 30, 2002).

[^3]: *National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952*, Order, DA 02-2263 (WCB/Pricing, released Sept.
    13, 2002).

[^4]: 47 U.S.C. § 201.

[^5]: *Investigation of Access and Divestiture Related Tariffs*, Phase I
    Order, CC Docket No. 83-1145, 97 FCC 2d 1082, 1169 (1984).

[^6]: In general, existing tariffs also provide that deposits may not
    exceed the actual or estimated rates and charges for service for a
    two-month period.

[^7]: *Annual 1987 Access Tariff Filings,* Memorandum Opinion and Order,
    2 FCC Rcd 280, 304-05 (1987). BellSouth apparently never implemented
    this provision.

[^8]: *See* 47 C.F.R. § 69.3(b).

[^9]: National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952 at 3 (filed Aug. 30, 2002). *See also* National
    Exchange Carrier Association, Inc., Tariff FCC No. 5, Transmittal
    No. 939 (filed June 17, 2002) (*NECA 2002 Annual Access Tariff
    Filing*).

[^10]: In the same transmittal, NECA also would delete outdated material
    relating to Digital Subscriber Line (DSL) service. Those revisions
    were not the subject of the suspension order.

[^11]: National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952 at 2.

[^12]: *Id*. at 3.

[^13]: National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952, Petition of Sprint to Reject or Alternatively
    Suspend and Investigate (Sept. 6, 2002) (*Sprint Petition*); AT&T
    Petition to Reject or Suspend and Investigate (Sept. 6, 2002) (*AT&T
    Petition*); Petition of General Communication, Inc. to Reject or
    Alternatively to Suspend and Investigate (Sept. 6, 2002) (*GCI
    Petition*).

[^14]: National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952, Reply of National Exchange Carrier Association,
    Inc. (Sept. 13, 2002). Verizon also filed "reply comments." Reply
    Comments of Verizon to Petitions to Reject or Suspend and
    Investigate NECA's Tariff (filed Sept. 12, 2002).

[^15]: 47 C.F.R. § 61.38. *See Sprint Petition* at 2; *AT&T Petition* at
    6; *GCI Petition* at 2, 3-4.

[^16]: *See, e.g*., *AT&T Petition* at 5-6, *GCI Petition* at 5-7.

[^17]: *GCI Petition* at 4-5.

[^18]: Because the issues presented in this tariff investigation are
    closely related to those raised in connection with NECA's
    Transmittal No. 951, which has also been suspended, we may use data
    submitted in response to the designation of issues relating to that
    transmittal in resolving this investigation. *National Exchange
    Carrier Association, Inc., Tariff FCC No. 5, Transmittal No. 951*,
    WC Docket No. 02-340, Order, DA 02-2948 (WCB/Pricing, released Oct.
    31, 2002).

[^19]: National Exchange Carrier Association, Inc., Tariff FCC No. 5,
    Transmittal No. 952 at 3.

[^20]: *See, e.g.*, AT&T Petition at 6-8.

[^21]: *See* 47 C.F.R. §1.1206(b)(2), as revised.