**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the matter of                 | *  | WC Docket No. 02-317         |
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| The Verizon Telephone Companies  | ** |                              |
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| Tariff FCC Nos. 1, 11, 14 and    | *  |                              |
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| Transmittal No. 226              |    |                              |
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**ORDER**

**Adopted: October 7, 2002 Released: October 7, 2002**

**Direct Case Due by:** October 28, 2002

**Oppositions to Direct Case Due by:** November 12, 2002

**Rebuttal Due by:** November 19, 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. 226 that the Verizon Telephone Companies
    (Verizon) filed to become effective August 9, 2002. Verizon
    subsequently deferred the effective date of the subject revisions in
    Transmittal 226 to August 23, 2002.[^2] We suspended Transmittal 226
    for five months on August 22, 2002, and initiated this
    investigation.[^3] As discussed below, we designate for
    investigation issues relating to Verizon's provisions for security
    deposits and advance payments contained in tariff Transmittal No.
    226 to ensure that the proposed tariff provisions are not unjust,
    unreasonable, or unreasonably discriminatory in violation of
    sections 201 and 202 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. As a price cap carrier, Verizon's rates
    at the time it entered price caps included a factor reflecting
    wholesale uncollectibles.[^8] Under price caps, the permitted price
    indexes are annually adjusted for changes in general economic
    conditions as reflected in the GDP-PI inflation index.[^9] Price cap
    carriers experiencing a rise in uncollectibles resulting in
    interstate rates of return below 10.25% may, if eligible, seek a
    low-end adjustment, permitting the carrier to target a 10.25% rate
    of return.[^10] Price cap carriers that are not eligible for a
    low-end adjustment because they have exercised pricing flexibility
    retain the right to demonstrate that earnings are low enough to
    warrant an above cap filing, or to seek an exogenous cost change,
    either of which would allow them to charge rates that exceed the
    current price caps.[^11]

4.  Under Verizon's current tariff, Verizon may require deposits from a
    customer that has a proven history of late payments or does not have
    established credit.[^12] Under its proposed revisions, Verizon may
    require at any time additional security deposits or advance payments
    from a customer based on any one of the following six criteria: (1)
    the customer has fallen in arrears in its account balance in any two
    months out of any consecutive twelve-month period; (2) the customer
    owes \$250,000 or more that is thirty days or more past due; (3) the
    customer or its parent (defined as an entity that owns an equity
    interest in more than 50 percent of the customer) informs Verizon or
    publicly states that it is unable to pay its debts as such debts
    become due; (4) the customer or its parent has commenced voluntary
    or involuntary receivership or bankruptcy; (5) the customer's or its
    parent's senior debt securities are below investment grade as
    defined by the Securities and Exchange Commission; or (6) the
    customer's or its parent's senior debt securities are rated the
    lowest investment grade rating category by a nationally recognized
    statistical rating organization and are put on review by the rating
    organization for a possible downgrade.[^13]

5.  Advance payments, which would not accumulate interest, would be
    based on the customer's average monthly billed account balance for
    the most recent three months for existing customers, and, for new
    customers, would be based on an amount equal to the estimated future
    charges for the next bill month, and, trued up every six months
    following payment of the first advance payment assessed.[^14]
    Advance payment must begin within seven days of written request from
    Verizon.[^15] The tariff revisions allow Verizon to determine
    whether late-paying customers will be required to make advance
    payments or supply a security deposit.[^16] Security deposits would
    be refunded after one year of prompt payment and if the customer has
    not met any of the six criteria listed above for more than one
    year.[^17] The revisions would also shorten from thirty to seven
    days the notice period before which Verizon can refuse to process
    new orders or discontinue service.[^18]

6.  As justification for this revision, Verizon states that its
    "interstate uncollectible revenues more than doubled in 2001 versus
    2000," and that it is a party to 92 different bankruptcy
    proceedings.[^19] Verizon also states, "\[t\]he telecommunications
    industry is in a period of unprecedented financial stress and
    upheaval."[^20]

7.  On August 1, 2002, AT&T Corp. (AT&T); Sprint Communications Company,
    L.P. (Sprint); WorldCom, Inc. (WorldCom); counsel for the
    Association for Local Telecommunications Services (ALTS), Broadview
    Networks, Inc., the Competitive Telecommunications Association, KMC
    Telecom Holdings, Inc., Talk America Inc., and XO Communications,
    Inc.; and counsel for the Association of Communications Enterprises,
    Business Telecom, Inc., DSL.net, Inc., ATX Communications, Inc., CTC
    Communications Corp., Focal Communications Corp., Freedom Ring
    Communications, LLC, Level 3 Communications, LLC, PaeTec
    Communications, Inc., Pac-West Telecomm, Inc., and US LEC Corp.
    filed petitions to reject, or, in the alternative, to suspend and
    investigate Verizon's tariffs.[^21] On August 8, 2002, Verizon filed
    its reply.[^22]

# issues designated for investigation 

## Basis for Requiring a Deposit or advance payments from a Customer 

### Background

8.  Under its present tariff, Verizon has discretion to require a
    deposit from a customer with a proven history of late payments or
    who does not have established credit.[^23] Under the proposed
    revisions, in addition to the above deposit requirement, Verizon
    could require the customer to pay a security deposit in a fixed
    amount of no more than two months estimated rates and charges, or
    require additional security in the form of advance payments for
    services if any of six criteria is met.[^24] Advance payments, which
    would not accumulate interest, would be based on the customer's
    average monthly billed account balance for the most recent three
    months for existing customers, and, for new customers would be based
    on an amount equal to the estimated future charges for the next bill
    month, and trued up every six months following payment of the first
    advance payment assessed.[^25] Security deposits would be refunded
    after one year of prompt payment and if the customer has not met any
    of the six criteria for more than one year.[^26] The revisions would
    also shorten from thirty to seven days the notice period before
    which Verizon can refuse to process new orders or discontinue
    service.[^27]

9.  Several carriers petitioned against the Verizon Transmittal No.
    226.[^28] These petitioners allege that the tariff revisions: (1)
    are unjust, unreasonable, and discriminatory in violation of
    sections 201(b) and 202(a) of the Act,[^29] (2) are vague and
    ambiguous in violation of sections 61.2 and 61.54 of the
    Commission's rules,[^30] and (3) permit Verizon too much discretion
    in determining whether to require a security deposit or advance
    payments for services.[^31]

10. In addition, several petitioners assert that requiring a security
    deposit or advance payment from any customer that has "commenced a
    voluntary receivership or bankruptcy proceeding (or had a
    receivership or bankruptcy proceeding initiated against it)"[^32]
    conflicts with the U.S. Bankruptcy Code provisions[^33] and
    bankruptcy court precedent.[^34] WorldCom asserts that the
    bankruptcy court has exclusive responsibility to determine the
    "adequate assurance" of payment to utilities to preclude termination
    of service for non-payment of certain utility bills.[^35]

### Discussion

11. The initial issue designated for investigation is whether the
    revised security deposit and advance payment provisions applicable
    to interstate access customers, both new and existing, are
    reasonable and not so vague as to permit Verizon to discriminate
    unreasonably among its interstate access customers, whether they be
    interexchange carriers, competitive LECs, or business end-user
    subscribers. The interstate access market has two distinct
    characteristics \-- Verizon must provide access services to IXCs and
    competitive LECs requesting such service, and those carriers must
    use Verizon's access services to originate or terminate many of
    their interstate calls. The proposed revisions regarding security
    deposits and advance payments significantly alter the balance
    between Verizon and its interstate access customers with respect to
    the risks of nonpayment of interstate access bills that was struck
    in the early 1980s when access charges were instituted. The
    revisions raise the question whether circumstances have changed so
    as to warrant the imposition of additional security deposits and
    advance payment requirements. The tariff also raises concerns about
    whether the tariff language clearly and unambiguously sets forth a
    standard that can be objectively administered in a nondiscriminatory
    manner. We therefore direct Verizon to respond to the matters
    discussed below and provide the requested information in its direct
    case. Nonetheless, Verizon may, as part of its direct case, seek to
    justify its expansion of the instances in which security deposits
    and advance payments may be required of interstate access customers.

12. As part of its direct case, Verizon shall explain why it believes
    its rates under price caps do not adequately compensate it for the
    risk of uncollectibles. Verizon's rates include a revenue
    requirement component for uncollectible debts that is based on the
    amount of uncollectibles permitted as an interstate revenue
    requirement at the time Verizon became subject to price cap
    regulation. Verizon is directed to submit the level of uncollectible
    debts from interstate access services for the years 1990 to the
    present and indicate the level of uncollectibles that was included
    in its initial price cap rates. It 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 to be endogenous to price caps, or
    whether it reflects some long term trend that warrants expanded
    security deposits and advance payments from customers meeting
    Verizon's proposed standards. Verizon shall provide the Commission
    with the total amount uncollected by year from January 2000 to July
    31, 2002. Verizon shall also provide the totals of each of the
    individual defaults grouped into the following ranges: less than
    \$250,000; \$250,001-\$500,000; \$500,001-\$1,000,000;
    \$1,000,000-\$5,000,000; and more than \$5,000,000. For each range,
    Verizon shall indicate the number of defaulting entities. Verizon
    shall also indicate the total dollar amount of security deposits it
    holds that are attributable to interstate access services and the
    percentage relationship of that amount to average monthly interstate
    access billings. The changes in the security deposit and advance
    payment provisions of Verizon's interstate access tariff would
    increase customer-supplied funding as well as reduce Verizon's
    exposure to defaults. Verizon should accordingly address what
    modifications should be made to its price cap indexes and service
    band indexes to account for these changes to the capital and risk
    parameters of price caps.

13. To assist the Commission in understanding the increase in the level
    of uncollectibles, Verizon should describe its billing and
    collection procedures and explain any changes in its billing and
    collection procedures or the accounting treatment of disputed
    amounts on bills within the past two years that could have affected
    the levels of uncollectibles. Verizon shall indicate the average
    length of time from the bill date until the bill is sent to the
    carrier customer and what percentage of those bills, by number of
    entities and by billed amount, is sent electronically. In addition,
    Verizon shall provide the Commission with the number of customers
    that have been sent non-payment, discontinuance of service, or
    refusal of new orders letters in the past year and the average
    length of time from a bill's being delinquent until the letter was
    sent. To provide information on possible changes in customer
    behavior, Verizon shall provide the Commission with the percent of
    carrier bills disputed, the percent of carrier-billed revenues
    disputed, and the percentage of the disputed amounts that were
    successfully disputed by the carrier for billing periods beginning
    with January 2000 to the present. Verizon should also indicate if it
    deducts disputed amounts from amounts billed for purposes of
    determining whether a carrier has complied with a deadline.

14. Verizon 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 Verizon faces.
    In this connection, Verizon should discuss whether different
    security deposit or advance payment provisions should apply
    depending upon whether the service is billed in advance or billed in
    arrears. Verizon shall also discuss the extent to which it has a
    debtor relationship with its customers and how that may affect
    Verizon's credit risk. Verizon has multiple business relationships
    with many of its access customers. For example, an IXC could also be
    a CLEC and bill Verizon for reciprocal compensation. By year for the
    period January 2000 to July 31, 2002, Verizon should indicate the
    total amount as well as the net amount owed it by customers it
    identified as defaulting on access charge payments.

15. Verizon 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 it has recovered through bankruptcy
    proceedings. Verizon should address whether its proposed tariff
    requiring a security deposit or advance payment is consistent with
    the U.S. Bankruptcy Code and precedents given that bankruptcy law
    contains provisions addressing payment to utilities by debtors.[^36]

16. If Verizon 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 Verizon proposal 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? Verizon should also discuss any other steps, other than
    requiring additional security deposits or advance payments, it might
    take to mitigate the risk. Verizon's tariff revisions increasing the
    security deposits and imposing advance payment obligations would
    impose additional costs on carriers that are also Verizon's
    competitors at a time when access to capital markets is extremely
    limited. This could adversely affect the competitiveness of
    telecommunications markets. Thus, if some measures are necessary, an
    approach that has the fewest adverse effects on the competitive
    market while protecting Verizon's interests would be preferred. One
    alternative would be to phase in deposit requirements over several
    months after a trigger had been reached. Verizon should comment on
    the efficacy of this alternative and how it might reduce Verizon's
    risk.

17. Verizon's proposed security deposit and advance payment provisions
    also raise questions about whether they are sufficiently clear and
    unambiguous to preclude discriminatory or anticompetitive
    application. Section 61.54(j) of the Commission's rules provides
    that "\[t\]he general rules (including definitions), regulations,
    exceptions, and conditions which govern the tariff must be stated
    clearly and definitely."[^37]

18. Presently, Section 2.4.1 (A) of the tariff[^38] allows Verizon to
    obtain a deposit for a period of no more than two months' estimated
    billings. Proposed Section 2.4.1 (A) (1) would allow Verizon to
    obtain a "deposit" for an unspecified amount. In addition, proposed
    Section 2.4.1 (A) (2) would allow Verizon to obtain a "security
    deposit" for no more than two months' estimated billings, or advance
    payment, as defined in proposed Section 2.4.1 (A) (3), in an amount
    equal to estimated future charges for the next month's bill. What is
    the difference between a "deposit" as stated in Section
    2.4.1 (A) (1) and a "security deposit" as stated in Section
    2.4.1 (A) (2)? How does the proposed Section 2.4.1 (A) (1) work with
    the proposed Section 2.4.1 (A) (2) or Section 2.4.1 (A) (3)? May
    Verizon collect more than two months' "deposit"? Verizon also
    proposes to adjust the size of advance payments at six month
    intervals, based on a three-month average.[^39] This long an
    interval potentially allows a mismatch to develop between advance
    payments and actual usage. Verizon should explain why advance
    payments should not be based on a rolling average of the previous
    three months' billings.

19. The revisions in proposed Section 2.4.1 (A) (2) state that, "the
    Company may . . . require a customer to make a security deposit" and
    in Section 2.4.1 (A) (3) state that, "in the event the Telephone
    Company elects to require payments in advance." The terms "may" and
    "elects" give Verizon considerable discretion to enforce these
    provisions. Without definitive criteria in the tariff, what would
    prevent Verizon from collecting a security deposit or advance
    payment from one customer and nothing from another customer when
    both meet one of the criteria for security deposits or advance
    payment? Verizon should explain how these tariff provisions can be
    applied in a non-discriminatory manner.

20. Proposed Section 2.4.1 (A) (2) of the tariff allows Verizon to
    require a customer "to make a security deposit in a fixed amount" or
    "in lieu of a security deposit . . . require additional security in
    the form of recurring payments in advance."[^40] If a customer meets
    one of the conditions for imposition of security deposits or advance
    payments, what criteria would Verizon use to determine whether to
    require a security deposit or advance payments? In reviewing the
    tariff, how would a customer know whether it will be required to
    make a deposit or pay in advance? In responding, Verizon should
    explain how these tariff provisions can be applied in a
    non-discriminatory manner.

21. Verizon's proposed tariff revisions give Verizon discretion to
    require a customer to make a security deposit in a fixed amount or
    require additional security in the form of advance payments for
    services if any one of the following occurs: (1) the customer has
    fallen in arrears in its account balance in any two months out of
    any consecutive twelve-month period; (2) the customer owes \$250,000
    or more that is thirty days or more past due; (3) the customer or
    its parent informs Verizon or publicly states that it is unable to
    pay its debts as such debts become due; (4) the customer or its
    parent has commenced voluntary or involuntary receivership or
    bankruptcy; (5) the customer's or its parent's senior debt
    securities are below investment grade as defined by the Securities
    and Exchange Commission; or (6) the customer's or its parent's
    senior debt securities are rated the lowest investment grade rating
    category by a nationally recognized statistical rating organization
    and are put on review by the rating organization for a possible
    downgrade.[^41] Verizon has not shown that criteria 3, 4, 5 and 6
    are valid predictors of the likelihood of a customer paying its
    access bill, or that they are better predictors of whether a
    customer will pay its bills in the future than the customer's past
    payment history. As part of its direct case, Verizon shall explain
    how each of criteria 3, 4, 5, and 6 is a valid predictor of whether
    the carrier will pay its interstate access bill and why each is a
    better predictor of timely payment than is a customer's previous
    payment history with Verizon. Verizon shall also explain how such
    varied data can be applied in a manner that will not produce
    arbitrary and/or discriminatory results. This is especially
    important because in most cases the entity upon which Verizon would
    impose the security deposit would also be a competitor of Verizon
    itself, or of its long-distance affiliate. In this connection,
    Verizon shall provide the Commission with information concerning the
    security deposits that it has required of any of its long-distance
    affiliates. We note that most of these criteria relate to ratings
    for carriers and large businesses. Verizon should discuss its
    intentions, if any, with respect to residential end users.

22. Verizon shall provide the Commission with data on the payment
    characteristics of defaulting interstate access customers during the
    year prior to the time the account was 90 days overdue. Verizon
    shall present the data in terms that will enable the Commission to
    identify patterns that may exist in a customer's payment practices
    prior to default that may permit alternatives to security deposits
    or advance payment to be identified and evaluated.

23. Finally, we ask Verizon to provide data, to the extent available, on
    the level of uncollectibles of other regulated utilities, or in the
    broader marketplace. It should also discuss the means those
    businesses use to address the risks of default, especially how they
    manage bad credit risks while continuing to provide goods or
    services to the customer.

## Notice for Deposit and Shortened Termination Period

### Background

24. Verizon's tariff revisions provide that "\[a\]ny security deposit or
    advance payment requirement shall be in addition to, and not in lieu
    of, any rights the Telephone Company may have to suspend or
    terminate services for nonpayment."[^42] The revisions also provide
    that if the customer fails to comply with certain provisions,
    including the provisions for advance payment and security deposit,
    Verizon may refuse additional applications for service and/or
    pending orders for service, and discontinue the provision of service
    to the customer, on seven days' notice, rather than the 30-day
    notice requirement in the existing tariff.[^43] The proposed
    revisions further provide that a security deposit is due within ten
    business days after receiving written notice from Verizon that a
    deposit is required.[^44] Verizon may utilize the security deposit
    to cover any amounts not paid within 30 days after the bill date,
    and the customer must reimburse the amount used within five days
    after receiving notice of such use.[^45] Advance payments are due
    monthly, beginning seven days from receiving written notice from
    Verizon.[^46]

25. Petitioners argue that Verizon's proposed timing provisions for
    deposit payments and termination of service are unjust,
    unreasonable, and violate the Commission's rules.[^47] The
    Association of Communications Enterprises claims that Verizon's
    proposed tariff revisions provide inadequate time, i.e., ten days,
    to assess Verizon's determination that a carrier must make a
    security deposit, and contain no provision to dispute the accuracy
    of such a determination.[^48] The Association of Communications
    Enterprises claims that such unilateral nature of the deposit timing
    provision is unjust and unreasonable in violation of section 201 of
    the Act, because, if the customer does not comply with Verizon
    determination within 10 days, Verizon could discontinue all
    services, including those provided under other tariffs.[^49]

### Discussion

26. The second issue designated for investigation is whether Verizon's
    proposals to reduce from 30 days to 7 days the notice required
    before termination of a service may occur and to require a customer
    to provide a security deposit and advance payments within 10 days of
    written notice are just and reasonable. We direct Verizon to respond
    to the matters discussed below and provide the requested information
    in its direct case. Nonetheless, Verizon may, as part of its direct
    case, seek to justify the reduced notice provisions in its proposed
    tariff revision.

27. As part of its direct case, Verizon shall explain why it believes
    that the security deposit and advance payment provisions it proposes
    are inadequate and why it needs shortened notice periods as well.
    Verizon shall explain why a ten-day deadline for payment of security
    deposits is (1) necessary to protect its interests and (2) adequate
    to allow a customer to assess Verizon's determination that a deposit
    is required, dispute that determination, and raise the necessary
    funds. Verizon shall also submit information for the most recent
    twelve months as to the timeliness of its billings. In this
    connection, it shall state the billing date, the delivery date
    (indicating whether it was by mail or electronically), and the due
    date for each billing cycle. It shall also address whether the
    Commission should prescribe the time within which a bill must be
    presented to the customer if a shortened notice period is allowed,
    in order to permit the customer sufficient time to review the bill
    and pursue its dispute rights. In particular, Verizon should address
    whether it could meet the three-day requirement the Commission
    adopted in 1987.[^50]

## Refund of Deposits 

### Background

28. The proposed tariff revision provides that a security deposit
    requested pursuant to any one of the six criteria will be returned
    to the customer at the customer's written request, if the customer
    satisfies all of the following: (1) the customer's account balance
    has been paid in full, (2) the customer no longer satisfies any of
    the six criteria for requiring a security deposit, and (3) the
    customer has not met the six criteria for a period of at least one
    year.[^51]

29. Certain petitioners assert that the refund language is unreasonable
    and there is no justification for Verizon to keep any deposit for so
    long.[^52]

### Discussion

30. The third issue designated for investigation is the reasonableness
    of the deposit refund provision. The refund provision requires a
    written request for a refund and ties the refund obligation to the
    six criteria used to determine if a security deposit is required. We
    direct Verizon to explain why it should not include provisions that
    provide it will periodically review the need for a security deposit
    and why it should not make refunds after timely payments have been
    received for twelve months. We further direct Verizon to explain why
    the proposed refund provision is not unreasonable, vague, and
    ambiguous for the same reasons identified for issue A, above.
    Verizon should also explain when and how interest received on "a
    cash deposit" will be paid to a customer under its proposed
    provisions.[^53] Verizon should also clarify whether the term "cash
    deposit" includes a cash "security deposit" under Sections
    2.4.1(A)(2).[^54] Nonetheless, Verizon may, as part of its direct
    case, seek to justify the security deposit refund provisions in its
    proposed tariff revision.

## Application of Revised Deposit Requirements to Term Plan Customers

### Background

31. Several petitioners assert that Verizon has not demonstrated
    substantial cause for a material change in a provision of a term
    plan, citing *RCA Communications, Inc*.[^55] For example, WorldCom
    states that the revisions fail the substantial cause test, under
    which the Commission measures the reasonableness of a tariff
    modification during a term plan by weighing two principal
    considerations: the carrier's explanation of the factors
    necessitating the desired changes at that particular time; and the
    position of the relying customer.[^56] WorldCom asserts that Verizon
    has not shown that it has experienced any material change in its
    business circumstances, much less a change that would constitute an
    injury to Verizon that would outweigh the existing customers'
    legitimate expectations of stability.[^57] Moreover, WorldCom states
    that the increase in uncollectibles is merely the normal effect of
    the business cycle, constituting only 1.2 percent of Verizon's
    interstate revenues, and with only a negligible effect on Verizon's
    financial performance, which produced an interstate return of 17.1
    percent in 2001.[^58]

### Discussion

32. The fourth issue designated for investigation is whether the
    imposition of revised security deposit and advance payment
    provisions constitutes a material change to Verizon's term
    contracts, and, if so, whether it is reasonable for Verizon to apply
    the revised security deposit and advance payment provisions to term
    plans. If a carrier would have to provide a new or increased
    security deposit or make advance payments to Verizon, its operating
    capital would be significantly reduced. This could affect other
    capital or loan commitments it had, potentially causing the carrier
    to need to restructure or terminate some services that would then
    trigger a termination penalty. This would be a serious destabilizing
    event in the competitive marketplace. We direct Verizon to respond
    to the matters discussed below and provide the requested information
    in its direct case. Nonetheless, Verizon may, as part of its direct
    case, seek to justify applying the revised security deposit and
    advance payment provisions to term plans.

33. Verizon shall explain in its direct case the reasons increased
    security deposits and advance payments should be required of
    customers with existing term plans and how that is consistent with
    the Commission's decision in *RCA Communications, Inc.* This could
    have significant financial and competitive consequences for existing
    term plan customers that, in most cases, would also be competitors
    of Verizon or its long-distance affiliate. Verizon shall provide the
    Commission with data on the share of its interstate access revenues
    that are received from services subject to term plans and, of that
    amount, what portion is attributable to services that are paid or
    billed in advance. If the majority of term plans require prepayment,
    the risk to Verizon would appear to be much less than if they were
    all paid in arrears. Moreover, we recognize that when customers'
    existing term plans expire Verizon will be able to apply prevailing
    security deposit or advance payment provisions to new plans taken by
    such carriers.

# PROCEDURAL MATTERS

## Filing Schedules

34. This investigation is designated WC Docket No. 02-317. The Verizon
    Telephone Companies is designated a party to this investigation.
    Verizon shall file its direct case no later than October 28, 2002.
    The direct case must present Verizon's position with respect to the
    issues described in this Order. Pleadings responding to the direct
    cases may be filed no later than November 12, 2002, and must be
    captioned "Oppositions to Direct Case" or "Comments on Direct Case."
    Verizon may file a "Rebuttal" to oppositions or comments no later
    than November 19, 2002.

35. 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 6-C222, 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. 02-317. 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. 02-317. 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.

36. 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           |
+-----------------------------------+----------------------------------+

37. 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}

38. 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.[^59] Other rules
    pertaining to oral and written presentations are also set forth in
    section 1.1206(b).

39. 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 6-C222, 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}

40. 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}

41. 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.

42. IT IS FURTHER ORDERED that the Verizon Telephone Companies SHALL BE
    a party to this proceeding.

43. IT IS FURTHER ORDERED that the Verizon Telephone Companies 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]: *The Verizon Telephone Companies*, Tariff FCC Nos. 1, 11, 14 and
    16, Transmittal No. 231 (Aug. 6, 2002).

[^3]: *The Verizon Telephone Companies*, Tariff FCC Nos. 1, 11, 14 and
    16, Transmittal No. 226, Order, DA 02-2055 (WCB, rel. Aug. 22,
    2002).

[^4]: 47 U.S.C. §§ 201 and 202.

[^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 (1986). BellSouth apparently never implemented
    this provision.

[^8]: For rate-of-return carriers, uncollectibles are reflected in the
    rate base that they use to calculate the 11.25% 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% rate of return.
    *See* 47 C.F.R. § 69.3(b).

[^9]: 47.C.F.R. § 61.45(b).

[^10]: 47 C.F.R. § 61.45(d)(1)(vii).

[^11]: 47 C.F.R. § 61.45(d).

[^12]: Verizon Telephone Companies, Tariff FCC No. 1, Section 2.4.1(A).

[^13]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2-26.

[^14]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.1.

[^15]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.1.

[^16]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2-26 and Original Page
    2-26.1.

[^17]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.3.

[^18]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2.7 and 1^St^ Revised Page
    2-8.

[^19]: Verizon Telephone Companies, Tariff FCC Nos. 1, 11, 14 and 16,
    Transmittal No. 226, Description and Justification at 9, 6.

[^20]: *Id.* at 6.

[^21]: Verizon Telephone Companies, Tariff FCC Nos. 1, 11, 14 and 16,
    Transmittal No. 226, Petition of AT&T Corp. (Aug. 1, 2002) (*AT&T
    Petition*); Petition of Sprint to Reject or Alternatively Suspend
    and Investigate (Aug. 1, 2002) (*Sprint Petition*); WorldCom
    Petition to Reject or, in the Alternative, Suspend and Investigate
    (Aug. 1, 2002) (*WorldCom Petition*); Petition to Reject or,
    Alternatively, to Suspend and Investigate of ALTS, Broadview
    Networks, Inc., the Competitive Telecommunications Association, KMC
    Telecom Holdings, Inc., Talk America Inc., and XO Communications,
    Inc. (Aug. 1, 2002) (*ALTS* *Joint Petition*); Petition to Reject or
    Suspend and Investigate Proposed Tariff Revisions of the Association
    of Communications Enterprises, Business Telecom, Inc., DSL.net,
    Inc., ATX Communications, Inc., CTC Communications Corp., Focal
    Communications Corp., Freedom Ring Communications, LLC, Level 3
    Communications, LLC, PaeTec Communications, Inc., Pac-West Telecomm,
    Inc., and US LEC Corp. (Aug. 1, 2002) (*Association of
    Communications Enterprises Joint Petition*).

[^22]: Verizon Telephone Companies, Tariff FCC Nos. 1, 11, 14 and 16,
    Transmittal No. 226, Reply Comments of Verizon to Petition to Reject
    or Suspend and Investigate (Aug. 7, 2002).

[^23]: *See, e.g.,* Verizon Telephone Companies, Tariff F.C.C. No. 1,
    Section 2.4.1(A).

[^24]: *See* para. 4, *supra. See also, e.g.,* Verizon Telephone
    Companies, Tariff FCC No. 1, Transmittal No. 226, 1^st^ Revised Page
    2-26.

[^25]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.1.

[^26]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.3.

[^27]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2.7 and 1^St^ Revised Page
    2-8.

[^28]: AT&T and WorldCom allege that Verizon's tariff filing violates a
    Commission prescription from 1984. *See* *supra*, note 5; AT&T
    Petition at 4-7; WorldCom Petition at 5-7. Even if these parties are
    correct, a tariff investigation is a valid means of reviewing a
    Commission prescription. *Pacific Northwest Bell Telephone Company*,
    Revisions to Tariff FCC No. 9, Transmittal No. 159, Memorandum
    Opinion and Order (rel. Oct. 11, 1985).

[^29]: 47 U.S.C. §§ 201(b) and 202(a). *See, e.g*., AT&T Petition at 8;
    WorldCom Petition at 14-18; Sprint Petition at 8-9; ALTS Joint
    Petition at 14-15.

[^30]: 47 C.F.R. §§ 61.2 and 61.54. *See, e.g*., WorldCom Petition at
    2-5, 9-14; AT&T Petition at 4-8, 13-14, 8-10; Sprint Petition at 5,
    6-8.

[^31]: *See, e.g*., AT&T Petition at 9-10; Sprint Petition at 9.

[^32]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2-26.

[^33]: *See, e.g.,* 11 U.S.C. §§ 361(explaining what constitutes
    "adequate protection" under sections 362, 363 and 364 of the
    Bankruptcy Code), 366, and 547.

[^34]: *See, e.g*., WorldCom Petition at 8-9; ALTS Joint Petition at 11;
    Association of Telecommunications Enterprises Joint Petition at
    10-12.

[^35]: WorldCom Petition at 8-9.

[^36]: *See, e.g.,* 11 U.S.C. § 366.

[^37]: 47 C.F.R. § 61.54(j).

[^38]: Verizon Tariffs FCC Nos. 1, 11, 14 and 16, Section 2.4.1.

[^39]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.1 (proposed Section
    2.4.1(A)(3) states that "the estimated future charges for the next
    bill month will be based on the customer's average monthly billed
    account balance during the most recent three (3) monthly billing
    periods . . . . Within six (6) months following payment of the first
    advance payment assessed, the Telephone Company shall adjust the
    required advance payment to true up the difference between the total
    charges billed and the advance payment received by the Telephone
    Company and will adjust the monthly advance charge to reflect the
    revised amount until further revised. The Telephone Company will
    conduct similar true ups no less than twice a year thereafter. An
    advance payment is not a deposit, and no interest will accrue on any
    true up balance for the advance payment.").

[^40]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2-30.

[^41]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Page 2-26.

[^42]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.3.

[^43]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, 1^st^ Revised Pages 2-7, 2-8, and 2-9.

[^44]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.2.

[^45]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.2.

[^46]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.1.

[^47]: *See, e.g.,* AT&T Petition at 7-8 and 13.

[^48]: Association of Communications Enterprises Joint Petition at 13.

[^49]: Association of Communications Enterprises Joint Petition at 13.

[^50]: *See, Annual 1987 Access Tariff Filings,* Memorandum Opinion and
    Order, 2 FCC Rcd 304-05.

[^51]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.3.

[^52]: *See, e.g.,* AT&T Petition at 12.

[^53]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.3 (proposed Section 2.4.1
    (A)(5) states that "\[i\]n case of a cash deposit, for the period
    the deposit is held by the Telephone Company, the customer will
    receive interest at the same percentage rate as that set forth in
    (B) (3) (b) (I) or in (B) (3) (b) (II), whichever is lower. The rate
    will be for the number of days from the date the customer deposit is
    received by the Telephone Company to and including the date such
    deposit is credited to the customer's account or the date the
    deposit is refunded by the Telephone Company. Should a deposit be
    credited to the customer's account, as indicated above, no interest
    will accrue on the deposit from the date such deposit is credited to
    the customer's account.").

[^54]: *See, e.g.,* Verizon Telephone Companies, Tariff FCC No. 1,
    Transmittal No. 226, Original Page 2-26.3.

[^55]: *RCA Communications, Inc., Revisions to FCC Tariff Nos. 1 and 2,*
    CC Docket No. 80-766, Transmittal Nos. 191 and 273, Memorandum
    Opinion and Order, 94 FCC 2d 1338 (1983). *See e.g.,* WorldCom
    Petition at 14-18; Sprint Petition at 8-9; and ALTS Petition at
    14-15.

[^56]: WorldCom Petition at 16-17.

[^57]: WorldCom Petition at 17.

[^58]: WorldCom Petition at 18.

[^59]: *See* 47 C.F.R. §1.1206(b)(2), as revised.