Baby Bells Seek Upfront Payments
The nation’s three biggest regional telephone companies are seeking government approval to demand millions of dollars in upfront payments from financially troubled carriers that use their networks.
The requests from SBC Communications Inc., Verizon Communications Inc. and BellSouth Corp. are receiving serious consideration from the Federal Communications Commission, which already allows long-distance carriers such as AT&T; Corp., WorldCom Inc. and Sprint Corp. to demand upfront payments from users of their long-distance networks.
The payments would accelerate the collection of an estimated $8.5 billion that the so-called Baby Bells and other local phone companies receive annually for connecting long-distance calls to the local phone network.
But industry groups and some financial analysts warn that granting such payments could push strapped carriers over the financial brink and exacerbate the woes of companies such as WorldCom, which last month filed the biggest bankruptcy in U.S. history.
“What the Bells are requesting is commercially unreasonable,” said H. Russell Frisby Jr., president of CompTel, a Washington trade group that represents long-distance companies and local phone competitors of the Baby Bells. “It will potentially wreak financial havoc on our members.”
Verizon, which filed comments with the FCC on Wednesday in support of its request, said uncollectable debt from other carriers that use its network has more than doubled to $110 million in 2001 from $38 million in 2000.
“Carrier debt has been increasing,” said Edward D. Young III, a senior vice president at Verizon. “We don’t want the average ratepayer to suffer when these carriers encounter financial difficulty.”
Likewise, SBC said WorldCom owed it more than $300 million before the long-distance carrier filed for bankruptcy protection.
“Today’s crisis is attributable not only to the behavior and failed business models of companies like WorldCom, but also to the well-intentioned but failed regulatory policies these companies have so cynically exploited for the past six years,” SBC President William Daley said last week in announcing that SBC would seek upfront payments.
To ward off deadbeats, the Bells have proposed that users of their networks with the lowest investment-grade credit rating, among other criteria, pay upfront for service. Verizon is seeking two months of advance payments; SBC has asked for one month upfront.
Because virtually all telecom competitors of the Baby Bells carriers are saddled with junk-bond credit status, the effect of upfront payments would be widespread.
If granted, the Bells’ proposals could trigger retaliation from long-distance carriers that already have the authority to require upfront payments. Moody’s Investors Service, for instance, announced Thursday that the finances of BellSouth, Verizon and SBC Communications are under close study and that the companies may have their credit ratings cut as a result.
Rivals of the Baby Bells were initially heartened last month when the FCC suspended a request from BellSouth to impose upfront payments. FCC Chairman Michael K. Powell later told a Senate panel July 30 that he would not be “easily rolled over” by other Bell requests for upfront payments.
Since then, there has been a shift in FCC sentiment, although agency officials caution that the issue remains under discussion.
Still, FCC and industry sources say the agency probably will act quickly to allow upfront payments, although it is unlikely that the amounts will be as large as the Bells are requesting.
One FCC official said the agency is wrestling with striking a balance that “doesn’t put carriers like WorldCom out of business but protects [the Bells] from very huge credit exposure.”
The Bells still “are healthy companies” after all, said the official, hinting at the criticism Powell has received from some members of Congress that the FCC isn’t doing enough to police the industry and protect consumers from service disruptions.
