20020822Worldcom Comments.pdf

DeanJ.Miller ISB#l968
McDEVITT &MILLER LLP
420 West Bannock Street
P.O.Box 2564-83701
Boise,Idaho 83702
Tel.:[phone]
Fax:[phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )
OF CENTURYTEL OF THE GEM STATE,INC.)AND CENTURYTEL OF IDAHO,INC.FOR )APPROVAL OF A TARIFF ADVICE )Case No.GNR-T-02-011
CONTAINING DEPOSIT REQUIREMENTSBY )INCUMBENT LOCAL EXCHANGE CARRIERS )
FOR INTEREXCHANGE CARRIERS.)
COMMENTS OF WORLDCOM,INC.
WorldCom Inc.("WorldCom"),on behalf of its regulated subsidiaries,hereby
submits its comments to reject the proposed tariff advice proposing to change the deposit
requirements for Interexchange Carriers ("IXCs")filed by CenturyTelof the Gem State,
Inc.and CenturyTel of Idaho,Inc.("CenturyTel")on July 12,2002.
I.PreliminaryIssue
With respect to WorldCom,CenturyTel'sTariff Applicationis moot and
superceded by Order of the United States BankruptcyCourt.
CenturyTel filed this tariff application on July 12,2002.On July 21,2002
WorldCom commenced a case under Chapter 11 of the United States Bankruptcy Code
(the Bankruptcy Code)in the Southern District of New York.As part of its initial filing,
WorldCom filed what is known as a "Utility Motion"seeking an order establishing
WORLDCOM COMMENTS 1
procedures by which WorldCom would provide adequate assurance of payment to utility
companies.Local exchange companies that provide access and related services to
WorldCom are included within the definition of "utility companies."The utility
companies were given the opportunity to object to the Proposed Adequate Assurance.
Followingreceipt of numerous objections'WorldCom submitted a Revised Adequate
Assurance.The BankruptcyCourt held a hearing on August 12,2002 to determine
whether the Revised Adequate Assurance satisfied the requirements of the Bankruptcy
Code.On August 14,2002 the Bankruptcy Court entered its Order approving,as
modified,the Revised Adequate Assurance.
Attached hereto are the Court's August 14,2002 Order and WorldCom's
Omnibus Response to Requests for Additional Adequate Assurances dated August 12,
2002.Taken together,these two documents provide additional factual and legal detail
regarding the bankruptcy proceeding.As can be seen from the August 14 Order,the
Bankruptcy Court rejected requests for deposits of the kind CenturyTelseeks in this
proceeding.
Pursuant to section 366 of the Bankruptcy Code,a debtor's utilities may not alter,
refuse or discontinue service against a debtor.Following a twenty-dayperiod,however,
utilities arguably may discontinue service to the debtor if the debtor does not provide
adequate assurance of future performance.Here,the Bankruptcy Court has determined
that WorldCom has provided adequate assurance of future performance.The
determination of the Bankruptcy Court is conclusive and WorldCom's creditors cannot,
in other forums,request more security than the Bankruptcy Court has granted.
*On informationand belief,WorldCom alleges that CenturyTel was a represented party in objections filed
to the Proposed Adequate Assurance.Even if it was not,the Bankruptcy Court Order supercedesCenturyTel'stariff filing,as explained below.
WORLDCOM COMMENTS 2
Accordingly,if the Commission is otherwise inclined to approve CenturyTel's
Tariff ,the Commission must defer to the exclusive jurisdiction of the Bankruptcy Court
and hold that the tariff may not be applied to WorldCom and its subsidiaries and
affiliates.
Irrespective of the legal effect of the Bankruptcy filing with respect to WorldCom,
there are other legal and policy reasons which justifyrejection of the Tariff as it applies
to all carriers.These are explained below.
II.Introduction and Summary
CenturyTel proposes to substantially revise Section 2.4.l(A)of its intrastate
access tariff.The proposed tariff revisions would significantlyincrease the number of
customers from whom CenturyTelcould request a security deposit.Whereas the existing
tariff language specifies that CenturyTelmay request a security deposit from a new
customer only if that customer does not have established credit.The proposed language
would allow CenturyTelto request a security deposit from new customers "[based on
[CenturyTel's]review of the Customer's credit worthiness.'92 And,whereas the existing
tariff language permits CenturyTel to demand a security deposit only from those existing
customers that have a historyof late payments,the new tariff language would permit
CenturyTel to demand a security deposit from an existing customer at any time "when
customer's credit worthiness has fallen below commercially acceptable levels and/or if its
2 Advice No.2002-10,1"revised page 2-19.
WORLDCOM COMMENTS 3
gross monthly billing has increased beyond the amount initially used to estimate a
security deposit ...."3
The Commission should reject CenturyTel'sproposed tariff language because (1)
it seeks to expand a Commission prescription;(2)the proposed tariff language is unjust
and unreasonable in violation of Idaho Code §61-303 and Section 201(b)of the Act;and
(3)CenturyTel'sproposed tariff denies or restricts customers'rights protected by
Commission rules.
III.CenturyTel'sProposed Tariff Advices Seek to Expanda CommissionPrescription
The existing security deposit language in Section 2.4.l(A)of CenturyTel's
intrastate access tariff was prescribed by the Telephone Customer Relations Rules
(TCRR).This chapter has the followingscope:These rules provide a fair,just,
reasonable and non-discriminatory rules to address areas of disagreement between
incumbent local exchange companies ("ILECs")and IXCs with regard to deposits,
guarantees,denial of service and termination of service.Specifically TCCR 101 through
199 are specific to residential and small business deposit and guarantee requirements.
The Commission has made no provision for the ILECs to propose or try to justify
alternate criteria to demand a deposit from any additional classes of customers --IXCs --
or to expand the definition of "customer"to include IXCs.
There cannot be any doubt that the tariff language proposed by CenturyTel seeks
to expand the Commission's prescription.The rule prescribed by the Commission states
that ILECs may demand or hold a deposit from residential and small business customers
3 Id.
4 IDAPA 31.41.01101
WORLDCOM COMMENTS 4
only.In particular,CenturyTel may not request deposits from any of the additional
classes of customers named in its tariff filings --new customers whose "credit
worthiness"is found wanting by CenturyTel,existing customers whose "credit
worthiness"has fallen or existing customers whose gross monthlybillinghas increased
beyond the initial amount used to estimate a security deposit.
Given that the tariff language proposed would expand a Commission prescription,
the Commission cannot permit that language to take effect unless the Commission adopts
an order modifying,suspending,or setting aside the prescription.Therefore,the
Commission should reject CenturyTel'stariff filings.
IV.The Proposed Revisions of the Security Deposit Provisions are Not Just
and Reasonable.
CenturyTel'sproposed terms and conditions are unjustand unreasonable in violation
of Idaho Code §61-303 and of Section 201(b)of the Act.Specifically,the proposed
terms and conditions do not strike a reasonable balance between protecting CenturyTel
against nonpayment and placing unnecessary and excessive burdens on CenturyTel's
customers.Moreover,the proposed terms and conditions do not provide any objective
criteria for when CenturyTelwould deem a customer's credit worthiness has fallen below
commercially acceptable levels.If the Commission were to approve this filing,the
Commission would be delegating its authority to CenturyTelor a third party credit
reporting service for their interpretation.
A.The Commission Rule already Protects CenturyTel
The Commission struck a reasonable balance between protecting ILECs against
nonpaymentand placing excessive burdens on customers.The Commission struck that
WORLDCOM COMMENTS 5
balance by permitting ILECs to request security deposits from two higher-risk categories
of customers --new customers without established credit and existing customers with a
history of late payments --but not from any other customers.
By dramatically increasing the number of customers that could be assessed
security deposits,the proposed tariff language would upset the balance the Commission
established in the rules.Whereas the security deposit requirement prescribed by the
Commission allows CenturyTelto request deposits only from new customers and
customers with a history of late payment,the tariff language proposed would allow
CenturyTel to request a security deposit from any customer whose level of billing
increases or whose "credit worthiness"has fallen below commercially acceptable levels
as determined by an independent credit rating or reporting service.Because virtually
every customer's credit worthiness fluctuates or level of billing increases,the language
proposed would apparently permit CenturyTel to request a security deposit from virtually
any customer includingother ILECs.
Moreover,CenturyTel is further protected against bad debt by the Commissi'on's
ratemaking process.As a rate-of-return carrier,CenturyTel may include an allowance for
uncollectibles in the revenue requirement used to develop intrastate access rates.
B.The Proposed Terms and Conditions are Not Just and Reasonable
CenturyTel'sproposed tariff language is not narrowlytargeted to addressing the
specific changes in the level of risk;instead,it shifts the balance between the interests of
CenturyTel and its customers dramatically in the direction of CenturyTel.
First,the tariff language is not narrowlytargeted only to specific customers that
are responsible for the alleged increase in risk.Indeed,the broad language proposed by
WORLDCOM COMMENTS 6
CenturyTel would apparently permit CenturyTE :o request security deposits even from
customers that present a low risk to CenturyTel.For example,it is doubtful that
customers "whose gross monthlybilling has increased beyond the amount initiallyused
to estimate a security deposit"necessarily present a greater risk than customers whose
monthlybilling is unchanged or has declined.Similarly,it is not obvious that customers
whose "credit worthiness has fallen"present a greater risk than customers whose "credit
worthiness"has not changed but was low to begin with.And it is not obvious that a
"decrease"in credit worthiness,no matter how slight,increases CenturyTel'srisk by a
material amount.
Second,the size of the required deposit,i.e.,two months'billing,in cash,is not
commensurate with the level of risk imposed by the groups targeted by the proposed
tariff language.While two months billing may have been an appropriate security deposit
for customers without established credit or a history of late billing,it is absurd to suggest
that two months'billing,in cash,is commensurate with the level of risk imposed by a
customer that does not have a history of late billing,has good credit worthiness,but still
falls within the scope of the new tariff language because its credit worthiness has
"fallen."
By targeting broad groups of customers,and by authorizing deposits far in excess
of the amount necessary to compensate CenturyTel for the risk associated with those
customers,the proposed tariff language would go far beyond simply reestablishing the
balance struck by the Commission Rules.Rather,the proposed tariff language would
emphatically shift that balance in the direction of CenturyTel'sinterests by virtually
eliminating CenturyTel'srisk of nonpayment.But the Commission has no obligation to
WORLDCOM COMMENTS 7
eliminate CenturyTel'srisk of nonpayment.After all,no non-ILEC has the ability to
eliminate its risk of nonpayment completely.Carriers operating in a competitive market
must balance their desire to reduce uncollectibles against the possibility that overly
stringent terms will cause customers to defect to other carriers.
C.The Proposed Terms and Conditions are PotentiallyDiscriminatory
The overbroad tariff language proposed is potentiallydiscriminatory because it
gives CenturyTel virtuallyunfettered discretion to decide which customers will be
assessed the security deposit.Not only is the proposed tariff language vague and
ambiguous,as discussed in more detail below,but the proposed tariff language grants
CenturyTel further discretion by stating that CenturyTel "may"assess a security deposit
or "reserves the right"to assess a security deposit.5 Such discretionary language is
potentiallyunreasonably discriminatory in violation of Section 202(a)of the Act.
CenturyTel could,for example,request deposits only from competitive local exchange
carriers ("CLECs")and unaffiliated IXCs,but not from its own affiliates or from "retail"
special access customers.
Even worse,the unfettered discretion afforded CenturyTelunder the tariff allows
CenturyTel to use the security deposit provisions of its tariff in an anticompetitive
manner.Virtuallyall of CenturyTel'saccess customers are also its competitors;many
CLECs compete with CenturyTelin the local market using special access circuits
purchased from CenturyTel'sintrastate access tariff.By allowingCenturyTel to request
5 Advice No.2002-10,'1"revised page 2-19 ("In order to safeguard its interests,the
TelephoneCompany...""A security deposit or an additional security deposit may be
required ....")
WORLDCOM COMMENTS 8
a cash deposit,in die amount of two months billing,from virtuallyany of CenturyTel's
competitors,the proposed tariff language would permit CenturyTel to deprive its
competitors of large amounts of capital that they would otherwise use to build out their
networks or develop services to compete against CenturyTel.
D.The Proposed Tariff Provisions are Vague and Ambiguous
The Commission should reject CenturyTel'stariff filings because the proposed
provisions are vague and ambiguous.
First,the proposed tariff language is unreasonably vague and ambiguous because
it does not state how "credit worthiness"would be measured.As a result,customers are
unable to determine whether the tariff s security deposit provisions apply to them.
Moreover,because "credit worthiness"is not defined,CenturyTel could (1)discriminate
unreasonablyby applying different credit worthiness standards to similarly-situated
customers;or (2)change its standards for measuring credit worthiness without notice.
Second,even if the term "credit worthiness"were clearly defined,the propose,d
tariff language would still be unreasonablyvague and ambiguous.Pursuant to the
proposed tariff,CenturyTelcould request a deposit whenever a customer's credit
worthiness "has fallen".Specifically,CenturyTel does not say whether the change in
credit worthiness will be measured relative to (1)the previous month's credit worthiness;
(2)the customer's initial credit worthiness;(3)the highest level of credit worthiness ever
achieved by the customer;or (4)some other level of credit worthiness.
Third,the proposed tariff language does not explain whether or when CenturyTel
will return deposits collected from existing customers whose billinghas increased or
whose credit worthiness has fallen.Preexisting language in CenturyTel'stariff provides
WORLDCOM COMMENTS 9
that deposits will be returned in a year as long as the customer has established a prompt
payment record.But that preexisting language was prescribed by the Commission to
apply to deposits collected from new customers without a credit history or existing
customers with a history of late payments.It is not clear whether CenturyTel intends
that language to also apply to deposits collected from existing customers whose billing
has increased or whose credit worthiness has fallen,or if CenturyTel intends to hold
those customers'deposits indefinitely.
V.CenturyTel'sproposed tariff language denies or restricts customers'rights
protected by the Commission Rules.
The proposed language regarding termination of service is in violation of IDAPA
31.41.01011 (Rule 11).This rule prohibits any company's tariff that contains provisions
that deny or restrict customers'rights protected by any of the rules when it states that the
rules shall supersede any conflicting tariff that deny or restrict any of those rights.
CenturyTel'stariff language raises similar problems under federal law and federal
jurisdiction as well:47 U.S.C.§§201 (requiring physical connections and just charges);
214 (procedures and restrictions on discontinuance of service);and 251 (interconnection
obligations),all of which would prohibit or limit all or part of CenturyTel's"deposit or
disconnection"ultimatum.
Consumers will be disadvantaged on their choice of long distance carriers should
CenturyTel be allowed to disconnect access service.For example,if WorldCom chooses
not to pay a deposit and CenturyTel disconnects its access service,CenturyTel's
proposed tariff can be seen to be discriminating against customers who choose
WorldCom,for example,as their presubscribed interexchangecarrier as opposed to those
who choose a competitor to WorldCom,who presumably would not have their service
WORLDCOM COMMENTS 10
disconnected by CenturyTel.Likewise,CenturyTel can also be seen to be disadvantaging
its own customers as opposed to customers of other local exchange carriers in that other
customers would have the additional choice of WorldCom for long distance service,a
choice CenturyTelwants to deny its own customers.Either way,Century's
disconnection policy is unlawful and must be denied.
CenturyTel'sproposal to revise the security deposit regulations applicable to
existing term plan and contract tariff customers in mid-term fails to meet the
Commission's "proofof a credit risk".Customers have legitimate expectations for
stability in term arrangements.
Contrary to term plan customers'expectation for stability,the proposed tariff
language would change CenturyTel'stariff to allow CenturyTel to request security
deposits from such customers and to cancel existing term arrangements if those
customers did not provide the requested security deposit.6 The new tariff provisions
would clearlyrepresent a revision of material provisions of existing term plans.When
existing term plan customers entered into their term arrangements,they relied on '
CenturyTel'sexisting tariff language that permits CenturyTelto discontinue a term plan
only in conjunctionwith a discontinuance of service pursuant to Section 2.1.8(A)of
CenturyTel'stariff.
VI.Other Concerns
The Commission had some concerns that they wanted the commenters to address.
WorldCom did address some of these concerns in its comments above.Below are the
remaining concerns WorldCom will address.
6 Advice No.2002-10,proposed Sections 2.4.l(A).
WORLDCOM COMMENTS 11
Would it be proper to have state requirements regarding these proposed security
deposits that track those that may be endorsed by the FCC?
Since the FCC has not established relevant security deposit requirements,
WorldCom cannot agree to this in the abstract.However,as a general rule,WorldCom,
as an international provider of telecommunications services,endorses state and federal
uniformity and consistency in order to minimize exceptions to business rules.
If an IXC is providingboth intrastate as well as interstate interexchangeservices,
would having a state standard and an FCC standard be problematic?
Yes this is problematic.Since intrastate and interstate traffic presumably traverse
the same circuits,if,for example,a deposit is not required for interstate services but is
required for intrastate services,how could CenturyTeldisconnect the circuit for only
intrastate traffic thereby allowing interstate traffic to continue to traverse the circuit?If
CenturyTel required separate trunks for intrastate and interstate traffic,then the cost to
IXCs could increase in an anti-competitive manner.Since IXCs purchase access service
out of an ILECs interstate and intrastate access tariffs,it would be less cumbersome and
confusing to have the same standard at the FCC level and state.
Should small LECs be treated the same as large LECs concerningusage of the termsofthisproposedtariff?Commission experience has shown that access revenues
represent a larger portion of overall revenues for small LECs than for large LECs.
With that in mind,are small LECs at greater risk than large LECs,therebyjustifyingdifferenttreatment?
Small LECS should be treated the same as large LECs.The assertion that access
revenues represent a large portion of overall revenues for small LECs may reflect the fact
that access charges are too high.Small LECs are at no greater risk.
Moreover,as WorldCom stated above,the tariff language CenturyTelproposed
will allow it to assess a security deposit on virtuallyany customer includingother ILECs.
WORLDCOM COMMENTS 12
As an initial matter,because the credit rating methodology is not specified in
CenturyTel'stariff,there would be no assurance that the credit rating methodology
selected by CenturyTelwould represent a reasonable approach for evaluating the risk of
non payment for intrastate access services.The factors and weightings used in
commercial "off-the-shelf'credit rating packages are not necessarily appropriate for
evaluating the risk of nonpayment for intrastate access services.
In addition,because the proposed tariff language affords CenturyTel near
complete discretion in selecting the credit rating methodology and threshold score,
CenturyTel would have the ability to set an unreasonablyhigh standard for the credit
worthiness that they deem to be "commercially acceptable".Indeed,CenturyTel could
potentiallyseek a security deposit from virtuallyany customer.While it would be in
CenturyTel'sinterest to craft such an onerous policy,in order to virtuallyeliminate their
risk of nonpayment,such a policy would shift the balance in favor of CenturyTel at the
expense of its customers.
The proposed tariff language gives CenturyTelvirtuallyunfettered discretion to
decide which customers would be assessed a security deposit,CenturyTel could,for
example,request deposits only from unaffiliated IXCs,but not from their own affiliates
or from "retail"special access or end user customers.
Would this requirementbecome a self-fulfillingprophecyif a financiallystruggling
company were required to pay a two-month deposit?
Yes.Granting such cash deposits could push strapped carriers over the financial
brink and exacerbate the woes of already cash strapped companies.If granted,this
requirement could potentiallywreak financial havoc throughoutthe entire
WORLDCOM COMMENTS 13
telecommunications industryas the effect of upfrontpayments would be widespread in
today's financial environment.
If the Commission were to find that the proposed deposit policy was in the public
interest,what is the proper triggerfor determiningcredit worthiness?
CenturyTel'sproposed deposit provisions based on debt rating determined by an
independent credit rating or reporting service allows CenturyTelvirtuallyunchecked
discretion to require deposits.A downgrade in debt rating may impact the cost of
obtaining capital,but nothingin the materials provided by CenturyTeleven suggests,
much less establishes,that an IXC will be unable to obtain capital or meet current cash
flow needs.
Furthermore,the tariff language proposed in CenturyTel'stariff filings is not
"clear and explicit on its face as to when it applies"because it does not specify either the
"independent credit rating or reporting service"or the "commerciallyacceptable level"of
credit worthiness that will be used by the CenturyTel to determine whether to request a
security deposit.Consequently,the language proposed does not provide the requisite
"fair notice to carriers or other customers"about the conditions under which security
deposit requests might be triggered.Even worse,CenturyTelwould have virtually
unlimited discretion to change both the credit rating methodology and the "commercially
acceptable level"of credit worthiness without notice.
Are there possible alternatives to requiringa deposit from IXCs?Is a surety bond a
reasonable alternative?
CenturyTel'sproposed solution is not supported by the facts or the law,and is bad
public policy.It is also whollyunnecessary.IXCs and other CLECS have been just as
WORLDCOM COMMENTS 14
exposed to increased uncollectibles as CenturyTel.The Commission should strike a
balance that meets the needs of customers,the public and fairness to all carriers.
Dated this~2h day of August,2002.
WorldCom,Inc.
By:
Dean J.Niller
Attorneyfor WorldCom,Inc.
Susan Travis
WorldCom,Inc.
707 17th Street,Suite 4200
Denver,CO 80202
WORLDCOM COMMENTS 15
CERTIFICATE OF SERVICE
I hereby certify that on the 22""day of August,2002,true and correct copies of
the foregoing COMMENTS OF WORLDCOM were forwarded,by U.S.Mail,postage
prepaid,to the following:
Pamela Donovan
CenturyTelof the Gem State,Inc.
805 Broadway
PO Box 9901
Vancouver,WA 98668-8701
Dean J.W1iller
WEIL,GOTSHAL &MANGES LLP
Attorneys for Debtors and Debtors In Possession
767 Fifth Avenue
New York,NY 10153-0119
Telephone:[phone]
Facsimile:[phone]
Marcia L.Goldstein,Esq.(MG 2606)
Lori R.Fife,Esq.(LF 2839)
Alfredo R.Perez,Esq.
UNITED STATES BANKRUPTCY COURTSOUTHERNDISTRICTOFNEWYORK
---------------------------------------------------------------x
In re :
:Chapter 11
WORLDCOM,INC.,e_t1.,:Case No.02-13533 (AJG)
:(Jointly Administered).Debtors.:
DEBTORS'OMNIBUS RESPONSE TO REQUESTSFORADDITIONALADEQUATEASSURANCES
TO THE HONORABLE ARTHUR J.GONZALEZUNITEDSTATESBANKRUPTCYJUDGE:
WorldCom,Inc.and certain of its direct and indirect subsidiaries,as
debtors and debtors in possession (collectively,"WorldCom"or the "Debtors"),as and
for their response to the numerous objections received in response to the motion,dated
July 21,2002 (the "UtilityMotion"),pursuant to sections 105(a)and 366(b)of title 11 of
the United States Code (the "BankruptcyCode"),for authorization to provide adequate
assurance to utility companies,respectfully represent:
NY2;\l l84862\01\P#8%01!.DOC\81793.0004
Background
1.On July 21,2002 (the "Commencement Date"),the Debtors each
commenced a case under chapter 11 of the Bankruptcy Code.The Debtors continue to
operate their businesses and manage their properties as debtors in possession pursuant to
sections l107(a)and 1108 ofthe Bankruptcy Code.
Jurisdiction
2.This Court has jurisdiction to consider this matter pursuant to 28
U.S.C.§§157 and 1334.This is a core proceeding pursuant to 28 U.S.C.§157(b).
Venue is proper before this Court pursuant to 28 U.S.C.§§1408 and 1409.
Requests for Adequate Assurance
3.In connection with the operation of its businesses and management
of its properties,WorldCom obtains electricity,telephone,telecommunications,and
similar services (collectively,the "UtilityServices")from many different utility
companies and telecommunications vendors throughout the United States (the "Utility
,
Companies").
4.There can be no doubt that all of the utility services -
telecommunications utility services in particular -are absolutely critical to WorldCom.
In fact,WorldCom's entire business is premised upon using the same
telecommunications services that the vast majority of WorldCom's utility companies,in
terms of dollar amount,supply to WorldCom.
5.On the Commencement Date,the Debtors filed the Utility Motion
seeking,inter alia,an order (the "Procedures Order")establishing procedures by which
the Debtors would provide adequate assurance of payment,as set forth in section 366 of
NY2:\ll84862\01\P#8%01!.DOC\81793.0004 2
the Bankruptcy Code,to the Utility Companies.Pursuant to the Procedures Order,the
Debtors sent notice (the "UtilityNotice")of certain proposed adequateassurance of
payment (the "Proposed Adequate Assurance")to all of the UtilityCompanies identified
on Exhibit A annexed to the Utility Motion.The Utility Notice was mailed on July 25,
2002.
6.The ProceduresOrder required that,to the extent Utility
Companies were not satisfied with the Proposed Adequate Assurance,such utilities had
to file an objection by Tuesday,August 6,2002 at 4:00 p.m.The Procedures Order
provided further that,if any objections to the ProposedAdequate Assurance were timely
filed,the Court would hold a hearing on August 12,2002,at which the Court would
determine whether the Proposed Adequate Assurance satisfies the requirements of section
366 of the Bankruptcy Code.
7.The Debtors have been inundated by objections to the Utility
Motion and requests for additional adequateassurance (the "Objections")from various ,
entities (the "Objecting Entities").A chart summarizing the relief requested in the
Objections from each of the Objecting Entities is annexedhereto as Exhibit A.While the
Debtors'have received approximately 120 Objections to the UtilityMotion,the
Objecting Entities have generally all requested similar relief.This Omnibus Response is
responsive to each of the Objections filed by the Objecting Entities.
8.Based upon the Objections and certain requests of the Objecting
Entities,the Debtors have revised the Proposed Adequate Assurance,as further described
below (the "Revised Adequate Assurance"),and submit that the Revised Adequate
Assurance provides all UtilityCompanies with adequateassurance of payment as
NY2;\ll84862\01\P#8%01!.DOC\8I793.0004 3
required by section 366 of the Bankruptcy Code.The Objecting Entities requests for,
inter alia,deposits,liens,superpriority claims,letters of credit,prepayments,expedited
payment terms,wire transfer payments,and escrow accounts are impractical and
unnecessary to provide adequate assurance.Forcing the Debtors to meet the demands of
the Objecting Entities and set aside valuable assets for,among other things,deposits will
severely constrain the Debtors'liquidity and direct the Debtors'attention and financial
resources away from the reorganization process to the detriment of the Debtors,their
customers,their creditors,and other parties in interest.Such demands are particularly
onerous and unreasonable given that,after taking into account the substantial sums owed
by many of the Objecting Entities to WorldCom,the net amounts owed by WorldCom to
the Objecting Entities,if any,are not substantial.
Utility Companies Have Been
Adequately Assured of Payment
9.Pursuant to section 366 of the Bankruptcy Code,within twenty
days after the commencement of a bankruptcy case,a debtor's utilities may not alter,
refuse or discontinue service to,or discriminate against,a debtor solely on the basis of
the commencement of its case or the existence of prepetition debts owed by the debtor.
Following the twenty-day period,however,utilities arguably may discontinue service to
the debtor if the debtor does not provide adequateassurance of future performance of it
postpetition obligations.Section 366 provides as follows:
(a)Except as provided in subsection (b)of this section,autilitymaynotalter,refuse,or discontinue service to,or
discriminate against,the trustee or the debtor solely on the
basis of the commencement of a case under this tile or that
a debt owed by the debtor to such utility for service
rendered before the order for relief was not paid when due.
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(b)Such utility may alter,refuse,or discontinue service if
neither the trustee nor the debtor,within 20 days after the
date of the order for relief,furnishes adequateassurance of
payment,in the form of a deposit or other security,for
service after such date.On request of a party in interest
and after notice and a hearing,the court may order
reasonablemodification of the amount of the deposit or
other security necessary to provide adequate assurance of
payment.
11 U.S.C.§366.
10.As set forth in the Utility Motion,in determining adequate
assurance,the Court is not required to give a utility company the equivalent of a guaranty
of payment,but must only determine that the utility is not subject to an unreasonablerisk
of nonpayment for postpetition services.See In re Caldor,Inc.-NY 199 B.R.1,3
(S.D.N.Y.1996);In re Santa Clara Circuits W.,Inc.,27 B.R.680,685 (Bankr.D.Utah
1982);In re George C.Frye Co.,7 B.R.856,858 (Bankr.D.Me.1980).Whether a
utility is subject to an unreasonablerisk of nonpayment must be determined by
examining the totality of the circumstances and making "a particularized inquiry into the
postpetition economics of a debtor's chapter 11 case."See In re AdelphiaBusiness
Solutions,Inc.,et al.,Ch.11 Case No.02-11389,slip op.at 32 (Bankr.S.D.N.Y.June 25,
2002)(A copy of which is annexedto the UtilityMotion as Exhibit D)
11.The governing case law in the Second Circuit regarding what is
necessary to provideutility companies with adequateassurance of payment as
contemplated by section 366 of the Bankruptcy Code is Virginia Elec.&Power Co.v.
Caldor,Inc.,I17 F.3d 646 (2d Cir.1997).In Caldor,Inc.-NY the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court")made
the following factual determinations:(i)the debtors have significant cash on hand;(ii)the
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debtors pose significantly less risk than other customers of the utilities;(iii)the utilities
have a greater ability to monitor the financial strength of the debtors;(iv)the debtors are
solvent and are operating out of the proceeds of their operations;(v)the debtors have a
solid prepetition payment history;and (vi)the utilities generally had not required deposits
from the debtors in the past.See In re Caldor,Inc.-NY,199 B.R.1,2 (S.D.N.Y.1996),
aff'd,l 17 F.3d 646 (2d Cir.1997).Based on these six findings,the United States District
Court for the Southern District of New York (the "District Court")affirmed the
Bankruptcy Court's holding that,based upon the relevant facts,the only security
necessary to provide "adequate assurance"to the utilities was (i)granting the utilities an
administrative priority;(ii)creating a streamlined procedure for the utilities to obtain
future relief and future security if the debtors were late on a single payment;and (iii)
requiring the Debtors to provide certain financial reports on a monthly basis to the
utilities.Id.
12.On appeal,the United States Court of Appeals for the Second ,
Circuit affirmed the District Court's decision,finding the Bankruptcy Court's authority to
"modify"the level of the "deposit or other security,"provided for under section 366(b),
includes the power to require no deposit or other security where none is necessary to
provide a utility with adequateassurance of payment.See Virginia Elec.&Power Co.v.
Caldor,Inc.,I17 F.3d 646,650 (2d Cir.1997).
13.In the instant case,the Debtors submit that,based upon the
following facts and the Revised Adequate Assurance,the Objecting Entities'requests for
adequateassurance in the form of,inter alia,deposits,liens,superpriority claims,letters
NY2:\ll84862\01\P#8%01LDOC\81793.0004 6
of credit,prepayments,expedited payment terms,and escrow accounts are impractical,
unnecessary,and should be denied.
(i)As of August 2,2002,the Debtors had approximately $415
million of cash on hand and had no outstanding borrowings
under their postpetition financing facility (the "DIP
Financing").The Debtors'13-week cash forecast indicated
that,as of August 2,2002,the Debtors would have cash on
hand of $316 million.However,the Debtors have
exceededthat forecast by approximately $100 million.
(ii)The Debtors have accounts receivable in excess of $4.5
billion,real property having a book value in excess of $1.5
billion,70,000 route miles of network assets,a significant
customer base,and many valuable contracts.Prior to the
petition date,the Debtors had no significant secured debt.
(iii)The Debtors are currently finalizing numerous operational
initiativesthat will reduce costs and enable the Debtors to
become cash flow positive in the near term.For example,
the Debtors have sold their wireless resale business -this
will save the Debtors approximately $700 million annually.
The Debtors will also be rejecting unprofitableexecutory
contracts and unexpired leases and divesting non-operating
assets,includingreal estate.
(iv)The Debtors are owed substantial amounts,as part of '
reciprocal obligations and billing and collection
agreements,from many of the UtilityCompanies,including
(i)approximately $769 million from Verizon,(ii)
approximately $211 million from the SBC Companies,(iii)
approximately $186 million from Bell South,(iv)
approximately $100 million from Qwest,and (v)
approximately $39 million from Sprint.
14.Within the Utility Motion,WorldCom offered adequateassurance
in the form of:
(i)the granting of administrative expense status for Utility
Services rendered to WorldCom by the UtilityCompanies
following the petition date;
(ii)timely payment of the undisputed amounts of each invoice
for postpetition UtilityServices;
NY2:\1I84862\01\P#8%01!.DOC\81793.0004
(iii)expedited procedures for the Court to review any
postpetition payment defaults;
(iv)provision of copies of the monthly operating reports to a
representative selected by the UtilityCompanies on the
same day such reports are provided to either the Court or
the U.S.Trustee,whichever is earlier;
(v)the exchange between WorldCom and any requestingUtilityCompanyofcontactinformationofemployees with
sufficient authority to deal with disputes,if any,regarding
postpetition payments;and
(vi)the availability of a process for modification of these
requirements if there is a material and adverse change with
respect to WorldCom's solvency or liquidity.
15.Since filing the UtilityMotion,the Debtors have negotiated with
many,if not all,of the Objecting Entities and have offered the Revised Adequate
Assurance,which,in addition to the Proposed Adequate Assurance,includes:
(i)in the event of a payment default for postpetition Utility
Services,a Utility Company may send notice by facsimile
to WorldCom,with a copy to counsel for WorldCom,and if
payment of the undisputed portion is not made by wire
transfer or similar good federal funds within three (3)
business days thereafter,such UtilityCompany may seek,
by order to show cause,an order requiring immediate
payment or such other relief as is appropriate,with
objections returnable not less than two (2)business days
thereafter;
(ii)immediately upon the receipt by WorldCom of an
Enforcement Notice (as defined in this Court's interim
order authorizing the DIP Financing),WorldCom shall
provide a copy of such notice to a representative selected
from among the UtilityCompanies;
(iii)WorldCom and the UtilityCompanies that have reciprocal
obligations to one another will negotiate in good faith to
resolve issues relating to and establish procedures for the
mutual setoff of payments for prepetition and postpetition
services and,to the extent WorldCom and a Utility
Company are unable to agree upon a resolution or such
NY2:\ll84862\0l\P#8%01!.DOC\81793.0004
procedures,WorldCom or such UtilityCompany may seek
relief from this Court;
(iv)to the extent termination of services to WorldCom's
customers is necessary,WorldCom shall comply with all
applicable regulatory requirements,including,but notlimitedto,timely service of notices to customers consistent
with 47 U.S.C.§214;
(v)a reservation of rights for WorldCom or any Utility
Company to assert that such UtilityCompany is or is not autilityascontemplatedinsection366oftheBankruptcy
Code;
(vi)a reservation of rights for WorldCom or any Utility
Company with respect to assumption or rejection of
executory contracts under section 365 of the Bankruptcy
Code;and
(vii)a limitation of the injunction preventing Utility Companies
from terminating services based upon a postpetition default.
16.Based upon the facts of these cases,all of the elements of the
Revised Adequate Assurance provide the UtilityCompanies with adequate assurance
under section 366 of the Bankruptcy Code.The Revised Adequate Assurance provides
Utility Companies with (i)a significantly reduced risk of non-payment,(ii)an ability to
limit postpetition credit exposure to the Debtors;(iii)an ability to closely monitor the
Debtors'financial status;and (iv)expedited procedures to return to the Court in the event
the Debtors'liquidity declines materially.The foregoing is precisely the "adequate
assurance"contemplated by section 366 of the Bankruptcy Code and Caldor.
The Adequate Assurance Set Forth in the ObjectingEntities'Objections is Impracticaland Unnecessary
17.The Objecting Entities'requests for deposits,letters of credit,
escrow accounts,prepayments,and expedited payment terms all suffer from the same
fatal flaw -having to furnish any of these requests will cripple the Debtors'liquidity.
NY2:\ll84862\01\P#8%0l!.DOC\81793.0004
The availability under the DIP Financing is critical to the Debtors'ability to continue to
operate its businesses in the ordinary course.Deposits,letters of credit,escrow accounts,
prepayments,and expedited payments all drain the Debtors'availability under the DIP
Financing and,therefore,the Debtors'liquidity,dollar for dollar.
18.Some of the Objecting Entities have requested that the Court
compel the Debtors to grant junior liens on the Debtors'property and superpriority
claims under sections 364(b)and (c)of the Bankruptcy Code.This is simply not an
option.The Debtors are expressly prohibited under the DIP Financing from granting
juniorliens on any of the Debtors'property or affording parties superpriority
administrative expense claims.The DIP Financing was the product of extensive arm's
length negotiations and is now in the process of syndication.The Utility Companies are
unrealistic to believe that these core provisions of the DIP Financing could be subject to
change.
19.Several of the Objecting Entities have also requested a "carve-out"
from the collateral securing the DIP Financing of amounts owed to them.Again,this
would be inconsistent with the provisions already negotiated and would result in a
severely damaging reduction of availability under the DIP Financing facility.
20.For no stated reason,several of the Objecting Entities have
requestedthat the Court compel the Debtors to pay for utility services by wire transfer.
This procedure is administratively burdensome and costly.The only way the Debtors
could pay by wire transfer is if each utility company billed the Debtors for all services
provided each month once a month,as opposedto the daily billing cycles that exist as
normal course today.Even if the Utility Companies were able to make that change,it
NY2:\ll84862\01\P#8%0]!.DOC\81793.0004 10
would be an administrative burden on the Debtors because wire transfers do not enable
the Debtors to accurately account for fund transfers in the same manner as paper checks.
Finally,paying for all utility services by wire transfer is costly.The Debtors have
approximately 70,000 accounts with the UtilityCompanies.One payment per month per
account,if done by wire transfer,would cost the Debtors an additional $490,000 per
month.There is no justification for this additional administrative burden or the excessive
associated cost.
21.Several of the Objecting entities -particularly the Incumbent Local
Exchange Carriers (the "ILECs")-have requestedthat the Court compel the Debtors to
provide deposits for what the ILECs consider "new services."The Debtors are
continuing to operate their businesses including obtaining new customers.Each time the
Debtors sign up a new customer or increase services to an existing customer,the Debtors
must add additional voice and/or data lines or additional network equipment.In most
cases,the only entities that can supply the additional lines and equipment are the ILECsa
If the ILECs are permitted to erect artificial barriers to provisioningcustomers by
designating additional services as "new services"and thereby requiring deposits,the
Debtors stand to lose significant revenues.Moreover,the additional deposit requirements
would drain the Debtors'liquidity dollar for dollar.These artificial barriers are no doubt
erected by the ILECs,not to provide adequate assurance,but rather to prevent WorldCom
from entering into markets and obtaining new customers that the ILECs -as the major
competitors of the Debtors -want to obtain as their own.The request that the ILECs be
allowed to determine what constitutes "new services"and that the Debtors be compelled
to provide deposits for such services should be denied.
NY2:\1184862\01\P#8%0I!.DOC\81793.0004 Î l
Notice
22.No trustee has been appointed in the Debtors'chapter 11 cases.
Notice of this Omnibus Responsehas been provided to the statutory creditors'committee
appointed in the Debtors'chapter 11 cases,the United States Trustee for the Southern
District of New York,attorneys for the Debtors'postpetition lenders,all Objecting
Parties,and all parties on the Master Service List.The Debtors submit that no other or
further notice need be provided.
Conclusion
23.Based upon the facts and circumstances of WorldCom's cases and
the Revised Adequate Assurance,the Debtors request the Court find the Objecting
NY2:\ll84862\01\P#8%01!.DOC\81793.0004 12
Entities adequately assured of payment.
Dated:New York,New York
August 12,2002
/s/Marcia L.Goldstein
Marcia L.Goldstein,Esq.(MG 2606)
Lori R.Fife,Esq.(LF 2839)
WEIL,GOTSHAL &MANGES LLP
767 Fifth Avenue
New York,NY 10153-0119
Telephone:[phone]
Facsimile:[phone]
and
Alfredo R.Perez,Esq.
WEIL,GOTSHAL &MANGES LLP
700 Louisiana,Suite 1600
Houston,TX 77002
Telephone:[phone]
Facsimile:[phone]
Attorneys for Debtors and
Debtors in Possession
NY2:\ll84862\01\P#8%01LDOC\81793.0004 13
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
X
In re :
:Chapter 11
WORLDCOM,INC.,J al.,:Case No.02-13533 (AJG)
:(Jointly Administered)
Debtors.:
X
ORDER PURSUANT TO SECTIONS 105(a)AND 366(b)
OF THE BANKRUPTCY CODE AUTHORIZING WORLDCOM TOPROVIDEADEQUATEASSURANCETOUTILITYCOMPANIES
Upon the motion,dated July 21,2002 (the "Motion"),of WorldCom,Inc.
and certain of its direct and indirect subsidiaries,as debtors and debtors in possession
(collectively,"WorldCom"or the "Debtors"),for an order pursuantto sections 105(a)
and 366(b)of title l1,United States Code (the "Bankruptcy Code")establishing
procedures for determiningthat all utility companies and telecommunications vendors
(collectively,the "Utility Companies"and individually,"Utility Company")that provide
electricity,telephone,telecommunications,or similar services (the "Utility Services")to
the Debtors havebeen provided with adequate assurance of payment,all as more fully set
forth in the Motion;and upon consideration of the supportingAfEdavit of Susan Mayer
Pursuant to Local Bankruptcy Rule 1007-2,sworn to on the 21st day of July,2002;and
upon the objections filed in connection with the Motion,and the recordof the hearings
held beforethe Court ("the Hearings");and the Courthavingjurisdiction to consider the
Motionand the reliefrequested therein pursuant to 28 U.S.C.§§157 and 1334 and the
Standing Orderof Referral of Cases to Bankruptcy Court Judges of the District Court for
A:\FINAL UTILITY ORDER.DOC
the Southern District of New York,dated July 19,1984 (Ward,Acting C.J.);and
consideration of the Motion and the relief requested thereinbeing a core proceedmg
pursuantto 28 U.S.C.§157(b);and venue being proper before this Court pursuantto 28
U.S.C.§§1408 and 1409;and due and proper notice of the Motion having been provided,
and it appearing that no otheror further notice need be provided;and the relief requested
in the Motion being in the best interests of the Debtors and their estates and creditors;and
the Court having reviewed the Motion and having heard the statements in support of the
relief requested therein at the Hearings;and the Court having determinedthat the legal
and factual bases set forth in the Motionand at the Hearingsestablish just cause for the
relief granted herein;and upon all of the proceedings had before the Court and after due
deliberationand sufficient cause appearing therefor,it is
ORDERED that the Motion is granted as modified herein;and it is further
ORDERED that pursuantto section 503(b)(l)(A)of the Bankruptcy Code,
any and all unpaid charges for postpetitionservices provided by the Utility Companies to
the Debtors constitute actual and necessary expenses of preserving WorldCom's estates;
in addition,with respect to those claims for the amounts incurredafter August 14,2002,
each Utility Companyis hereby granted an administrativeexpense priority claim and
such claim shall constitute a junior superpriorityadministrativeclaim in each of the
WorldCom estates and such claim shall be "pari passu"with one anotherand shall be
junior only (i)to the claims of the DIP Lenders (definedconsistently with this Court's
Interim orderauthorizingWorldCom's postpetitionfmancing)as a result of the Interim or
any fmal order,and (ii)to any intercompanyjunior liens and claims of each of the
2
WorldCom Debtors,and shall be senior to any other administrativeclaim unless
otherwiseorderedby the Court;and it is further
ORDERED that the Debtors shall pay on a timely basis,in accordance
with applicable contracts and tariffs,all undisputedinvoiceswith respect to postpetition
UtilityServices renderedby the Utility Companies;and it is further
ORDERED that WorldCom and the Utilities Companies shall negotiate in
good faith to establish an expedited dispute resolutionprocedurethat includes an
arbitrator,mediator,or similar trier of fact with respect to disputes involving postpetition
invoicesin an amount not to exceed a sum to be determinedupon a recommendation
from the Debtors within fifteen (15)days after the entry of this order ("Debtors'
Recommendation")with an opportunity by the Utility Companies to object five (5)days
thereafter("Utilities'Recommendations"and together with the Debtors'
Recommendation,the "Recommendations");provided,however,that unless the Court
orders otherwise,upon receiving the Recommendationsthe Court shall issue an order
without furtherhearingresolving any dispute conceming the Recommendations;and it is
further
ORDERED that,in the event of a payment default for postpetition Utility
Services,a Utility Companymay send notice by facsimile to WorldCom,with a copy to
counsel for WorldCom and the Creditors'Committee,and if payment of the undisputed
portion is not made by wire transferor similar good federal funds within three (3)
business days thereafter,such Utility Company may seek,(i)by order to show cause,an
orderrequiring immediate paymentor such otherreliefas is appropriate,with objection
retumable not less than two (2)business days thereafter,or (ii)appropriateaction under
3
any applicable tariff or regulation,provided,however,that such action is without
prejudiceto the Debtors'right to seek injunctive relief from this Court;and it is further
ORDERED that,immediatelyupon the receipt by WorldCom of an
EnforcementNotice (as defmed in this Court's interim order authorizing WorldCom's
postpetitionfinancing (the "DIP")),WorldCom shall provide a copy of such notice to the
Utilities Companies by e-mail within two (2)business days following receipt of an
EnforcementNotice;and it is further
ORDERED that WorldCom shall provide to each Utility Companythat
has executed an appropriateconfidentiality agreement,a weekly report setting forth (i)
WorldCom's unrestricted cash and (ii)the availability underthe DIP;and it is further
ORDERED that WorldCom and any requestingUtilityCompany shall
exchange contract information of employees with sufficient authority to deal with
disputes,if any,regardingpostpetition payments;and it is further
ORDERED that,in additionto any rights under section 366 of the
Bankruptcy Code,the Utility Companies shall have the right to petition for
reconsiderationof this Orderupon a material and adverse change with respect to,
including but not limited to,WorldCom's "administrative solvency,"liquidity or other
financialcondition,or with respect to the volume and/ortypes of service a Utility
Companyis providing to the Debtors,and to seek an orderrequiring WorldCom,among
other things,to provide deposits or letters of credit,or prepay for future Utility Services;
and it is further
ORDERED that WorldCom and the Utility Companies that are both
creditors to,and debtors of,WorldCom,shall negotiatein good faith to establish
4
procedures for the mutual setoff of payments for prepetition services (the "Prepetition
Procedures")and for the mutual setoff of payments for postpetitionservices (thte
"Postpetition Procedures");provided,however,that nothingherein shall be deemed to
grant any Utility Company the right to setoffpostpetition amounts owing to WorldCom
against prepetitionamounts such Utility Companyis owed by WorldCom or to eliminate
the requirementof mutuality in orderto assert a right of setoff;providedfitrther,
however,that,to the extent WorldCom and a Utility Companyare unable to agree upon
either a Prepetition Procedures or a Postpetition Procedures,WorldCom or such Utility
Companymay seek relieffrom this Court;and it is further
ORDERED that,to the extent termination of services to WorldCom's
customers in necessary,WorldCom shall comply with all applicable regulatory
requirements,including,but not limited to,timely service of notices to customers
consistent with 47 U.S.C.§214;and it is further
ORDERED that WorldCom shall serve notice of this Order on the Utility
Companies identified on Exhibit A annexed to the Motion by first-class mail within five
(5)business days of its entry;and it is further
ORDERED that nothing herein shall prejudiceWorldCom's or any Utility
Company'sright to assert that such Utility Companyis or is not a utility as contemplated
in section 366 of the Bankruptcy Code;and it is further
5
ORDERED that the relief granted herein shall not constitute an approval
or assumption of any agreement pursuantto section 365 of the Bankruptcy Code and,to
the extent WorldCom seeks to assume or assign any executory contract or unexpired
lease that may exist betweenWorldCom and a Utility Company,WorldCom shall comply
with the applicableprovisions of the Bankruptcy Code;provided,however,that nothing
hereinshall be deemed to establish that any contract is or is not subject to section 365 of
the Bankruptcy Code.
Dated:New York,New York
August 14,2002
s/Arthur J.Gonzalez
UNITED STATES BANKRUPTCY JUDGE
6