So, what can the FCC do to support companies in rural America in the face of the recent bankruptcies? First, the FCC must let rural telcos protect themselves from customers whose credit ratings are tumbling -- before they stop paying their access bills. The FCC also must realize that predicting slow payers and nonpayers is a very difficult problem. Such an assessment will likely require different methods for large and small customers, and it may require assessing all customers for the losses caused by a few.
Without this protection, bad business decisions made by access customers who spent recklessly and those who committed outright fraud will continue to endanger the health of rural telcos. Already, the National Exchange Carrier Association's (NECA) pool members estimate Global Crossing and WorldCom alone owe about $70 million in unpaid, interstate access fees prior to their bankruptcies. In its opposition to NECAs and other telco proposals, WorldCom says telcos do not have the right to require deposits from companies who look and act financially sick before they develop a poor payment history.
During the five-month suspension period, the FCC will investigate telco proposals for limiting their accounts receivable risk for interstate access services. It has two basic options to choose from: Requiring deposits or building uncollectibles into access rates.
The telcos want to extend these options to carriers with deteriorating financial conditions -- before a crisis occurs. To limit risk, they also want to shorten the time between recognizing a credit problem and acting.
Additional deposits, prepayments and terminating service are company-specific actions to help limit potential losses from customers with high financial risk. They affect only those customers that are likely to be or actually are poor credit risks. Raising access rates, in contrast, assesses all customers in a customer class -- in this case, all interstate access customers.
On a technical level, the basic problem is not with the proposed remedies; it is with the indicators used to trigger a telco response to increased financial risk. The triggers must be fair; use objective standards; be easy to administer; and be highly correlated with the likelihood of late or nonpayment of bills. This is a tall order when some customers are billion-dollar, publicly traded enterprises and others are small and privately held.
BellSouth Corp. solves the big/small problem by confining its remedies to customers with more than $1 million of business per month -- typically, publicly traded companies. BellSouth wants to require deposits from customers that have been identified by standard indicators as financially distressed. Its shopping list of indicators includes Dun and Bradstreet's credit rating; the number of years in business; D&B's Paydex, which measures how much a customer owes another; liens, suits and judgments; financial stability as measured by Altman Z score, which is a function of cash flow, net worth, debt-to-net-worth, and profitability; Moody's Accelerate, if a company's financial statements are available; debt-rating trends; news articles and stock performance.
The obvious question is how to weigh these indicators into an objective score so a thirdparty like the FCC could replicate BellSouth's decision. This is one of the sticking points with BellSouth and other telco proposed tariff revisions, but it is not the only one.
Rural telcos need different treatment because they are small and so are many of their access customers. Administering a sophisticated financial risk system is too costly for them. Instead, NECA proposes a simple method based on the existence of any one of the following three conditions:
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The customer has established a proven history of late payments, which is defined as two or more occurrences in the preceding 12 months
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The customer's average bill for the preceding three months has increased beyond its currently held deposit, if applicable
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The company becomes aware that a customer's debt rating has fallen below BBB according to Standard and Poor's or an equivalent rating by another agency. For those customers that do not issue debt, credit worthiness is defined as a D&B rating of "good" or a Paydex score published by D&B of at least "average"
Like the big telcos' conditions, NECA's plan suffers from being inexact but at least it is administratively doable by small, rural telcos. They have limited financial resources and don't have statistical modelers working for them. Yet, they must do something to limit risk because at least 50 percent of their revenue is derived from interstate access services and universal service.
NECA also has chosen to file for interstate access rate increases to cover expected losses from late and nonpayments for the remainder of the current tariff period. This approach recognizes that it is too costly to target accurately all the poor credit risks. Instead, the risk is spread over all access customers. The FCC also has suspended this proposal.
Setting standards for extending short-term credit to a customer would not be an issue except that telcos are classified as dominant carriers and their access customers also may be their biggest competitors. In nonregulated industries, a company's credit policy is one of many strategic decisions made to boost profits, or in this case, limit losses. If a company has a misguided credit policy, it will lose valuable customers.
The FCC says even a rural telco has monopoly power over its customers because it owns the local loops. Access customers have claimed telcos are using the bankruptcies to gain a competitive advantage in the marketplace by forcing them to tie up their capital in deposits.
The telcos, in response, say they are absorbing all the potential losses from financially distressed customers. The bankruptcy courts did not allow them to disconnect even Global Crossing and WorldCom. Their nightmare is carrying traffic for customers who may stop paying their bills and sinking into bankruptcy from no fault of their own.
The FCC probably wants to see this problem fade away without granting the telcos additional protection because it is in a bind. It does not want to put added financial burdens on long distance carriers and CLECs when they are already suffering financially. The FCC wants competitors to succeed in the marketplace. If it needs to provide them a helping hand, the FCC will do so. It's hoped the economy will improve and unleash pent up demand for telecom-munications services. However, even if industry conditions improve, the FCC still needs to allow telcos to write off claims against a funding source. In the meantime, telcos better hold their breaths, or better yet, hope for the good health of Qwest, Sprint, and AT&T.
Victor Glass is director of demand forecasting and rate development at NECA. He can be reached at vglass@neca.org. Formed in 1983 by the FCC as a not-for-profit membership corporation, NECA plays a role in administering the FCC's access charge plan and administers various other federal and state programs related to telecom.
